CTI INDUSTRIES CORP, SB-2/A, 1997-10-22

CTI INDUSTRIES CORP
SB-2/A, 1997-10-22
MISCELLANEOUS MANUFACTURING INDUSTRIES

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<PAGE>

As filed with the Securities and Exchange Commission on October 22, 1997
SEC File No. 333-31969

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------

AMENDMENT No. 4

to
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------------
CTI INDUSTRIES CORPORATION
(Name of Small Business Issuer in its charter)

<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 3970 36-2848943
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)

</TABLE>

22160 North Pepper Road
Barrington, Illinois 60010
(847) 382-1000
(Address and Telephone Number of Principal Executive Offices)

22160 North Pepper Road
Barrington, Illinois 60010
(Address of Principal Place of Business)

Howard W. Schwan, President
22160 North Pepper Road
Barrington, Illinois 60010
(847) 382-1000
(Name, address and telephone number of Agent for Service)

Copies to:

JOHN M. KLIMEK, ESQ. RUBI FINKELSTEIN, ESQ.
Fishman Merrick Miller Genelly Orrick, Herrington & Sutcliffe LLP
Springer Klimek & Anderson, P.C. 666 Fifth Avenue
30 North LaSalle, Suite 3500 New York, New York 10103-0001
Chicago, Illinois 60602 (212) 506-5000
(312) 726-1224 (212) 506-5151 (Facsimile)
(312) 726-2649 (Facsimile)

Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box / /
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>

CTI INDUSTRIES CORPORATION

CROSS REFERENCE SHEET
Showing the Location in the Prospectus
of Information Required by Items of Form SB-2

<TABLE>
<CAPTION>
Registration Statement Item Number and Heading Location in Prospectus
----------------------------------------------- ----------------------------------------------
<S> <C> <C>
1. Front of Registration Statement and Outside
Front Cover Page of Prospectus ............... Outside Front Cover of Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus ........................... Inside Front and Outside Back Cover Pages of
Prospectus
3. Summary Information and Risk Factors ......... Prospectus Summary; Risk Factors
4. Use of Proceeds .............................. Use of Proceeds
5. Determination of Offering Price ............... Outside Front Cover Page; Risk Factors;
Underwriting
6. Dilution .................................... Dilution
7. Selling Security Holders ..................... N/A
8. Plan of Distribution ........................ Outside Front Cover Page of Prospectus;
Underwriting
9. Legal Proceedings ........................... Business - Legal Proceedings
10. Directors, Executive Officers, Promoters
and Control Persons ........................... Management; Principal Stockholders
11. Security Ownership of Certain
Beneficial Owners and Management ............ Principal Stockholders
12. Description of Securities ..................... Description of Capital Stock; Underwriting
13. Interest of Named Experts and Counsel ......... Experts
14. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities Management - Limitation of Liability and
Indemnification; Underwriting
15. Organization Within Last Five Years ......... Not Applicable
16. Description of Business ..................... Prospectus Summary; Risk Factors; Manage-
ment's Discussion and Analysis of Financial
Condition and Results of Operations; Busi-
ness; Management; Certain Transactions;
Financial Statements
17. Management's Discussion and Analysis or
Plan of Operation ........................... Management's Discussion and Analysis of
Financial Condition and Results of Operations
18. Description of Property ..................... Business - Manufacturing
19. Certain Relationships and
Related Transactions ........................ The Company; Certain Transactions
20. Market for Common Equity and
Related Stockholder Matters .................. Risk Factors; Description of Capital Stock
21. Executive Compensation ........................ Management - Executive Compensation
22. Financial Statements ........................ Financial Statements
23. Changes in and Disagreements With
Accountants on Accounting and Financial
Disclosure .................................... Change in Independent Accountants
</TABLE>

<PAGE>

Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.

SUBJECT TO COMPLETION, DATED OCTOBER 22, 1997

PROSPECTUS

1,500,000 Shares

CTI Industries Corporation [LOGO]

Common Stock

--------------------

CTI Industries Corporation, a Delaware corporation (the "Company"), is
hereby offering (this "Offering") 1,500,000 shares of common stock, $.065 par
value per share ("Common Stock"). Prior to this Offering, there has been no
public market for the Common Stock and there can be no assurance that such a
market will develop after the completion of this Offering or, if developed,
that it will be sustained. It is currently anticipated that the initial public
offering price will be $4.00 per share of Common Stock. The offering price of
the Common Stock was determined by negotiation between the Company and the
Underwriter and is not necessarily related to the Company's asset or book
values, results of operations or any other established criteria of value. See
"Risk Factors," "Description of Capital Stock" and "Underwriting." The Common
Stock has been approved for quotation on the Nasdaq SmallCap Market ("Nasdaq")
under the symbol "CTIB."
----------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS,"
COMMENCING ON PAGE 8, AND "DILUTION."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.

===============================================================================
Price to Underwriting Proceeds to
Public Discounts(1) Company(2)
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Per share ...... $ $ $
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Total(3) ...... $ $ $
===============================================================================

(1) Does not include additional compensation payable to the Underwriter in the
form of a non-accountable expense allowance. In addition, see
"Underwriting" for information concerning indemnification and contribution
arrangements and other compensation payable to the Underwriter.

(2) Before deducting estimated expenses of $______ payable by the Company,
including the Underwriter's non-accountable expense allowance.

(3) The Company has granted to the Underwriter an option (the "Over-Allotment
Option"), exercisable for a period of 45 days after the date of this
Prospectus, to purchase up to 225,000 additional shares of Common Stock
upon the same terms and conditions set forth above, solely to cover
over-allotments, if any. If the Over-Allotment Option is exercised in
full, the total Price to Public, Underwriting Discounts and Proceeds to
Company will be $_____________, $____________ and $______________,
respectively. See "Underwriting."

The Common Stock is being offered by the Underwriter, subject to prior
sale, when, as and if delivered to and accepted by the Underwriter, and subject
to approval of certain legal matters by its counsel and subject to certain
other conditions. The Underwriter reserves the right to withdraw, cancel or
modify this Offering and to reject any order in whole or in part. It is
expected that delivery of the Common Stock offered hereby will be made against
payment, at the offices of Joseph Stevens & Company, Inc., New York, New York,
on or about _________, 1997.

----------------

JOSEPH STEVENS & COMPANY, INC.
The date of this Prospectus is _______________, 1997.

<PAGE>

[PHOTOGRAPHS OF SELECT LATEX AND MYLAR BALLON PRODUCTS]

The Company intends to furnish to the registered holders of the Common
Stock, annual reports containing financial statements audited by its
independent accounting firm and quarterly reports for the first three quarters
of each fiscal year containing unaudited interim financial information.
---------------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE MARKET PRICE, PURCHASES OF
THE COMMON STOCK MAINTAINED BY THE UNDERWRITER IN THE COMMON STOCK AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."

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<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus. In
July, 1997, the Company restated its Certificate of Incorporation to provide
for Common Stock and Class B Common Stock. The shares of Class B Common Stock
contain rights identical to shares of Common Stock, except that shares of Class
B Common Stock, voting separately as a class, have 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, vote on all other matters including the election of
the remaining directors. Also in July, 1997, the Company effected a 1 for 2.6
reverse stock split of both its Common Stock and Preferred Stock. Upon the
closing of this Offering, the holders of the Company's then outstanding
Convertible Preferred Stock will convert all outstanding shares of such
Convertible Preferred Stock into 1,098,901 shares of Class B Common Stock.
Except as otherwise noted, all information in this Prospectus gives retroactive
effect to the aforementioned recapitalization, the 1 for 2.6 reverse stock
split and conversion of Convertible Preferred Stock, and assumes no exercise of
the Over-Allotment Option or the Underwriter's Warrants. See "Description of
Capital Stock." Investors should carefully consider the information set forth
under the heading "Risk Factors."

The Company

CTI Industries Corporation (the "Company") is one of the leading
manufacturers and sellers of mylar balloons in the world. The Company also
sells latex balloons, novelty and "message" items, such as mugs and banners,
and toy products, such as inflatable masks, punch balls and water bombs, and
produces laminated and specialty films for food packaging and other commercial
uses. The Company's balloons and related products are sold throughout the
United States and in 30 foreign countries through a wide variety of retail
outlets including grocery, general merchandise and drugstore chains, such as
Eckerd Drug Stores and the Safeway and Winn Dixie grocery chains, card and gift
shops, such as Hallmark and Factory Card Outlet stores, and party goods stores,
such as Party City, as well as through florists and balloon decorators. The
Company estimates the worldwide wholesale market for latex and mylar balloons
to be in excess of $570 million. During fiscal 1996, the Company manufactured
and sold over 15 million mylar balloons.

The mylar balloon, actually a balloon made of a nylon based material with
metallized and polyethylene coatings, has become a popular medium of social
expression. Most mylar balloons contain printed characters, designs and
messages. The Company maintains licenses on numerous characters and designs,
including, for example, Peanuts(TM) characters, Garfield(TM), Precious
Moments(TM) and Hallmark.

To meet the needs of the mylar balloon market, the Company has developed
sophisticated film products and techniques which have other applications. The
Company's expertise in multi-color printing, with water-based ink in
particular, has enabled the Company to expand its business to include the
production of film wrappers for consumables. The Company produces, laminates
and prints films for food packaging companies and manufactures custom film
products for other commercial uses.

The Company is a fully integrated designer and manufacturer of its mylar
balloon product line. The Company is a party to a long term agreement with a
Mexican manufacturer under which a broad line of latex balloons are
manufactured for the Company. The Company thereby has a competitive source of
supply of quality latex balloon products which it markets with its mylar
balloon line. The Company has also established a joint venture with this
Mexican manufacturer for the packaging of balloon products and printing of
latex balloons. See "Risk Factors--Dependence on Supplier; Creditors
Proceeding."

The Company's objective is to become a dominant participant in the
worldwide mylar and latex balloon industry. To achieve this objective, the
Company is pursuing a business strategy that includes the following principal
elements:

Strengthen and Expand Marketing Efforts. The Company is focusing its sales
and marketing efforts to strengthen, develop and expand its relationships with
balloon distributors and believes it can expand the

3
<PAGE>

business volume generated through current distributors of its products. The
Company also intends to seek out relationships with new distributors both in
current markets and in new sales areas and plans to pursue additional national
chain accounts. The Company is developing relationships with independent sales
representatives for the marketing of its toy-grade latex balloons, inflatable
masks and other toy/novelty products and also is expanding its marketing
efforts for its laminated and specialty film products.

Increase Production Capability. The Company plans to purchase additional
printing, graphic and laminating equipment which will allow it to increase its
production capabilities and enable it to produce eight-color mylar balloons and
custom film products.

Secure Supply. The Company plans to secure its low cost, high quality
source of latex balloons by providing capital in the form of loans to its
Mexican supplier of these products. The Company believes this relationship
provides the Company with a competitive advantage over its competitors.

Expand Balloon Design and Product Development. By continuing to expand its
design and research and development departments, the Company plans to develop
new balloon designs and create or license additional characters for display on
its balloons to increase the demand for its products. The Company also intends
to expand its toy/novelty product line of toy-grade latex balloons, inflatable
masks, punch balls and water bombs.

Develop Alternative Sales Channels. The Company plans to develop strategic
alliances with greeting card companies and other members of the social
expression industry to more effectively market its products. The Company will
seek to become the supplier of custom, special order balloon products to major
distributors and suppliers.

The Company's executive offices are located at 22160 North Pepper Road,
Barrington, Illinois 60010, and its telephone number is (847) 382-1000.

4
<PAGE>

The Offering

Common Stock offered ................... 1,500,000 shares

Common Stock outstanding
before this Offering .................. Common Stock Class B Common Stock
1,010,202(1) 1,098,901

Common Stock to be
outstanding after this Offering ... 2,510,202(1) 1,098,901

Nasdaq SmallCap Market ................. CTIB
Symbol

Use of Proceeds ...... The net proceeds of this Offering will be used as
follows: (i) approximately $1,250,000 for repayment
of bank indebtedness, including accrued interest,
(ii) $400,000 for sales and marketing programs,
(iii) $1,100,000 for improvements to plant and
equipment, (iv) $400,000 for loans to Mexican
supplier, (v) $150,000 for investment in Mexican
joint venture, (vi) $400,000 for product development
and character and image licenses and (vii)
$1,022,000, the balance, for working capital and
general corporate purposes.

Risk Factors ......... Investment in the Common Stock offered hereby is
highly speculative and involves significant risks
and substantial dilution. See "Risk Factors."

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(1) Excludes (i) warrants to purchase an aggregate of 230,769 shares of Common
Stock at an exercise price of $.91 per share, (ii) warrants to purchase
277,244 shares of Common Stock at an exercise price of $3.12 per share,
(iii) 121,000 shares of Common Stock issuable pursuant to options having
an exercise price equal to the initial public offering price per share of
Common Stock which were granted under the Company's stock option plan and,
(iv) 179,000 shares of Common Stock issuable pursuant to options which may
be granted under the Company's stock option plan in the future.

5
<PAGE>

Summary Financial Information
(in thousands except share and per share data)

The following table sets forth summary financial data of the Company for
the two years ended October 31, 1996 and 1995 (collectively, the "Year-End
Data") and as of July 31, 1997, and for the nine month periods ended July 31,
1996 and 1997. The Year-End Data has been derived from the audited financial
statements of the Company appearing elsewhere herein, which have been audited
by Coopers & Lybrand L.L.P. The summary financial data set forth below should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and the Financial Statements and notes
thereto and other financial and statistical data appearing elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
Years Ended October 31, Nine Months Ended July 31,
---------------------------------- ---------------------------
1995 1996 1996 1997
------------- ------------------ ------------ ------------
<S> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Net sales .................................... $ 22,784 $ 13,910 $ 10,769 $ 12,082
Cost of sales ................................. 15,078 8,558 6,547 7,346
Gross profit ................................. 7,706 5,352 4,222 4,736
Operating Expenses:
General and administrative .................. 2,900 2,055 1,603 1,335
Selling .................................... 3,770 2,387 1,863 2,043
Advertising and marketing .................. 2,356 592 489 625
Plant shut down expense ..................... 850 ---- ---- ----
Loss on disposition of latex equipment ....... 822 ---- ---- ----
---------- ----------- ---------- ----------
Total operating expenses ..................... 10,698 5,034 3,955 4,003
========== =========== ========== ==========
Operating income (loss) ........................ (2,992) 318 267 733
Other income (expense) ........................ (675) (495) (395) (386)
Income tax benefit (expense) .................. 774 (6) ---- ----
---------- ----------- ---------- ----------
Net income (loss) .............................. (2,893) (183) (128) 347
Dividends applicable to Convertible Preferred
Stock ....................................... ---- (74) (42) (97)
---------- ----------- ---------- ----------
Net income (loss) applicable to common shares $ (2,893) $ (257) $ (170) $ 250
========== =========== ========== ==========
Net income (loss) per common and common
equivalent share .............................. $ (2.18) $ (.20) $ (.13) $ .20
========== =========== ========== ==========
Weighted average number of common and
common equivalent shares outstanding ......... 1,328,952 1,265,835 1,277,670 1,235,626
Pro forma per share data reflecting recapitaliza-
tion(1):
Net income (loss) per common and comon
equivalent shares ........................ $ (.08) $ .16
Weighted average common and common
equivalent shares outstanding ............ 2,268,582 2,238,373
</TABLE>

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<TABLE>
<CAPTION>
July 31, 1997
-----------------------------------
Pro Forma
Pro Forma(2) As Adjusted(2)(3)
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<S> <C> <C>
Consolidated Balance Sheet Data:
Working capital ........................... $ 1,166 $ 4,238
Total assets .............................. $ 11,756 $ 15,228
Long-term debt, less current portion ...... $ 3,670 $ 3,670
Total liabilities ........................... $ 10,424 $ 9,174
Stockholders equity ........................ $ 882 $ 5,604
</TABLE>

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(1) Pro forma per share data gives effect to the conversion of all convertible
preferred stock into common shares as if it occurred as of November 1,
1995 using the treasury stock method. The following table presents a
reconciliation of the pro forma weighted average common shares used in the
pro forma per share computations.

<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
October 31, 1996 July 31, 1997
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<S> <C> <C>
Weighted average common shares outstanding ...... 1,026,572 996,363
Conversion of preferred stock .................. 1,002,747 1,002,747
Warrants ....................................... 239,263 239,263
---------- ----------
2,268,582 2,238,373
========== ==========
</TABLE>

(2) Gives retroactive effect to recapitalization and conversion of Convertible
Preferred Stock to shares of Class B Common Stock. See "Certain
Transactions."

(3) Adjusted to give effect to this Offering assuming an initial public
offering price of $4.00 per share of Common Stock and the initial
application of the net proceeds therefrom.

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<PAGE>

RISK FACTORS

The purchase of Common Stock offered hereby involves substantial risks and
immediate substantial dilution. Prospective investors should carefully consider
the risk factors set forth below in addition to the other information contained
in this Prospectus before purchasing the securities offered hereby.

Operating Results; History of Losses; Decline in Sales. Although the
Company had net income of $347,000 for the nine months ended July 31, 1997, the
Company's revenues and results of operations have fluctuated materially during
the last five fiscal years. For the fiscal year ended October 31, 1995 and
1996, the Company experienced net losses of $2,893,000 and $183,000,
respectively. There can be no assurance that the Company can maintain
profitability. Although the Company's net sales increased to $12,082,000 for
the nine months ended July 31, 1997, from $10,768,000 for the same period in
1996, for the fiscal year ended October 31, 1996, net sales decreased to
$13,910,000 from net sales of $22,784,000 for the fiscal year ended October 31,
1985. The sales decline was due to (i) a decline in the sales of latex balloons
due to the closing of the Company's latex balloon manufacturing operations in
September, 1995, (ii) a decline in the sales of mylar balloons due to the loss
of several national account customers and (iii) the elimination of the sale of
plush toys. While the Company has obtained a supply of latex balloons and has
initiated programs to make it more competititve in the mylar market, there can
be no assurance that the Company will continue to incerase its net sales. See
"Selected Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements and notes
thereto included herein.

Additional Capital Requirements; Uncertainty of Additional Funding. Based
on its current operating plan, the Company anticipates that its existing
capital resources together with the proceeds of this Offering will be adequate
to satisfy its requirements for at least 12 months from the date of this
Prospectus. Thereafter, the Company may require additional capital in order to
expand its business. There can be no assurance that the Company will be able to
secure additional debt or equity financing or that such financing will be
available on favorable terms. Historically, the Company has been substantially
dependent upon bank debt financing and debt and equity financing and guarantees
from its affiliates. There can be no assurance that the Company's affiliates
will continue to extend or guarantee such financing. See "Certain
Transactions." Additionally, financing, if any, may be either equity, debt or a
combination of debt and equity. An equity financing could result in dilution in
the Company's net tangible book value per share of Common Stock. The Company
has agreed not to sell or offer for sale any of its securities for a period of
18 months following the date of this Prospectus without the consent of the
Underwriter. If the Company is unable to obtain additional financing, if
needed, the Company's ability to meet its obligations and to expand its
operations will be materially and adversely affected. See "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and notes thereto included herein.

Dependence on Limited Product Lines. The business of the Company is
dependent on three principal product lines -- mylar balloons, latex balloons
and specialty and printed films. Competition in each of these product lines is
intense. There can be no assurance that the Company will be able to establish
or maintain sales in all or any of these lines sufficient to achieve or sustain
profitability. If demand for one or more of these product lines is not
developed or maintained, as the case may be, whether due to competition,
product performance, customer assessment of the Company's resources,
technological changes or other factors, the Company's operations will be
materially adversely affected. See "Business--Products."

Dependence on Supplier; Creditors Proceeding. The Company is dependent on
a supplier located in Mexico for the manufacture of its latex balloon product
line. This supplier has experienced financial difficulty and has sought
protection from its creditors in a Suspension of Payments proceeding similar
but not identical to a reorganization proceeding under U.S. bankruptcy laws. In
the event of the loss of this supplier, there can be no assurance that the
Company will be able to obtain an alternative source of supply on favorable
terms or at all. The loss of the source of supply for the latex balloon product
line for any reason would materially adversely affect the business of the
Company. The Company has entered into an agreement to provide capital in the
form of loans to the Mexican supplier, and has made loans and advances to the
supplier to date in the amount of $300,000. In the event the Mexican supplier
is unsuccessful in negotiating a reorganization with its creditors and is
forced into bankruptcy, the collection of all or any portion of such advances
is unlikely. The amount of the advances will not exceed $400,000, and the
Company's commitment to provide additional funding beyond the

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<PAGE>

$400,000 is contingent on the successful conclusion of the Suspension of
Payments proceeding. A portion of the proceeds of this Offering will be used to
provide such loans to the Mexican supplier. The Company is also a party to a
joint venture with the Mexican supplier for the packaging of balloons and
printing of latex balloons of both the Company and the supplier. In the event
of the bankruptcy of the Mexican supplier, the Company anticipates that the
business of the joint venture would continue, subject to the approval of the
Mexican bankruptcy court. See "Use of Proceeds" and "Business--Manufacturing."

Dependence On Key Personnel. The Company's success depends to a
significant degree on the continued service of certain key management
personnel, in particular Howard W. Schwan, the Company's President and John C.
Davis, the Company's Executive Vice President of Sales. The loss or
interruption of Messrs. Schwan or Davis' services, for whatever reason, would
have a material adverse effect on the Company. In the event of the loss of
services of either Mr. Schwan or Mr. Davis, no assurance can be given that the
Company will be able to obtain the services of adequate replacement personnel.
The Company has entered into a five year employment agreement with Mr. Schwan
and has extended the term of Mr. Davis' employment agreement through January,
2000. Mr. Schwan's agreement includes provisions under which Mr. Schwan agrees
not to compete with the Company for a period of three years after termination
of his employment with the Company. The Company does not currently maintain key
man life insurance on its officers but has applied for a policy covering Mr.
Schwan of which the Company shall be the sole beneficiary. See
"Management--Employment Agreement."

Related Party Transactions; Potential Conflicts of Interest. In June,
1997, the Company issued notes in the principal amount of $865,000, together
with warrants to purchase 277,244 shares of the Company's Common Stock at $3.12
per share. These notes and warrants were purchased by an investor group
including Howard W. Schwan, John H. Schwan, Stephen M. Merrick and John C.
Davis, current members of Company management. The notes will not be repaid out
of the proceeds of the Offering nor will the shares of Common Stock underlying
the warrants be included in this Offering. The Company believes that all of
these arrangements are favorable to the Company and were entered into on terms
reflecting arms' length negotiation; however, since no independent appraisals
evaluating these affiliated business transactions were obtained, there can be
no assurance that such transactions were based on terms no less favorable than
could have been obtained from unaffiliated third parties. Potential conflicts
of interest could arise between the Company and the affiliated parties in
connection with the future enforcement, amendment or termination of these
arrangements. All transactions between the Company and related parties are
subject to review and approval of a majority of the disinterested members of
the Company's board of directors who have access, at Company's expense, to the
Company's independent counsel. See "Management," "Certain Transactions" and
"Principal Stockholders."

Related Party; Corporate Counsel. Stephen M. Merrick, Chief Executive
Officer and principal shareholder of the Company is also a member of Fishman
Merrick Miller Genelly Springer Klimek & Anderson, P.C., the law firm which
represents the Company in this Offering and which has passed on the validity of
the Common Stock. Mr. Merrick will only devote a portion of his time to
managing the affairs of the Company. Other members of Fishman Merrick Miller
Genelly Springer Klimek & Anderson, P.C. also have an equity ownership interest
in the Company. A conflict may arise between the responsibilities and duties of
Fishman Merrick Miller Genelly Springer Klimek & Anderson, P.C., Mr. Merrick,
and/or the other members of the firm, as shareholders, as officers of the
Company, and as counsel to the Company. See "Management," "Certain
Transactions" and "Legal Matters."

Related Party; Supplier. John H. Schwan, Chairman and principal
shareholder of the Company is also president and a principal owner of Packaging
Systems, Inc., a supplier to the Company. Mr. Schwan will only devote a portion
of his time to managing the affairs of the Company. A conflict may arise
between Mr. Schwan's respective duties and responsibilities as an officer and
shareholder of these two entities. See "Management," "Certain Transactions."

Control by Insiders; Reduced Probability of Change in Control. Upon
completion of this Offering, the Company's executive officers and directors
will beneficially own 65% of the outstanding Class B Common Stock and will
beneficially own approximately 36% of the outstanding Common Stock (44% if
their shares of Class B Common Stock are converted to shares of Common Stock)
and will be able to elect at least a majority of the Company's directors and
thereby direct the policies of the Company. As a result of the executive
officers owning the majority of the Class B Common Stock and thereby being able
to elect a majority of the Company's

9
<PAGE>

directors, it is less likely that an outside party will seek to obtain control
of the Company through the purchase of Common Stock. In addition, for a period
of five years from the date of this Prospectus, the Underwriter has been
granted the right to designate a person for election to the Company's board of
directors. See "Principal Stockholders," "Management," "Description of Capital
Stock" and "Underwriting."

Limited Number of Independent Directors. The Company currently has one
independent, non-management director and will appoint a second independent
director within 90 days of the date of this Prospectus. Management directors
will constitute a majority of the board and in the case of a conflict between
the interests of stockholders and those of management the board may be less
likely to represent the interests of stockholders than if a majority of the
board were independent. See "Management."

Limitation of Director Liability. The Company's Certificate of
Incorporation contains a provision which eliminates the personal liability of
directors for monetary damages for breach of their fiduciary duties as
directors subject to certain limitations. As a result, it may be more difficult
for stockholders to obtain relief against a director for breaches of such
director's fiduciary duty than if this provision was not included in the
Company's Certificate of Incorporation. See "Management--Limitation of
Liability and Indemnification."

Competition. The markets in which the Company competes are highly
competitive and rapidly changing. A number of companies offer products and
services which are the same or similar to those offered by the Company. The
Company's ability to compete depends upon 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 to 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. There
can be no assurance that the Company will be able to compete successfully
against current or future competitors, or that competitive pressures will not
have a material adverse effect on the Company's business, operating results and
financial condition. See "Business--Competition."

Dependence on Licenses. Particularly in connection with its mylar balloon
product line, the Company relies significantly on the use of character and
other copyright licenses to develop, maintain and market its products and to
compete against other companies having licenses for other characters and
copyrights. All of the Company's licenses are for one or two year terms. The
loss of one or more of its present significant licenses or the failure to
obtain new licenses as they become available could have a material adverse
effect on the business of the Company. There is intense competition among the
manufacturers of mylar balloons to obtain and maintain such licenses and there
can be no assurance that the Company will be able to retain or obtain current
or new licenses. See "Business--Competition."

Dilution; Disproportionate Risk to Purchasers of Common Stock. Purchasers
of the Common Stock at the initial public offering price will experience
immediate and substantial dilution in the net tangible book value per share of
Common Stock of $2.45 or 61% ($2.33 or 58%, if the Over-Allotment Option is
exercised in full). The existing stockholders of the Company have acquired
their respective equity interests at costs substantially below the offering
price in this Offering. Accordingly, to the extent that the Company incurs
losses, the purchasers in this Offering will bear a disproportionate risk with
respect to such losses. See "Dilution."

No Dividends. The Company has never paid any dividends on its Common Stock
and does not currently intend to pay dividends on its Common Stock in the
foreseeable future. The Company currently intends to retain all its earnings,
if any, to finance the development and expansion of its business. The Company
has also agreed to restrictions on the payment of dividends in connection with
its current bank financing. See "Dividend Policy."

Broad Discretion of Management in Use of Proceeds. Approximately 39% of
the estimated net proceeds of this Offering (approximately 47% if the
Over-Allotment Option is exercised in full) is to be used for sales and
marketing activities, character and copyright licensing and working capital and
general corporate purposes. Accordingly, the Company's management will have
broad discretion as to the application of such proceeds. In addition, a portion
of the proceeds of this Offering may be used to acquire companies or products
at the broad discretion of the board of directors. Except as otherwise
disclosed in this Prospectus, the Company has no agreement or arrangement with
respect to any such acquisition. See "Use of Proceeds."

10
<PAGE>

Use of Proceeds to Repay Debt. Approximately 26% of the estimated net
proceeds of this Offering is to be used for the repayment of bank debt. These
funds will therefore not be otherwise available for the Company's operations.
See "Use of Proceeds."

Securities Eligible for Future Sale. Sales of substantial amounts of
Common Stock after this Offering could adversely affect the market price of the
Company's Common Stock. The number of shares of Common Stock available for sale
in the public market is limited by restrictions under the Securities Act of
1933, as amended (the "Securities Act"), and by lock-up agreements pursuant to
which the holders of all of the issued and outstanding shares prior to this
Offering have agreed not to sell or dispose of any of their shares for a period
of 18 months after the date of this Prospectus (the "Lock-up Period") without
the prior written consent of the Underwriter. The Underwriter may, in its sole
discretion and at any time without notice, release all or any portion of the
shares subject to such lock-up agreements. Although the Underwriter does not
currently intend to release all of such shares from the lock-up agreements
prior to their expiration, it may from time to time release all or a portion
thereof, depending on a securityholder's individual circumstances, as market
conditions permit. Of the 2,510,202 shares of Common Stock that will be
outstanding after this Offering, the 1,500,000 shares sold in this Offering
will be freely tradeable without restriction or further registration under the
Securities Act, except that shares owned by "affiliates" of the Company, as
that term is defined in Rule 144 ("Rule 144") under the Securities Act
("Affiliates"), may generally only be sold in compliance with applicable
provisions of Rule 144. The remaining 1,010,202 shares of Common Stock and the
1,098,901 shares of Class B Common Stock (and Common Stock underlying the Class
B Common Stock) will be "restricted securities," as that term is defined in
Rule 144, and in certain circumstances may be sold without registration
pursuant to such rule. After this Offering, substantially all of the restricted
shares will be eligible for sale in compliance with Rule 144; however, all of
these shares are subject to lock-up agreements and will be subject to
restrictions on sale until the expiration of the Lock-up Period, unless
released therefrom by the Underwriter. See "Management--Stock Option Plan,"
"Description of Capital Stock," "Securities Eligible for Future Sale" and
"Underwriting."

Absence of Public Market; Arbitrary Determination of Offering Price;
Possible Volatility of Stock Price. Prior to this Offering, there has been no
public market for the Common Stock, and there can be no assurance that an
active public market will develop or be sustained after this Offering. The
initial public offering price of the Common Stock has been determined by
negotiations among the Company and the Underwriter and may not necessarily bear
any relationship to the assets, book value, earnings or net worth of the
Company or any other recognized criteria and should not be considered to be an
indication of the actual value of the Company. Accordingly, the initial public
offering price may bear no relationship to the trading price of the Common
Stock after the consummation of this Offering, and there can be no assurance
that the price will not decline below the initial public offering price. See
"Underwriting." The trading price of the Common Stock could be subject to wide
fluctuations in response to actual or anticipated quarterly operating results
of the Company, announcements of the Company or its competitors and general
market conditions, as well as other events or factors. In addition, the stock
markets have experienced extreme price and volume trading volatility in recent
years. This volatility has had a substantial effect on the market price of many
small capitalization companies, and has often been unrelated to the operating
performance of those companies. This volatility may adversely affect the market
price of the Common Stock.

Underwriter's Potential Influence on the Market. It is anticipated that a
significant portion of the Common Stock offered hereby will be sold to
customers of the Underwriter. Although the Underwriter has advised the Company
that it intends to make a market in the Common Stock, it will have no legal
obligation to do so. The price and the liquidity of the Common Stock may be
significantly affected by the degree, if any, of the Underwriter's
participation in the market. No assurance can be given that any market
activities of the Underwriter, if commenced, will be continued. See
"Underwriting."

Delisting from the Nasdaq SmallCap Market; Potential Penny Stock
Classification. The Common Stock has been approved for quotation on the Nasdaq
SmallCap Market. However, there can be no assurance that a trading market for
the Common Stock will develop, or if developed, that it will be maintained. In
addition, no assurance can be given that the Company will be able to satisfy
the criteria for continued quotation on the Nasdaq SmallCap Market following
this Offering. Failure to meet the maintenance criteria in the future may
result in the Common Stock not being eligible for quotation.

11
<PAGE>

If the Company were removed from the Nasdaq SmallCap Market, trading, if
any, in the Common Stock would thereafter have to be conducted in the
over-the-counter market in so-called "pink sheets" or, if then available,
Nasdaq's OTC Bulletin Board. As a result, holders of the Common Stock would
find it more difficult to dispose of, or to obtain accurate quotations as to
the market value of, the Common Stock.

In addition, if the Common Stock is delisted from trading on Nasdaq and
the trading price of the Common Stock is less than $5.00 per share, trading in
the Common Stock would also be subject to the requirements of Rule 15g-9
promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Under such rule, broker/dealers who recommend such low-priced
securities to persons other than established customers and accredited investors
must satisfy special sales practice requirements, including a requirement that
they make an individualized written suitability determination for the purchaser
and receive the purchaser's written consent prior to the transaction. The
Securities Enforcement Remedies and Penny Stock Reform Act of 1990 also
requires additional disclosure in connection with any trades involving a stock
defined as a penny stock (generally, according to recent regulations adopted by
the Securities Exchange Commission (the "Commission"), any equity security not
traded on an exchange or quoted on Nasdaq that has a market price of less than
$5.00 per share, subject to certain exceptions), including the delivery, prior
to any penny stock transaction, of a disclosure schedule explaining the penny
stock market and the risks associated therewith. Such requirements could
severely limit the market liquidity of the Common Stock and the ability of
purchasers in this Offering to sell their securities in the secondary market.
There can be no assurance that the Common Stock will not be delisted or treated
as a penny stock.

Litigation. The Company is a party to certain legal proceedings, and a
finding against the Company could adversely affect the Company's operations.
See "Legal Matters."

Forward-Looking Information and Associated Risk. This Prospectus contains
various forward-looking statements, including statements regarding, among other
things, (i) the Company's growth strategy, (ii) anticipated trends in the
Company's business, and (iii) the Company's ability to enter into contracts
with licensors, suppliers, distributors and strategic partners. These
statements are based upon management's current beliefs as well as assumptions
made by management based upon information currently available to it. These
statements are subject to various risks and uncertainties, including those
described above, as well as potential changes in economic or regulatory
conditions generally which are largely beyond the Company's control. Should one
or more of these risks materialize or changes occur, or should management's
assumptions prove incorrect, the Company's actual results may vary materially
from those anticipated or projected.

12
<PAGE>

THE COMPANY

Background. 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. The principal executive
offices of the Company are located at 22160 North Pepper Road, Barrington,
Illinois 60010; the Company's telephone number is (847) 382-1000. See
"Business--Property." 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. 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 herein to the Company shall refer to the Company, its
predecessor Creative Technology, Inc. and its wholly-owned subsidiary, CTI
Balloons.

Change in Control. In March and May of 1996, a group of investors made an
equity investment of $1,000,000 in the Company in return for 1,098,901 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. See "Management"
and "Certain Transactions."

Recapitalization. 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 effective upon the closing of
this Offering of all then outstanding shares of the Company's Convertible
Preferred Stock into an aggregate of 1,098,901 shares of Class B Common Stock.
The shares of Class B Common Stock contain rights identical to shares of Common
Stock, except that shares of Class B Common Stock, voting separately as a
class, have 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, vote on all
other matters, including the election of the remaining directors. The
recapitalization and related transactions were approved by written consent of
the shareholders. See "Description of Capital Stock."

13
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of the Common Stock offered
by the Company hereby, after deduction of the underwriting discounts, the
Underwriter's non-accountable expense allowance and other estimated expenses of
this Offering payable by the Company, are expected to aggregate $4,722,000
($5,505,000 if the Over-Allotment Option is exercised in full).

The following table summarizes the Company's estimated use of the net
proceeds:

<TABLE>
<CAPTION>
Approximate Approximate
Application of Proceeds Amount Percentage
- ----------------------- ------------- -------------
<S> <C> <C>
Repayment of bank indebtedness(1) ........................ $ 1,250,000 26.4%
Selling and marketing(2) ................................. $ 400,000 8.5%
Plant and equipment(3) ................................. $ 1,100,000 23.3%
Loans to Mexican supplier(4) ........................... $ 400,000 8.5%
Investment in Mexican joint venture(4) .................. $ 150,000 3.2%
Character and other licenses ........................... $ 400,000 8.5%
Working capital and general corporate purposes(5) ...... $ 1,022,000 21.6%
------------ ------
Total ................................................ $ 4,722,000 100%
============ ======
</TABLE>

- ------------
(1) Repayment of revolving line of credit. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and
Capital Resources."

(2) Includes hiring of additional personnel in marketing, product design and
development, and sales, and acquiring product displays for expansion into
additional retail locations. See "Business--Marketing, Sales and
Distribution."

(3) Includes purchase of laminating and coating equipment and graphics
equipment, including eight-color graphic printer. See
"Business--Manufacturing."

(4) See "Business--Manufacturing" for description of loan to Mexican supplier
and further investment in Mexican joint venture.

(5) Includes purchase of inventory and payment of trade payables.

In the event the Underwriter exercises the Over-Allotment Option in full,
the Company will utilize the additional net proceeds for general corporate
purposes.

The Company anticipates that the proceeds from this Offering, together
with its current capital resources and projected cash flow from operations,
will be sufficient to satisfy its requirements for at least 12 months from the
date of this Prospectus. Thereafter, the Company may need to raise additional
funds to expand its operations. There can be no assurance that additional
financing will be available or if available will be available on favorable
terms. If the Company is unable to obtain such additional financing, the
Company's ability to maintain its current level of operations will be
materially and adversely affected. See "Risk Factors--Additional Capital
Requirements; Uncertainty of Additional Funding."

Pending application of the proceeds of this Offering, the Company intends
to invest the net proceeds in certificates of deposit, money market accounts,
United States government obligations or other short-term interest bearing
obligations of investment grade.

Proceeds of this Offering may also be used, if the Company so elects, to
acquire companies or products that complement its business or operations. In
the ordinary course of its business, the Company from time to time evaluates
companies for acquisition and products for acquisition or license. Except as
otherwise disclosed herein, the Company has no agreement or arrangement with
respect to any such acquisition or license.

14
<PAGE>

DIVIDEND POLICY

The Company has never paid any dividends on its Common Stock and does not
currently intend to pay 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 has covenanted not to declare any dividend or other
distribution on its shares or redeem or purchase any of its shares in excess of
$250,000 in any year. It is also likely that the Company will be required to
agree to restrictions on the payment of dividends in connection with future
financings, if any. See "Risk Factors--No Dividends."

CAPITALIZATION

The following table sets forth the proforma capitalization of the Company
as of July 31, 1997, and as adjusted to reflect the sale of the Common Stock
offered hereby at an assumed initial public offering price of $4.00 per share
of Common Stock and the initial application of the net proceeds therefrom
(after deducting the underwriting discounts and estimated Offering expenses
payable by the Company). The pro forma column gives retroactive effect to the
recapitalization and conversion of Convertible Preferred Stock to shares of
Class B Common Stock upon the closing of the Offering. See "The
Company--Recapitalization" and "Certain Transactions." This table should be
read in conjunction with the Company's financial statements attached hereto.

<TABLE>
<CAPTION>
July 31, 1997
--------------------------
Pro Forma
Pro Forma As Adjusted
(in thousands)
<S> <C> <C>
Long-term debt, less current portion ........................... $ 3,670 $ 3,670
-------- --------
Stockholders' equity
Common Stock, $.065 par value, 11,000,000 shares authorized,
1,010,202 shares outstanding, pro forma, 2,510,202 shares pro
forma as adjusted(1) ....................................... $ 75 $ 173
Class B Common Stock, $.91 par value, 1,100,000 shares autho-
rized, 1,098,901 shares outstanding $ 1,000 $ 1,000
Additional paid-in capital .................................... $ 248 $ 4,872
Retained earnings .......................................... $ 387 $ 387
Treasury stock ............................................. $ (371) $ (371)
Redeemable common stock ....................................... $ (450) $ (450)
Stock Subscription Receivable ................................. $ (7) $ (7)
-------- --------
Total stockholders' equity ................................. $ 882 $ 5,604
-------- --------
Total capitalization ....................................... $ 4,552 $ 9,274
======== ========
</TABLE>

- ------------
(1) Excludes (i) warrants to purchase an aggregate of 230,769 shares of Common
Stock at an exercise price of $.91 per share, (ii) warrants to purchase
277,244 shares of Common Stock at an exercise price of $3.12 per share,
(iii) 121,000 shares of Common Stock issuable pursuant to options having
an exercise price equal to the initial public offering price per share of
Common Stock which were granted under the Company's stock option plan and
(iv) 179,000 shares of Common Stock issuable pursuant to options which may
be granted under the Company's stock option plan in the future.

15
<PAGE>

DILUTION

"Net tangible book value per share" represents the amount of total
tangible assets of the Company reduced by the amount of total liabilities and
divided by the number of shares of capital stock outstanding. "Dilution"
represents the difference between the price per share to be paid by new
investors for the shares of Common Stock offered hereby, and the pro forma net
tangible book value per share as of July 31, 1997, after giving effect to this
Offering. The pro forma net tangible book value per share at July 31, 1997,
also gives retroactive effect to the recapitalization and conversion of the
Company's Preferred Stock into shares of Class B Common Stock upon the closing
of this Offering. See "Certain Transactions." At July 31, 1997, the pro forma
net tangible book value of the capital stock was (including shares of Class B
Common Stock) $882,000 in the aggregate, or $.42 per share. After giving effect
to the sale of the shares of Common Stock offered hereby (at the assumed
initial public offering price of $4.00 per share of Common Stock, resulting in
estimated net proceeds of $4,722,000, after deducting underwriting discounts
and estimated Offering expenses payable by the Company), the pro forma net
tangible book value of the capital stock (including shares of Class B Common
Stock), as of July 31, 1997, would have been $5,604,000 in the aggregate, or
$1.55 per share. This represents an immediate increase in pro forma net
tangible book value of $1.13 per share to existing stockholders and an
immediate dilution per share of $2.45, or 61%, to new investors in this
Offering.

The following table illustrates the dilution per share as described above:

<TABLE>
<S> <C> <C>
Initial public offering price per share of Common Stock ........................ $4.00
Pro forma net tangible book value per share (including shares of Class B
Common Stock) before this Offering ................................. $ .42
Increase attributable to new investors ................................. $1.13
------
Pro forma net tangible book value per share (including shares of Class B
Common Stock) after this Offering ............................................. $1.55
------
Dilution per share to new investors ............................................. $2.45
======
</TABLE>

Based on the foregoing assumptions, the following table sets forth, as of
completion of this Offering, the number of shares purchased from the Company,
the total cash consideration paid to the Company and the average price per
share paid by the existing stockholders and by new investors purchasing shares
of Common Stock in this Offering.

<PAGE>

<TABLE>
<CAPTION>
Total Average Price
Shares Purchased Consideration Per Share
----------------------- ----------------------- --------------
Number Percent Amount Percent
----------- --------- ------------ --------
<S> <C> <C> <C> <C> <C>
Existing Common Stock holders ...... 1,010,202 28% $ 256,388 3.53% $ .25
Class B Common Stock holders ...... 1,098,901 30% $1,000,000 13.78% $ .91
New Investors ..................... 1,500,000 42% $6,000,000 82.69% $4.00
--------- ---- ----------- ------
Total .............................. 3,609,103 100% $7,256,388 100%
========= ==== =========== ======
</TABLE>

If the Over-Allotment Option is exercised in full, the pro forma net
tangible book value at July 31, 1997, after giving effect to this Offering
would be approximately $6,387,000 or $1.67 per share, and the dilution per
share to new investors would be approximately $2.33 or 58%.

The foregoing also assumes no exercise of the Underwriter's Warrants or
any outstanding stock options or warrants. As of July 31, 1997, there were
outstanding warrants to purchase an aggregate of 230,769 shares of Common Stock
at an exercise price of $.91 per share and warrants to purchase up to 277,244
shares of Common Stock at a price of $3.12 per share. See "Certain
Transactions." The Company has granted options to purchase up to 121,000 shares
of its Common Stock with an exercise price equal to the initial public offering
price per share of Common Stock pursuant to its stock option plan. The Company
has a total of 179,000 shares of Common Stock reserved for issuance upon the
exercise of stock options which may be granted from time to time in the future
pursuant to its stock option plan. See "Management--Stock Option Plan." To the
extent that any options or warrants are exercised at a price per share less
than the initial public offering price, there will be further dilution to new
investors.

16
<PAGE>

SELECTED FINANCIAL DATA
(in thousands except share and per share data)

The following table sets forth selected financial data of the Company for
the two years ended October 31, 1996 and 1995 (collectively, the "Year-End
Data"), and for the nine months ended July 31, 1997 and 1996. The Year-End Data
has been derived from the audited financial statements of the Company appearing
elsewhere herein, which have been audited by Coopers & Lybrand L.L.P. The
selected financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Financial Statements and notes thereto and other financial and
statistical data appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
Nine Months
Year Ended October 31, Ended July 31,
-------------------------------- ---------------------------
1995 1996 1996 1997
------------- ---------------- ------------ ------------
<S> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Net sales ....................................... $ 22,784 $ 13,910 $ 10,769 $ 12,082
Cost of sales ................................. $ 15,078 $ 8,558 $ 6,547 $ 7,346
---------- ---------- ---------- ----------
Gross profit ................................. $ 7,706 $ 5,352 $ 4,222 $ 4,736
Operating Expenses:
General and administrative ..................... $ 2,900 $ 2,055 $ 1,603 $ 1,335
Selling ....................................... $ 3,770 $ 2,387 $ 1,863 $ 2,043
Advertising and marketing ..................... $ 2,356 $ 592 $ 489 $ 625
Plant shut down expense ........................ $ 850 -- -- --
Loss on disposition of latex equipment ......... 822 -- -- --
---------- ---------- ---------- ----------
Total operating expenses ..................... $ 10,698 $ 5,034 $ 3,955 $ 4,003
---------- ---------- ---------- ----------
Operating income (loss) ........................ $ (2,992) $ 318 $ 267 $ 733
---------- ---------- ---------- ----------
Other income (expense) ........................ $ (675) $ (495) $ (395) $ (386)
---------- ---------- ---------- ----------
Income (loss) before income taxes ............... $ (3,667) $ (177) $ (128) $ 347
Income tax benefit (expense) .................. $ 774 $ (6) $ -- $ --
---------- ---------- ---------- ----------
Net income (loss) .............................. $ (2,893) $ (183) $ (128) $ 347
Dividends applicable to Convertible Preferred
Stock .......................................... -- $ (74) $ (42) $ (97)
---------- ---------- ---------- ----------
Net income (loss) applicable to common shares $ (2,893) $ (257) $ (170) $ 250
========== ========== ========== ==========
Net income (loss) per common and common
equivalent share .............................. $ (2.18) $ (.20) $ (.13) $ .20
========== ========== ========== ==========
Weighted average number of common and
common equivalent shares outstanding ......... 1,328,952 1,265,835 1,277,670 1,235,626
Pro forma per share data reflecting recapitaliza-
tion(1):
Net income (loss) per common and common
equivalent share ........................... $ (.08) $ .16
Weighted average common and common
equivalent shares outstanding ............... 2,268,582 2,238,373
</TABLE>

17
<PAGE>

<TABLE>
<CAPTION>
Pro Forma(1)
October 31, 1996 July 31, 1997
------------------ --------------
<S> <C> <C>
Consolidated Balance Sheet Data:
Working capital ........................... $ 347 $ 1,166
Total assets .............................. $ 10,286 $ 11,756
Long term debt, less current portion ...... $ 3,105 $ 3,670
Total liabilities ........................ $ 9,355 $ 10,424
Stockholders' equity ..................... $ 481 $ 882
</TABLE>

- ------------
(1) Gives retroactive effect to recapitalization and conversion of Convertible
Preferred Stock to shares of Class B Common Stock. See "Certain
Transactions."

18
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

In February, 1996, there was a change of control and management of the
Company. Since that time, new management has focused its efforts on (i)
reducing costs of operations, (ii) achieving liquidity, (iii) formulating and
implementing plans and programs to increase revenues and (iv) achieving
profitability. Operating expenses were reduced from 1995 to 1996 by over $4.8
million, a reduction of approximately 49%. Included in the expense reduction
was a $200,000 decrease in depreciation expense related to a change in
accounting estimate of the useful life of certain equipment. The net loss of
the Company was reduced from the 1995 level of $2,893,000 to $183,000 for
fiscal 1996; $1,672,000 of the loss in fiscal 1995 related to the shutdown and
sale of the Company's latex balloon manufacturing operation. While net sales
decreased 39% in fiscal 1996 to $13,910,000 from $22,784,000 in fiscal 1995,
net sales for the nine months ended July 31, 1997 have increased 12% from net
sales for the same period in 1996. For the nine months ended July 31, 1997, the
Company had net income of $347,000 compared to a net loss of $128,000 for the
same period in 1996. Working capital increased to $1,230,000 on July 31, 1997
from $347,000 on October 31, 1996. During the past 18 months, the Company has
introduced over 180 new mylar balloon designs, has out-sourced the manufacture
of and engaged in active marketing of latex balloons and introduced several new
products. Approximately $1.9 million of new financing has been provided in
private financings and a new bank loan and line of credit in the aggregate
amount of $6.3 million has been obtained.

The Company anticipates investing $1.1 million of the proceeds of this
Offering in capital items and operations to improve the products, production
capacity, marketing efforts, product development and operations of the Company.
The Company plans to make capital investments of approximately $2.8 million, a
portion of which will be financed through equipment leases or otherwise, in
plant improvements and equipment which will increase production capacity and
which will allow the Company to print eight-color designs in the mylar product
line and the laminated and printed films business. The Company plans to make
loans to its supplier of latex balloons to further assure the source of supply.
See "Risk Factors--Dependence on Supplier; Creditors Proceeding." The Company
plans to invest a portion of the proceeds of this Offering for the hiring of
personnel in marketing, product design and development and sales to enhance the
Company's product design and development efforts, its product line, marketing,
customer service and support and sales effort.

Results of Operation

Net Sales. For the nine months ended July 31, 1997, net sales increased to
$12,082,000 from $10,768,000 for the same period in 1996, an increase of
approximately 12%. This increase in net sales was a reflection principally of
increases in the sales of latex balloons and printed and laminated films. For
the fiscal year ended October 31, 1996, net sales were $13,910,000, as compared
to net sales of $22,784,000 for the fiscal year ended October 31, 1995. The 39%
decline in sales for that period was a result of (i) a decline of approximately
$2 million in the sales of latex balloons because of the closing of the
Company's latex balloon manufacturing operations in September, 1995 and the
lack of supply of latex balloons from October, 1995 to June, 1996, (ii) a
decline in sales of mylar balloons of approximately $6 million resulting
primarily from the loss of several national account customers and (iii) the
elimination of sales of plush toys which represented approximately $900,000 in
sales during fiscal 1995. Several of the Company's national accounts were lost
to American Greetings, a recent entrant in the mylar balloon market. American
Greetings is a major greeting card company, and has existing sales
relationships with many national customers in the expression industry. The
Company has initiated several programs to compete with American Greetings,
including single pack mylar balloons, store servicing arrangements, helium
supply arrangements and discount pricing.

For the fiscal year ending October 31, 1996, foreign sales were
$1,777,000, or 12.8% of net sales, as compared to $1,823,000 or 8% of sales for
fiscal 1995. For the nine months ended July 31, 1997, foreign sales were
$1,532,000, or 12.7% of net sales as compared to $1,323,000, or 12.3% of sales
for the same period of 1996.

During fiscal 1995, mylar balloons represented approximately 87% of
revenues, latex balloons 11% of revenues and laminated and printed films
approximately 2% of sales. During fiscal 1996, mylar balloons represented

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87% of sales, latex balloons 4% of sales and laminated and printed films 9% of
sales. During the nine months ended July 31, 1997, mylar balloons represented
78% of sales, latex balloons 9% of sales and laminated and printed films 13% of
sales as compared to 92%, 2% and 6%, respectively, for the nine months ended
July 31, 1996. The Company anticipates that the percentage of sales represented
by latex balloons and laminated and printed films will continue to increase
during fiscal 1997 and 1998. The profit margins associated with latex balloons
and laminated and printed films are not materially different from the profit
margin on mylar balloons. For the nine months ended July 31, 1997, the profit
margins on mylar balloons, latex balloons and laminated and printed materials
were 28.7%, 29%, and 26%, respectively.

Cost of Sales. For the nine months ended July 31, 1997, cost of sales
represented 60.8% of net sales the same percentage experienced for the
comparative period in 1996. For the fiscal year ended October 31, 1996, cost of
goods represented 61.5% of net sales as compared to 66.2% for the fiscal year
ended October 31, 1995. The primary factors which contributed to reduced cost
of sales in 1996 were a decline in salaries and related payroll expenses, and a
decrease in depreciation expense of $200,000.

Administrative. For the nine months ended July 31, 1997, administrative
expenses were $1,335,000, or 11.1% of sales as compared to $1,603,000, or 14.9%
of sales, for the same period in the prior year. For the fiscal year ended
October 31, 1996, general and administrative expenses were $2,055,000, or 14.8%
of sales, as compared to $2,900,000, or 12.7% of sales, for the prior fiscal
year. The decreases were the result of a number of items including the
reduction in accounting and financial staff, and reduction in certain executive
salaries and expenses, and a reduction in overhead expenses.

Selling. For the nine months ended July 31, 1997, selling expenses were
$2,043,000, or 16.9% of net sales, as compared to $1,863,000, or 17.3% of net
sales for the same period in the prior year. For the fiscal year ended October
31, 1996, selling expenses were $2,387,000, or 17.2% of net sales, as compared
to selling expenses of $3,770,000, or 16.5% of sales for the fiscal year ended
October 31, 1995.

Advertising and Marketing. For the nine months ended July 31, 1997,
advertising and marketing expenses were $625,000, or 5.2% of sales, as compared
to advertising and marketing expenses of $489,000, or 4.5% of sales, for the
same period in the prior year. The increase in these expenses was a result of
catalogue printing costs and service fees paid on national account sales
programs. For the fiscal year ended October 31, 1996, advertising and marketing
expenses were $592,000 compared to $2,356,000 for the fiscal year ended October
31, 1995. This decrease of $1,764,000 was the result of a significant decline
in the cost of printed materials incurred by the Company, particularly in its
catalogue, as well as a decline in print advertising. Service fees related to
national account sales programs declined with the loss of several national
account customers.

Plant Shutdown Expenses and Loss on Disposition of Latex Equipment. In
fiscal 1995, the Company ceased latex manufacturing operations at its Cary,
Illinois facility and sold its latex balloon manufacturing equipment. See
"Business-Manufacturing." Shutdown expenses of $850,000 were accrued for rent,
utilities, operating expenses, building rehabilitation and latex inventory
write-down during this period. Specific shutdown expenses accrued were: rent of
$250,000; utilities of $30,000; operating expenses of $240,000; building
rehabilitation of $80,000; and latex inventory writedown of $200,000. No
accruals remain as of July 31, 1997. A loss on disposition of latex equipment
was incurred in fiscal 1995 of $822,000 upon sale of the equipment and the
forgiveness of the $400,000 receivable relating to the sale.

Other Expenses. For the nine months ended July 31, 1997, interest expense
was $471,000 as compared to $449,000 for the same period in the prior year. For
the fiscal years ended October 31, 1995 and 1996, interest expense was $800,000
and $553,000, respectively. The reduction in interest expense for fiscal 1996
is a reflection of the reduction in the aggregate indebtedness of the Company
and the new bank loan arrangement in September, 1996 at overall rates of
interest less than the prior bank loan rates. The increase in interest expense
for the nine months ended July 31, 1997, as compared to the 1996 period, is a
result of interest paid on $865,000 of notes issued in June, 1997. See "Certain
Transactions."

Net Income or Loss. For the nine months ended July 31, 1997, the Company
had net income of $347,000 as compared to a net loss of $128,000 for the same
period in the prior year. For the fiscal year ended October 31, 1996, the
Company had net loss of $183,000 as compared to a net loss of $2,893,000 for
the prior fiscal year.

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The Company has determined that a tax valuation allowance is necessary as
of July 31, 1997, based on (i) the loss carryback potential for existing net
operating losses have been exhausted; (ii) the Company has additional tax
losses as of July 31, 1997; and (iii) it is not possible to determine with
certainty that sufficient taxable income will be generated in the future that
will allow for the utilization of the Company's deferred net operating losses.
Due to the anticipated tax loss for the nine months ended July 31, 1997, no tax
provision has been recorded for such interim period.

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 has been immaterial. As a result, the Company has
determined not to provide any hedge against currency rate fluctuations.

Liquidity and Capital Resources

Cash flow used in operations during the nine months ended July 31, 1997
was $643,000. This resulted primarily from increased sales and resulting
increases in accounts receivable and inventory of over $950,000. During fiscal
years 1995 and 1996, the Company had cash flows from operations of $541,000 and
$840,000, respectively. During fiscal 1996, cash raised from the issuance of
Preferred Stock and the new revolving line of credit was used in part to reduce
accounts payable and accrued expenses.

At July 31, 1997 the Company maintained a cash balance of $263,000. The
Company's current cash management policy includes maintaining minimal cash
balances and utilizing the revolving line of credit for liquidity. As of
October 31, 1996, the Company had cash and cash equivalents of $131,000. As of
July 31, 1997, the Company had working capital of $1,230,000. Working capital
as of October 31, 1996 was $347,000.

During the past eighteen months, the Company has funded its operations
primarily through the cash provided by its operating activities, a private
placement financing of Preferred Stock, funding provided by a new bank loan and
line of credit and a private placement of notes and warrants. In early 1996,
the Company completed a private placement of 1,098,901 shares of Preferred
Stock, par value $.91 per share, for gross proceeds of $1,000,000. The
Preferred Stock included a cumulative preferred dividend at the rate of 13%.
The shares of Preferred Stock will be converted into 1,098,901 shares of Class
B Common Stock upon the closing of this Offering. See "The
Company--Recapitalization."

In September, 1996, the Company entered into a Loan Agreement with a bank
under which the bank provided loans and a line of credit to the Company
aggregating $6,300,000. The arrangement included term loans in the amount of
$3,300,000 and a revolving line of credit providing for maximum advances of
$3,000,000 of which $441,000 was unused at July 31, 1997. The term loans are
due on September 1, 2001, and bear interest at either 8.75% or prime plus 1%.
The revolving loan was due on September 1, 1997 and has been renewed until July
1, 1998. The revolving line of credit bears interest at prime plus 1%. During
July, 1997, the same bank provided additional term loans to the Company in the
aggregate amount of $475,000. All these loans are secured by all of the
Company's assets. Three principal shareholders of the Company, John H. Schwan,
Howard W. Schwan and Stephen M. Merrick have guaranteed these obligations. A
portion of the proceeds of this Offering will be used to pay down the revolving
line of credit. See "Use of Proceeds."

During June, 1997, the Company completed a private placement of notes and
warrants for gross proceeds of $865,000. The notes issued in the placement are
subordinated unsecured two year notes, bearing interest at the rate of 10% per
annum. Individuals participating in the placement received five year warrants
to purchase 277,244 shares of Common Stock of the Company at the price of $3.12
per share. Two officers and directors of the Company applied advances made by
them to the Company in January, 1997, in the aggregate amount of $400,000
toward the purchase of the notes and warrants. The proceeds of the placement
were used to reduce trade payables, to increase product inventories, for
acquiring product displays, for catalogue and artwork expenses, and for
providing loans to a Mexican supplier. See "Certain Transactions."

During fiscal 1995 and 1996, the Company invested $479,000 and $496,000,
respectively, in plant and equipment and has invested $471,000 during the nine
months ended July 31, 1997.

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During fiscal 1995 and 1996, the Company utilized $124,000 and $336,000,
respectively, in financing activities, principally the reduction of bank
indebtedness. During the nine months ended July 31, 1997, the Company has
generated $1,303,000 in financing activities.

The Company believes that the net proceeds of this Offering, together with
existing capital resources and cash generated from operations, will be
sufficient to meet the Company's requirements for at least 12 months following
the date of this Prospectus. Thereafter the Company may require additional
capital in order to expand its business and there can be no assurance that the
Company will be able to secure additional debt or equity financing or that such
financing will be available on favorable terms. See "Risk Factors--Additional
Capital Requirements; Uncertainty of Additional Financing."

Seasonality

In the mylar product line, sales have historically been seasonal with
approximately 17% to 27% of annual sales of mylar being generated in December
and January and 13% to 15% of annual mylar 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 to the extent sales in these areas
increase as a percentage of total sales, this should decrease the seasonality
of the Company's total net sales.

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BUSINESS

General

Background. CTI Industries Corporation (the "Company") is one of the
leading manufacturers and sellers of mylar balloons in the world. The Company
also sells latex balloons, novelty and "message" items, such as mugs and
banners, and toy products, such as inflatable masks, punch balls and water
bombs, and produces laminated and specialty films for food packaging and other
commercial uses. The Company's products are sold throughout the United States
and in 30 foreign countries through a wide variety of retail outlets including
grocery, general merchandise and drugstore chains, such as Eckerd Drug Stores
and Safeway and Winn Dixie grocery chains, card and gift shops, such as
Hallmark and Factory Card Outlet stores, and party goods stores, such as Party
City, as well as through florists and balloon decorators. The Company estimates
the worldwide wholesale market for mylar and latex balloons to be in excess of
$570 million.

To meet the needs of the mylar balloon market, the Company has developed
sophisticated film products and techniques which have other application. The
Company's expertise in multi-color printing using water-based ink, in
particular, has enabled the Company to expand its business to include the
production of film wrappers for consumables. The Company produces, laminates
and prints films for food packaging companies and provides custom film products
for other commercial uses.

Business Plan. Upon assuming control in early 1996, new management
concentrated initially on reducing costs of operations, achieving liquidity and
profitability and formulating plans to increase revenues. Having achieved these
goals in late 1996 and early 1997, management's focus turned to generating
increased sales and market share to position itself as a market leader.

To achieve this goal, the Company is focusing its efforts on developing
sales and marketing programs to strengthen, develop and expand its relationship
and sales to its distributors, national chains and other buyers of its
products. In addition to expanding the core U.S. market, the Company will seek
to increase its presence in emerging markets for its balloon and related
products, such as Europe and Central and South America. The Company will also
seek additional distributors for its toy/novelty line of products and will
continue to expand its customer base for its laminated and specialty film
products.

To enable the Company to meet customer demand for high quality,
multi-color mylar balloons and custom film products, the Company will invest in
new laminating and graphic equipment, including an eight-color graphic printer.
The Company also intends to assure its supply of competitively priced latex
balloons by providing capital in the form of loans to its Mexican supplier of
such products. The Company believes that this will provide it with added
control over supply and give the Company an advantage over other latex balloon
distributors. See "Risk Factors--Dependence on Supplier; Creditors Proceeding."

The Company will continue its efforts to license new characters and
designs for its mylar balloons and to develop or license new balloon designs to
increase consumer demand for its products. The Company's catalogue published in
June, 1997, introduced over 100 new balloon designs. The Company has recently
introduced a lower-priced, higher quality standard line of latex balloons and
has introduced a number of new latex balloon

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colors and now manufactures mylar and latex balloons in coordinated colors.
Further, with the introduction of inflatable masks the Company has entered the
novelty/toys market. The Company believes that its full line of mylar and latex
balloons and its manufacturing capability may afford the Company a competitive
advantage in the market.

The Company will continue to seek out new methods for the sale of its
products, including strategic partnerships with companies engaged in the
greeting card, party goods and related businesses to take advantage of these
entities' distribution channels and resources. The Company will continue to
offer custom balloon manufacture for distributors and suppliers to position
itself as a full service manufacturer.

Industry Overview

The mylar balloon came into existence in the late 1970s. During the 1980s,
the market for mylar 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. Because of
its ability to remain buoyant for a long period of time when filled with helium
and its facility for the printing of graphics and messages, the product has
significant appeal as a novelty and message item. Mylar 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.

The Company estimates that the wholesale world market for mylar balloons
is approximately $120 million. Mylar 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. Particularly in areas of Europe and Latin America,
mylar balloons are also sold by individual vendors at fairs, amusement parks
and other public areas.

There are presently seven manufacturers of mylar balloons whose products
are sold in the United States. Five of these companies maintain their own
production facilities in the United States. Several companies market and sell
mylar balloons designed by them and manufactured by others for them.

Mylar balloons are marketed in the United States and foreign countries
through wholesalers or distributors and directly to retail customers. Often the
sale of mylar balloons by the wholesalers/distributors is accompanied by
related products including latex balloons, floral supplies and candy
containers. Although the latex balloon market overlaps the mylar balloon
market, the latex balloon market has been in existence for a longer period than
mylar balloons and extends to more customers and market categories than mylar
balloons.

There are three separate latex balloon product lines: (i) high quality
decorator balloons, (ii) standard novelty balloons and (iii) printed balloons.
The high quality decorator balloons are generally sold to and through balloon
decorators 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 mylar balloons. Printed latex balloons
are sold both in retail outlets and for balloon decoration purposes including
floral designs.

There are at least seven manufacturers of latex balloons whose products
are sold in the United States. It is estimated that the wholesale world market
for latex balloons exceeds $450 million.

While the market for printed and laminated films is fragmented, the
Company believes it is a billion dollar industry.

Products

Mylar Balloons. The mylar balloon is actually composed of a base nylon
material which is coated on one side with a metal deposit and on the other with
polyethylene. Typically, the balloon film is printed with graphic designs and
messages.

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The Company manufactures over 380 balloon designs, in different shapes and
sizes, including the following:

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

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

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

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

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

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

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

o Smackers(TM) are helium filled red lip-shaped balloons.

o You Name It(TM) are balloons to which lettering can be attached for a
personalized message.

In addition to size and shape, a principal element of the Company's mylar
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 licensed characters. The Company maintains licenses for Peanuts(TM),
Garfield(TM), Precious Moments(TM), Hallmark, Ziggy(TM), Grimmy(TM),
Elephantz(TM), Paddington(TM), Face-Offs(TM), Gibson Greetings(TM), Postman
Pat(TM) and several others. See "Business--Patent, Trademarks and Copyrights."

Latex Balloons. The Company sells a high end line of latex balloons under
the product line name Hi-Tex(TM) and a standard line of latex balloons marketed
under the name Partyloons(TM).

Toys and Novelty. The Company also manufactures or sells additional and
related novelty items including mugs, banners and inflatable masks. With its
standard line of latex balloons and newly introduced inflatable masks, the
Company has made entry into the toy market. The Company intends to develop and
acquire additional novelty and toy lines of products, in many cases products
which can be sold in conjunction with its existing products including latex
punch balls and water bombs.

Packaging Films. The Company fabricates and prints films for use in food
packaging. The Company has developed sophisticated methods for the printing of
films, including the use of water-based ink. These techniques have proven
desirable for companies engaged in packaging food products, particularly candy
and snack items, with the result that the Company now provides printed
packaging films for several food packaging companies, including Farley Candies,
and intends to expand and extend this business line.

Custom Film Products. In addition to printed films for food packaging, the
Company fabricates custom film products for various commercial and industrial
purposes. These now include "dunnage" bags (inflatable film products) used in
the packaging of goods and systems for the storage of clothing items.

Marketing, Sales and Distribution

The Company markets and sells its mylar balloon, latex balloon and related
novelty products throughout the United States and in over 30 foreign countries.
The Company maintains a marketing, sales staff and support staff of 11
individuals and a customer service department of 16 individuals. European sales
are conducted by CTI Balloons, the Company's subsidiary located in Rugby,
England. 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 over 350 distributors and wholesalers situated throughout the United
States and in a number of 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. The Company intends to use a portion of the

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<PAGE>

proceeds of this Offering to expand its marketing efforts with current
distributors and to seek out new distributors both in current markets and in
new sales areas. While the Company will continue to focus on the core U.S.
market, it will also seek to exploit other world markets such as Europe and
South America. No distributor or other customer accounts for more than 10% of
the Company's sales revenues. Most sales are on an individual order basis.

The Company also sells balloons and related products to certain national
chain stores including grocery, general merchandise and drug store chains and
party goods stores. The Company's largest chain store customer is Eckerd Drug
Stores. The Company also sells its balloons to individual retail outlets
generally through coordinated efforts with its distributors.

The Company has entered into an agreement with a major greeting card
company under which such company will act as an agent for the sale of the
Company's balloon products in retail outlets to which such company sells
greeting cards. Under the agreement, this company takes orders for balloons,
services the display of balloons and maintains inventory in the stores. The
Company pays this company a commission on sales the company generates and
services. The Company is pursuing similar strategic partnerships with other
companies in the expression industry.

The Company has established independent sales representatives for the sale
of its toy/novelty line which include the standard quality latex balloon,
inflatable masks, punch balls and water bombs. These products constitute a
separate product class requiring a different distribution network.

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 catalogue 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 numerous trade shows for the gift, novelty, balloon and other
industries and advertises in a number of trade and other publications. The
Company also attends licensing shows for the purpose of seeking out additional
design licenses.

The Company markets and sells its printed and laminated films directly and
through independent sales representatives. The Company markets these products
to companies which package their products in plastic wrapping, in particular
food products such as candies.

Manufacturing

Production and Operations. At the Barrington, Illinois headquarters, the
Company owns and operates a modern facility which includes machines of its own
design and construction which fabricate mylar balloons, banners and packaging
bags. These production systems include a patented system for the production and
insertion of valves in balloons. These machines have the capacity to
manufacture approximately 55 million 18" balloons annually.

The Company owns and operates graphic machinery at its facility in
Barrington, Illinois that is used for the printing of films for mylar balloons
and for printed and laminated films. The Company's use of water-based ink makes
its printed films attractive to food processors for the packaging of their
products. The Company intends to use a portion of the proceeds of this Offering
for the acquisition of additional graphic equipment which will be located at
this facility. See "Use of Proceeds."

At the Barrington facility, the Company owns and operates two laminating
machines. The Company intends to use a portion of the proceeds of this Offering
for the purchase of additional laminating machinery which will substantially
enhance the capacity of the Company to produce laminated films. See "Use of
Proceeds."

The Company also 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 50,000 orders annually.

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Pulidos et Terminados Finos. The Company's latex balloons are manufactured
for it by Pulidos et Terminados Finos S.A. de C.V. ("P&TF"), a Guadalajara,
Mexico company engaged principally in the manufacture of latex balloons. In
1995, the Company entered into an agreement with P&TF under which (i) the
Company sold to P&TF all of its latex balloon manufacturing equipment (for the
manufacture of decorator balloons) and such equipment is now operated by P&TF,
(ii) P&TF has agreed for a period of 10 years to supply balloons exclusively to
the Company for the United States and Canada manufactured on such equipment and
(iii) for such 10 year period, P&TF has agreed to supply to the Company,
exclusively in the United States except as to two other companies, all balloons
manufactured by P&TF. Commencing in 1996, P&TF began manufacturing the
Company's high-end line of latex balloons exclusively for the Company for the
United States and also manufactures a standard line of latex balloons which the
Company distributes throughout the United States and in various foreign
countries under the product line name Partyloons(TM).

P&TF has experienced financial difficulties and in 1995, sought protection
from creditors in a "Suspension of Payment" proceeding in Mexico similar, but
not identical to, a reorganization under U.S. bankruptcy laws. In the event of
the loss of P&TF as a supplier, there can be no assurance that the Company will
be able to obtain an alternative source of supply on favorable terms or at all.
See "Risk Factors--Dependence on Supplier; Creditors Proceeding." The Company
believes it has an opportunity to further secure its source of supply by
providing necessary funding to P&TF. In July, 1997, the Company entered into an
Agreement with P&TF whereby it agreed to subscribe for a note of P&TF in the
principal amount of U.S.$1,200,000 and an option to purchase a portion of
P&TF's capital stock. The Company has also agreed to make advances to P&TF in
an amount up to U.S.$400,000 prior to the closing of the transaction
contemplated by the Agreement. The advances are secured by shares of capital
stock of P&TF. The purchase price for the note and option is to be paid by (i)
applying the advances made prior to the closing, (ii) by forgiving $400,000 of
debt relating to the 1995 acquisition by P&TF of the Company's latex balloon
manufacturing equipment and (iii) a cash payment for the balance. In addition
to the purchase of notes and option, the Company has also agreed to loan or
provide for a loan of up to an additional $800,000 to P&TF. The Company's
obligations to purchase the note and option are subject to the termination of
P&TF's Suspension of Payment proceeding, the payment or settlement of P&TF's
current bank debt and the successful completion of this Offering. It is
anticipated that the Company's commitment under the agreement to provide funds
to P&TF will enable P&TF to negotiate its debts with bank and other creditors
and allow it to successfully conclude the Suspension of Payments proceeding.
The Company believes this relationship provides the Company with a competitive
advantage over its competition. A portion of the proceeds of this Offering will
be used to finance the acquisition of the note and option. See "Use of
Proceeds."

P&TF maintains two manufacturing facilities in Guadalajara, Mexico
totaling approximately 60,000 square feet of manufacturing, office and
warehouse space and operates seven latex balloon machines.

CTF International. In September, 1996, the Company and P&TF entered into a
joint venture agreement to organize and operate CTF International, a Mexican
corporation. The joint venture is owned equally by the Company and P&TF. CTF
leases a facility of 15,000 square feet in Guadalajara, Mexico. CTF engages in
the packaging of balloons for the Company and P&TF and in the printing of latex
balloons. The Company believes it can achieve significant savings in overhead,
labor and other operating costs through the operation of CTF and expects CTF to
be an independent profit center. A portion of the proceeds of this Offering
will be used to finance the operations of CTF. See "Use of Proceeds." In the
event of the bankruptcy of P&TF, the Company anticipates that the business of
CTF would continue, subject to the approval of the Mexican bankruptcy court.
See "Risk Factors--Dependence on Supplier; Creditors Proceeding."

Competition

The balloon and novelty industry is highly competitive, with numerous
competitors. There are presently seven major manufacturers of mylar balloons
whose products are sold in the United States including Anagram International,
Inc., M&D Balloons, Inc., Pioneer Balloon, Convertidora International, Classic
Balloon and Betallic. Several companies, including American Greetings, Amscan
and Flowers, Inc., market and sell mylar balloons designed by them and
manufactured by others for them.

27
<PAGE>

There are at least seven manufacturers of latex balloons whose products
are sold in the United States including Globus Occidental, Pioneer Balloon,
National Latex, Maple City, Tilco and P&TF. 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. See "Risk Factors--Competition."

Patents, Trademarks and Copyrights

In connection principally with its mylar 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 approximately 20
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 a number of
its licensors and has been able to obtain renewal of its license agreements
with them. The Company has held a license on Peanuts(TM) characters for over 11
years, on Garfield(TM) for more than 10 years and on Hallmark designs for
approximately 10 years.

Trademarks. The Company is the owner of over 23 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 relating to balloon products. These include (i) ownership of two
patents, and a license under a third, relating to self-sealing valves for mylar
balloons and methods of making balloons with such valves and (ii) a patent on a
combination of a greeting card and balloon connected by a ribbon contained in
single package.

Research and Development

The Company maintains a product development and research department of six
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 its fiscal years 1995 and 1996, the Company
estimates that the total amount spent on research and development activities
was approximately $306,000 and $201,000, respectively.

Employees

As of June 30, 1997, the Company had 146 full-time employees in the United
States, of whom six are executive or supervisory, 25 are in sales, 106 are in
manufacturing and nine are clerical. As of that same date, the Company had 11
full time employees in England, of whom two are executive or supervisory, two
are in sales, five are in warehousing and two are clerical. The Company is not
a party to any collective bargaining agreement, has not experienced any work
stoppages and believes that its relationship with its employees is
satisfactory.

Legal Proceedings

On October 27, 1995, an action entitled National Sales Services, Inc. v.
CTI Industries Corporation, No. 95 L 15381 was filed in the Circuit Court of
Cook County, Illinois. In the action, National Sales Services claims

28
<PAGE>

that there is due to it from the Company for service rendered in the
maintenance of product at retail stores, pursuant to an agreement for such
services, the sum of $101,323. The Company has filed an answer to the complaint
denying the claims and asserting several affirmative defenses, including that
National Sales Services (i) failed to perform the agreement, (ii) failed to
perform certain conditions precedent and (iii) failed to perform the services
claimed. The Company also filed a counterclaim alleging damages of $152,512 for
breach of the agreement by National Sales Services. The Company intends to
actively defend the claim and pursue its counterclaim.

By letter dated October 28, 1996, Kredietbank of Antwerp, Belgium
communicated to the Company that it had determined to terminate the opening of
a credit which it claimed to have granted to the Company. In the letter,
Kredietbank claimed that it was entitled to close the current account and claim
repayment of the entire debit balance immediately. Kredietbank further stated
that the letter was a notice of the termination of the credit and included a
request that the Company settle its current account in full. The amount claimed
to be due is believed to be approximately $450,000. Management of the Company
has communicated that Kredietbank advanced certain funds to a former subsidiary
of the Company -- Superloon N.V., a Belgium company -- but has stated that, at
no time, has Kredietbank ever advanced or loaned any funds to the Company.
Management of the Company does not believe the Company is obligated with
respect to the credit referred by Kredietbank.

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 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. A
number of states have enacted laws limiting or restricting the release of
helium filled mylar balloons. The Company does not believe such legislation
will have any material effect on its operations.

Property

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.

The Company also leases approximately 62,500 square feet of space in Cary,
Illinois expiring December 31, 1999. The Company has subleased approximately
70% of this space through August, 1998. The Company's monthly rent (net of
subleases) is $5,957. The facility is utilized for warehouse and latex balloon
printing.

The Company leases 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.

29
<PAGE>

MANAGEMENT

Directors and Executive Officers

The Company's current directors and executive officers and their ages, as
of June 30, 1997, are as follows:

<TABLE>
<CAPTION>
Name Age Position with Company
---- --- ---------------------
<S> <C> <C>
John H. Schwan ......... 53 Chairman and Director
Stephen M. Merrick ...... 55 Chief Executive Officer, Secretary, Chief Financial Officer
and Director
Howard W. Schwan ...... 43 President and Director
John C. Davis ............ 64 Executive Vice President and Director
Sharon Konny ............ 39 Manager of Finance and Administration
Brent Anderson ......... 31 Vice President of Manufacturing
Stanley M. Brown ......... 51 Director
</TABLE>

All directors hold office until the annual meeting of stockholders 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
experience 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, Inc. and affiliated companies
for over the last 10 years. Mr. Schwan devotes approximately 20% of his time to
his position as Chairman of the Company and the balance of his time to
Packaging Systems, Inc. and affiliates. 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. See "Certain Transactions."

Stephen M. Merrick, Chief Executive Officer and Secretary. Mr. Merrick was
President of the Company from January, 1996 to June, 1997 when he became Chief
Executive Officer of the Company. Mr. Merrick devotes approximately 20% of his
time to his position as Chief Executive Officer of the Company and the balance
of his time is devoted to the practice of law. He has been a director and
Secretary of the Company since inception. Mr. Merrick is a principal of the law
firm of Fishman Merrick Miller Genelly Springer Klimek & Anderson, P.C. of
Chicago, Illinois and has been engaged in the practice of law for more than 30
years. He is also Secretary, Director and a member of the Management Committee
of Reliv International, Inc. (NASDAQ), a manufacturer and direct marketer of
nutritional supplements and food products.

Howard W. Schwan, President. Mr. Schwan has been associated with the
Company for 17 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. Mr. Schwan manages
administration, production and engineering functions as well as the sales
function for latex balloons and custom and created films. See "Certain
Transactions."

John C. Davis, Executive Vice President-Sales. Mr. Davis has been
associated with the Company since 1975 and was President and a director of the
Company from that time to January, 1996. Mr. Davis has been active in a sales
and marketing capacity and, in January, 1996, became Executive Vice President
of Sales.

Sharon Konny, Manager of Finance and Administration. Ms. Konny has been
Manager of Finance and Administration at the Company since October, 1996. From
November of 1992 to 1996, she was an Assistant Vice President of First Chicago
Corporation, initially as Loan Servicing Manager of the Mortgage Services
Division and in December, 1994, achieving the position of Manager of Financial
Administration for the First Card Division. She became a Certified Public
Accountant in 1992.

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.

30
<PAGE>

Stanley M. Brown, Director. Mr. Brown was appointed as a director of the
Company in January, 1996. Mr. Brown has been President of Inn-Room Systems,
Inc., a manufacturer and lessor of in-room vending systems for hotels since
March, 1996 and, since 1990, has been President of Surface Preparation Systems,
Inc., a company engaged in the business of developing and marketing equipment
for the preparation, cleaning and profiling of concrete and other surfaces.
From 1968 to 1989, Mr. Brown was with the United States Navy as a naval
aviator, achieving the rank of Captain. During his term with the U.S. Navy he
served in various command and staff positions including an Amphibious
Helicopter Carrier (with 2,500 personnel), an anti-submarine, aviation squadron
and at the Pentagon. Mr. Brown was awarded 2 Meritorious Service Medals, 3 Navy
Commendation Medals and campaign and service medals from the Pacific and
Atlantic Fleets.

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

For a period of five years from the date of this Prospectus, the
Underwriter has been granted the right to designate a person for election to
the Board of Directors. See "Underwriting."

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.
Summary Compensation Table

<TABLE>
<CAPTION>
Annual Compensation
-------------------------------------------------
Other Annual All Other
Name and Salary Bonus Compensation Compensation
Principal Position Year ($) ($) ($) ($)
- ------------------------- ------ ---------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Stephen M. Merrick 1996 $ 45,000 -- -- --
Chief Executive Officer 1995 -- -- -- --
1994 -- -- -- --
Howard W. Schwan 1996 $108,500 -- $ 6,957(1) $ 1,250(3)
President 1995 $ 94,231 -- $ 6,933(1) $ 1,242(3)
1994 $ 90,096 $ 28,986 $ 6,813(1) $ 1,159(3)
John C. Davis 1996 $195,177 -- $ 11,438(2) $ 3,252(3)
Executive Vice 1995 $280,000 $248,000 $ 23,747(2) $ 5,150(3)
President-Sales 1994 $237,000 $450,000 $ 44,367(2) $ 7,170(3)
</TABLE>

- ------------
(1) Perquisites include country club membership ($5,000).

(2) Perquisites include country club membership ($5,000) and allocated personal
use of Company vehicles ($5,158 in 1996, $16,767 in 1995 and $37,387 in
1994).

(3) Company contribution to the Company 401(k) Plan as pre-tax salary deferral.

No executive officer owns any options or warrants issued in connection
with their employment. Certain executive officers received warrants to purchase
Common Stock of the Company in connection with their guarantee of certain bank
loans secured by the Company. See "Certain Transactions." No executive officer
received or exercised any stock options during the fiscal year ended October
31, 1996.

Employment Agreements

In April, 1996, the Company entered into an employment agreement with John
C. Davis as Executive Vice President-Sales, which provided for an annual salary
of $150,000. The term of the agreement was through January 31, 1998. On June
27, 1997, the agreement was amended to extend the term through January 31,
2000, and to provide for an annual salary of $120,000 per year. The agreement
contains covenants of Mr. Davis not to use the Company's confidential
information while such information remains confidential and establishing the
Company's rights to inventions created by Mr. Davis during the term of
employment. Mr. Davis' agreement does not contain a covenant not to compete.

31
<PAGE>

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 is through June 30, 2002. 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 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.

Stock Option Plan

A total of 300,000 shares of Common Stock are reserved for issuance under
the Stock Option Plan. As of the date of this Prospectus, 121,000 options have
been granted with an exercise price equal to the initial public offering price
per share of Common Stock, none of which have been exercised. 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, 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.

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.

Generally, awards must be exercised by cash payment to the Company of the
exercise price. However, the Administrator may allow a participant to pay all
or a portion of the exercise price by means of a promissory note, stock or
other lawful consideration. The Plan also allows the Administrator to provide
for withholding and employment taxes payable by a participant to the Company
upon exercise of the award.

In the event of any change in the outstanding shares of Common Stock by
reason of any reclassification, recapitalization, merger, consolidation,
reorganization, spin-off, split-up, issuance of warrants or rights or
debentures, stock dividend, stock split or reverse stock split, cash dividend,
property dividend or similar change in the corporate structure, the aggregate
number of shares of Common Stock underlying any outstanding options may be
equitably adjusted by the Administrator in its sole discretion.

The Company has agreed that for a 18-month period commencing on the date
of this Prospectus that it will not, without the consent of the Underwriter,
adopt or propose to adopt any plan or arrangement permitting the grant, issue
or sale of any shares of its securities or issue, sell or offer for sale any of
its securities, or grant any options for its securities, except for options to
purchase up to an aggregate of 300,000 shares of Common Stock which shall have
an exercise price per share no less than the greater of (a) the initial public
offering price of the Common Stock set forth herein and (b) the fair market
value of the Common Stock on the date of grant. No option or other right to
acquire Common Stock granted, issued or sold during this period shall permit
(a) the payment with any form of consideration other than cash, (b) payment of
less than the full purchase price or exercise price for such shares of Common
Stock or other securities of the Company on or before the date of issuance, or
(c) the existence of stock appreciation rights, phantom options or similar
arrangements.

Limitation of Liability and Indemnification

As permitted by the Delaware General Corporation Law ("DGCL"), the Company
has included in its Certificate of Incorporation a provision to eliminate the
personal liability of its directors for monetary damages for breach or alleged
breach of their fiduciary duties as directors, except for liability (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which

32
<PAGE>

involved intentional misconduct or a knowing violation of law, (iii) in respect
of certain unlawful dividend payments or stock redemptions or repurchases, as
provided in Section 174 of the DGCL, or (iv) for any transaction from which the
director derived an improper personal benefit. The effect of this provision in
the Company's Certificate of Incorporation is to eliminate the rights of the
Company and its stockholders (through stockholders' derivative suits on behalf
of the Company) to recover monetary damages against a director for breach of
the fiduciary duty of care as a director, except in the situations described in
(i) through (iv) above. This provision does not limit nor eliminate the rights
of the Company or any stockholder to seek non-monetary relief such as an
injunction or rescission in the event of a breach of a director's duty of care.
These provisions will not alter the liability of directors under federal
securities laws.

The Certificate of Incorporation and the by-laws of the Company provide
that the Company is permitted to indemnify its officers and directors,
employees and agents under certain circumstances. In addition, if permitted by
law, the Company is permitted to advance expenses to its officers and directors
as incurred in connection with proceedings against them in their capacity as a
director or officer for which they may be indemnified upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that such person is not entitled to
indemnification. At present, the Company is not aware of any pending or
threatened litigation or proceeding involving a director, officer, employee or
agent of the Company in which indemnification would be required or permitted.
The Company believes that its charter provisions and indemnification agreements
are necessary to attract and retain qualified persons as directors and
officers.

Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors and officers of the Company pursuant to the
foregoing provisions or otherwise, the Company has been advised that in the
opinion of the Securities and Exchange Commission ("Commission"), such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of the Company's capital stock, as of the date of this
Prospectus 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 or Class B
Common Stock, (ii) each director and executive officer of the Company who owns
any shares of Common Stock or Class B 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 Class B Shares of Common Percent of Common Stock(4)
Common Stock Stock Beneficially -------------------------------------
Name and Address(1) Beneficially Owned(2)(3) Owned(2) Prior to Offering After Offering
- ----------------------------- -------------------------- -------------------- ------------------- ---------------
<S> <C> <C> <C> <C>
Stephen M. Merrick 219,781 318,807(5) 23.55 14.22
John H. Schwan 329,670 189,103(6) 22.57 13.66
Howard W. Schwan 164,835 92,949(7) 11.70 6.96
John C. Davis -- 464,281(8) 21.52 12.70
Sharon Konny -- 12,000(9) * *
Brent Anderson -- 12,000(9) * *
Stanley M. Brown -- 5,000(10) * *
747 Glenn Avenue
Wheeling, IL
Frances Ann Rohlen 274,725 -- 13.03 7.6
c/o Cheshire Partners
1504 Wells
Chicago, IL 60610
Philip W. Colburn 109,890 118,267(11) 10.82 6.32
All directors and executive 714,286 1,094,140 68.34 43.62
officers as a group (7 persons)
</TABLE>

- ------------
*less than one percent

33
<PAGE>

- ------------
(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) Figures below represent all Class B Common Stock outstanding. Beneficial
ownership of shares of Class B Common Stock for Messrs. Merrick, John
Schwan, Howard Schwan and Ms. Rohlen include indirect ownership of such
shares through CTI Investors, L.L.C. See "Certain Transactions."

(4) Assumes conversion of all shares of Class B Common Stock into shares of
Common Stock.

(5) Includes warrants to purchase up to 76,923 shares of Common Stock at $.91
per share and warrants to purchase up to 100,961 shares of Common Stock at
$3.12 per share.

(6) Includes warrants to purchase up to 76,923 shares of Common Stock at $.91
per share and warrants to purchase up to 112,180 shares of Common Stock at
$3.12 per share.

(7) Includes warrants to purchase up to 76,923 shares of Common Stock at $.91
per share and warrants to purchase up to 16,026 shares of Common Stock at
$3.12 per share.

(8) Includes warrants to purchase up to 48,077 shares of Common Stock at $3.12
per share, and 230,769 shares of Common Stock subject to redemption by the
Company. See "Certain Transactions."

(9) Includes incentive stock options to purchase up to 12,000 shares of Common
Stock at the initial public offering price per share of Common Stock.

(10) Includes non-qualified stock options to purchase up to 5,000 shares of
Common Stock at the initial public offering price per share of Common
Stock.

(11) Includes shares held by immediate family members.

CERTAIN TRANSACTIONS

In March 1996, the Company entered into a Stock Redemption Agreement with
John C. Davis which was subsequently amended June 27, 1997. Under the amended
Stock Redemption Agreement the Company was obligated to redeem 102,564 shares
of Common Stock and has the right, but not the obligation, to redeem up to an
additional 230,769 shares of Common Stock owned by Mr. Davis at the price of
$1.95 per share at any time through January 31, 1998. Commencing March 1, 1998
through February 28, 2000, the Company is obligated to pay to Mr. Davis, for
the redemption of shares at $1.95 per share (i) an amount equal to 2% of the
Company's pretax profits each fiscal quarter (beginning with the quarter ended
February 28, 1998) and (ii) an amount equal to 2% (but not to exceed $8,000) of
the amount by which latex and mylar balloon revenues exceed $1.3 million in any
month. The Company's obligations terminate once a total of 333,333 shares of
Common Stock have been redeemed under the Stock Redemption Agreement. The
Company also has the right to redeem additional shares of Common Stock from Mr.
Davis during this period at $1.95 per share, provided that the total number of
shares subject to redemption under the Stock Redemption Agreement does not
exceed 333,333. As of the date of this Offering 102,564 shares of Common Stock
have been redeemed pursuant to the Stock Redemption Agreement.

In March and May of 1996, a group of investors made an equity investment
of $1,000,000 in the Company in return for 1,098,901 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

34
<PAGE>

directors. CTI Investors, L.L.C., an Illinois limited liability company,
invested $900,000 in the shares of Preferred Stock. Members of CTI Investors,
L.L.C. include Howard W. Schwan, John H. Schwan and Stephen M. Merrick, members
of management, and Frances Ann Rohlen. See "Management."

In December, 1996, Howard W. Schwan, John H. Schwan and Stephen M. Merrick
were each issued warrants to purchase 76,923 shares of the Company's Common
Stock at an exercise price of $.91 per share in consideration of their
facilitating and guaranteeing a bank loan to the Company in the amount of $6.3
million. The warrants have a term of six years. See "Management's Discussion
and Analysis of Financial Condition and Results of Operation."

In June, 1997, the Company issued in a private placement notes in the
principal amount of $865,000, together with warrants to purchase up to 277,244
shares of the Company's Common Stock at an exercise price of $3.12 per share.
The warrants have a term of five years. Howard W. Schwan, John H. Schwan,
Stephen M. Merrick and John C. Davis, members of management, purchased $50,000,
$350,000 and $315,000 and $150,000, respectively, of the notes and warrants.
Mr. John Schwan and Mr. Merrick applied advances of $200,000 each, made to the
Company in January, 1997, toward the purchase of notes and warrants. See "Risk
Factors--Related Party Transactions; Potential Conflicts of Interest."

Stephen M. Merrick, Chief Executive Officer of the Company, is a principal
of the law firm of Fishman Merrick Miller Genelly Springer Klimek & Anderson,
P.C. which serves as general counsel of the Company. Fishman Merrick Miller
Genelly Springer Klimek & Anderson, P.C. will pass on the validity of the
Common Stock in this Offering. In addition, Mr. Merrick owns 219,781 shares of
Class B Common Stock, 140,923 shares of Common Stock, warrants to purchase
76,923 shares of Common Stock at $.91 per share, and warrants to purchase
100,961 shares of Common Stock at $3.12 per share. Other members of the firm of
Fishman Merrick Miller Genelly Springer Klimek & Anderson, P.C. own an
aggregate of 53,561 shares of Common Stock. See "Risk Factors--Related Party;
Corporate Counsel" and "Legal Matters."

John H. Schwan is the president and shareholder of Packaging Systems, Inc.
and affiliated companies. The Company made purchases of packaging materials
from these entities in the amount of $1,106,649 during the year ended October
31, 1996 and $184,154 for the nine months ended July 31, 1997. See "Risk
Factors--Related Party; Supplier."

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, including loans and forgiveness of debt, must be
approved by a majority of disinterested directors who have access, at Company's
expense, to the Company's independent counsel.

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 11,000,000 shares
of Common Stock, $.065 par value, and 1,100,000 shares of Class B Common Stock,
$.91 par value and 2,000,000 shares of Preferred Stock, $.91 par value. On the
date of this Prospectus, after giving effect to the recapitalization and the
conversion, the Company has outstanding 1,010,202 shares of Common Stock held
of record by over 20 stockholders and 1,098,901 shares of Class B Common Stock
held of record by 2 stockholders. All outstanding shares of capital stock of
the Company are fully paid and non-assessable.

Common Stock and Class B Common Stock

The holders of Common Stock are entitled to one vote for each share held
of record on all matters submitted to a vote of the stockholders. Holders of
Common Stock will vote together with holders of Class B Common Stock, on a one
vote for each share basis, on all matters submitted to a vote of stockholders
except the election of directors. Holders of Common Stock and Class B Common
Stock shall share equally, on a per share basis, in all dividends declared by
the Company and will participate equally in the proceeds of dissolution of the
Company, on a per share basis.

Holders of Class B Common Stock, voting separately as a class, have the
right to elect four of the Company's seven directors, and will vote together
with holders of Common Stock, as a class, on the election of the

35
<PAGE>

remaining three directors. Neither the Common Stock or Class B Common Stock
possess cumulative voting rights or preemptive rights. Holders of Class B
Common Stock have the right to convert their shares into shares of Common
Stock, on a share for share basis at any time, and such shares will
automatically convert on July 23, 2002.

The Preferred Stock

The Preferred Stock may be issued in one or more series at such times and
for such consideration as shall be authorized from time to time by the Board of
Directors.

Transfer Agent and Registrar

The transfer agent and registrar for the Common Stock of the Company is
Continental Stock Transfer & Trust Company, New York, New York.

SECURITIES ELIGIBLE FOR FUTURE SALE

Upon completion of this Offering, the Company will have outstanding an
aggregate of 2,510,202 shares of Common Stock and 1,098,901 shares of Class B
Common Stock assuming (i) the issuance by the Company of 1,500,000 shares of
Common Stock offered hereby, (ii) no issuance of shares of Common Stock
underlying the Underwriter's Warrants or relating to other outstanding warrants
to purchase Common Stock, (iii) no exercise of outstanding options to purchase
Common Stock and (iv) no conversion of the Class B Common Stock. Of these
shares, the 1,500,000 shares included in this Offering will be freely tradeable
without restriction or further registration under the Securities Act, except
for shares held by Affiliates of the Company (whose sales would be subject to
certain limitations and restrictions described below) and the regulations
promulgated thereunder).

The remaining shares were sold by the Company in reliance on exemptions
from the registration requirements of the Securities Act and are "restricted
securities" within the meaning of Rule 144 under the Securities Act. Most of
these shares will be eligible for sale in the public market under Rule 144;
however, all of these shares are subject to lock-up agreements whereby such
securities cannot be sold for a period of 18 months from the date of this
Prospectus, unless released therefrom by the Underwriter.

In addition, without the consent of the Underwriter, the Company has
agreed not to sell or offer for sale any of its securities during the Lock-up
Period, except pursuant to outstanding options and warrants and pursuant to the
Company's existing option plans.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially
owned shares for at least one year is entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of (i) 1% of the
then outstanding shares of Common Stock or (ii) the average weekly trading
volume in the Common Stock during the four calendar weeks preceding such sale,
subject to the filing of a Form 144 with respect to such sale and certain other
limitations and restrictions. In addition, a person who is not deemed to have
been an Affiliate of the Company at any time during the 90 days preceding a
sale and who has beneficially owned the shares proposed to be sold for at least
two years would be entitled to sell such shares under Rule 144 without regard
to the requirements described above. To the extent that shares were acquired
from an Affiliate of the Company, such stockholder's holding period for the
purpose of effecting a sale under Rule 144 commences on the date of transfer
from the Affiliate.

Sales of a substantial amount of Common Stock in the public market could
adversely affect the market price of the Common Stock and could impair the
Company's future ability to raise capital through the sale of its equity
securities.

UNDERWRITING

Joseph Stevens & Company, Inc. (the "Underwriter") has entered into an
Underwriting Agreement with the Company pursuant to which, and subject to the
terms and conditions thereof, it has agreed to purchase from the Company, and
the Company has agreed to sell to the Underwriter, on a firm commitment basis,
all of the Common Stock offered by the Company hereby.

36
<PAGE>

The Company has been advised by the Underwriter that the Underwriter
initially proposes to offer the Common Stock to the public at the public
offering price set forth on the cover page of this Prospectus and that the
Underwriter may allow to certain dealers who are members of the National
Association of Securities Dealers, Inc. ("NASD") concessions not in excess of
$____ per share of Common Stock, of which amount a sum not in excess of
$__________ per share of Common Stock may in turn be reallowed by such dealers
to other dealers. After the commencement of this Offering, the public offering
price, concessions and reallowances may be changed. The Underwriter has
informed the Company that it does not expect sales to discretionary accounts by
the Underwriter to exceed five percent of the securities offered by the Company
hereby.

The Company has granted to Underwriter an option, exercisable within 45
days of the date of this Prospectus, to purchase from the Company at the
offering price, less underwriting discounts and the non-accountable expense
allowance, all or part of an additional 225,000 shares of Common Stock on the
same terms and conditions of this Offering for the sole purpose of covering
over-allotments, if any.

The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act. The Company has
agreed to pay to the Underwriter a non-accountable expense allowance equal to
three percent (3%) of the gross proceeds derived from the sale of the Common
Stock underwritten, $30,000 of which has been paid to date.

In connection with this Offering, the Underwriter and certain selling
group members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriter also may create a short position for the account of the Underwriter
by selling more Common Stock in connection with this Offering than it is
committed to purchase from the Company, and in such case may purchase Common
Stock in the open market following completion of this Offering to cover all or
a portion of such short position. The Underwriter may also cover all or a
portion of such short position, up to 225,000 shares of Common Stock, by
exercising the Over-Allotment Option. In addition, the Underwriter may impose
"penalty bids" under contractual arrangements whereby it may reclaim from a
dealer participating in this Offering for the account of the Underwriter, the
selling concession with respect to shares of Common Stock that are distributed
in this Offering but subsequently purchased for the account of the Underwriter
in the open market. Any of the transactions described in this paragraph may
result in the maintenance of the prices of the Common Stock at levels above
that which might otherwise prevail in the open market. None of the transactions
described in the paragraph is required, and, if they are undertaken, they may
be discontinued at any time.

All of the holders of the issued and outstanding shares of Common Stock
and Class B Common Stock prior to this Offering have agreed (i) not to,
directly or indirectly, issue, offer to sell, sell, grant an option for the
sale of, transfer, pledge, assign, hypothecate, or otherwise encumber or
dispose of (collectively, "Transfer"), any securities issued by the Company,
including shares of Common Stock and Class B Common Stock or securities
convertible into or exchangeable or exercisable for or evidencing any right to
purchase or subscribe for any shares of Common Stock or Class B Common Stock
for a period of eighteen (18) months from the effective date of the
Registration Statement (the "Lock-Up Period"), without the prior written
consent of the Underwriter, except in a private transaction where the
transferee agrees to such restrictions, and (ii) that, for twenty-four (24)
months following the effective date of the Registration Statement, any public
sales of the Company's securities shall be made through the Underwriter in
accordance with its customary brokerage practices either on a principal or
agency basis. An appropriate legend shall be marked on the face of certificates
representing all such securities.

In connection with this Offering, the Company has agreed to issue and sell
to the Underwriter and/or its designees, at the closing of the proposed
underwriting, for nominal consideration, five (5) year Underwriter's Warrants
(the "Underwriter's Warrants") to purchase 150,000 shares of Common Stock. The
Underwriter's Warrants are exercisable at any time during a period of four (4)
years commencing at the beginning of the second year after their issuance and
sale at a price of $__________ [135% of the offering price per share of the
Common Stock] and are restricted from sale, transfer, assignment or
hypothecation for a period of twelve months from the date hereof, except to
officers of the Underwriter. The shares of Common Stock issuable upon exercise
of the Underwriter's Warrants are identical to those offered to the public. The
Underwriter's Warrants contain

37
<PAGE>

anti-dilution provisions providing for adjustment of the number of warrants and
exercise price under certain circumstances. The Underwriter's Warrants grant to
the holders thereof and to the holders of the underlying securities certain
rights of registration of the securities underlying the Underwriter's Warrants.

The Company has also agreed that for five (5) years from the effective
date of the Registration Statement, the Underwriter may designate one person
for election to the Company's Board of Directors (the "Designation Right"). In
the event that the Underwriter elects not to exercise its Designation Right,
then it may designate one person to attend all meetings of the Company's Board
of Directors for a period of five (5) years. The Company has agreed to
reimburse the Underwriter's designee for all out-of-pocket expenses incurred in
connection with the designee's attendance at meetings of the Board of
Directors. The Company has also agreed to retain the Underwriter as the
Company's financial consultant for a period of twenty-four (24) months from the
date hereof and to pay the Underwriter a monthly retainer of $2,000, all of
which is payable in advance on the closing date set forth in the Underwriting
Agreement.

Prior to this Offering, there has been no public market for the Common
Stock. Accordingly, the initial public offering price of the Common Stock was
determined by negotiation between the Company and the Underwriter. Among the
factors considered in determining such price, in addition to the prevailing
market conditions, included the history of and the prospects for the industry
in which the Company competes, the market price of the Common Stock, an
assessment of the Company's management, the prospects of the Company, its
capital structure and such other factors that were deemed relevant. The
offering price does not necessarily bear any relationship to the assets,
results of operations or net worth of the Company.

The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a
copy of each such agreement which are filed as exhibits to the Registration
Statement. See "Additional Information."

LEGAL MATTERS

The validity of the Common Stock offered hereby has been passed upon for
the Company by Fishman Merrick Miller Genelly Springer Klimek & Anderson, P.C.,
Chicago, Illinois. Stephen M. Merrick, Chief Executive Officer, and a principal
shareholder, of the Company, is a principal of Fishman Merrick Miller Genelly
Springer Klimek & Anderson, P.C. and members of the firm also have an equity
ownership in the Company. See "Certain Transactions" and "Risk Factors--Related
Party; Corporate Counsel." Orrick, Herrington & Sutcliffe LLP, New York, New
York, has acted as counsel for the Underwriter in connection with this
Offering.

EXPERTS

The balance sheet as of October 31, 1996, and the consolidated statements
of operations, stockholders equity, and cash flows for each of the two years in
the period ended October 31, 1996, included in this Prospectus have been
included herein in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.

CHANGE IN INDEPENDENT ACCOUNTANTS

In 1996, the Company voluntarily changed its independent accountants from
Detterbeck & Associates, Ltd. ("Detterbeck") to Jacobson, Scott, Gordon &
Horewitch ("JSG&H"). This change was approved by the Company's Board of
Directors. Detterbeck had been retained to audit the Company's financial
statements as of and for the year ended October 31, 1995. The report of
Detterbeck for the year ended October 31, 1995, which is not included herein,
contained no adverse opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope or application of accounting
principles. During the year ended October 31, 1995 and through the date of
replacement, there were no disagreements with Detterbeck on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure.

In 1997, the Company voluntarily changed its independent accountants from
JSG&H to Coopers & Lybrand L.L.P. This change was approved by the Company's
Board of Directors. The financial statements for each of the years in the two
year period ended October 31, 1996, were audited by Coopers & Lybrand L.L.P.
JSG&H had been retained to audit the Company's financial statements as of and
for the year ended October 31, 1996. The

38
<PAGE>

report of JSG&H for the year ended October 31, 1996, which is not included
herein, contained no adverse opinion or disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope or application of
accounting principles. During the year ended October 31, 1996 and through the
date of replacement, there were no disagreements with JSG&H on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure.

AVAILABLE INFORMATION

The Company has filed with the Commission a Registration Statement on Form
SB-2, including amendments thereto, relating to the Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits thereto. Statements contained in
this Prospectus as to the contents of any contract or other document referred
to are not necessarily complete; however, all material information with respect
to such contracts and documents are disclosed in this Prospectus. In each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference.

For further information with respect to the Company and the securities
offered hereby, reference is made to such Registration Statement, exhibits and
schedules. A copy of the Registration Statement may be inspected by anyone
without charge at the public reference facilities maintained by the Commission
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and will also be available for inspection and copying at the regional offices
of the Commission located at 7 World Trade Center, New York, New York 10048 and
at Citicorp Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material may also be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. Such material may also be accessed electronically by
means of the Commission's home page on the Internet at http://www.sec.gov. As a
result of this Offering, the Company will be subject to the informational
requirements of the Exchange Act. So long as the Company is subject to the
periodic reporting requirements of the Exchange Act, it will furnish holders of
the Common Stock with annual reports containing, among other information,
audited financial statements certified by an independent accounting firm. The
Company also intends to furnish such other reports as it may determine or as
may be required by law.

39
<PAGE>

CTI Industries Corporation and Subsidiary

Table of Contents

<TABLE>
<CAPTION>
Page(s)
<S> <C>
Report of Independent Accountants ................................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of October 31, 1996 and July 31, 1997 (unaudited) ... F-3
Consolidated Statements of Operations for the years ended October 31, 1995 and 1996
and the nine months ended July 31, 1996 and 1997 (unaudited) ..................... F-4
Consolidated Statements of Stockholders' Equity for the years ended October 31, 1995
and 1996 ........................................................................... F-5
Consolidated Statements of Cash Flows for the years ended October 31, 1995 and 1996
and the nine months ended July 31, 1996 and 1997 (unaudited) ..................... F-6
Notes to Consolidated Financial Statements ....................................... F-7
</TABLE>

F-1
<PAGE>

Report of Independent Accountants

To the Board of Directors of
CTI Industries Corporation

We have audited the accompanying consolidated balance sheet of CTI
Industries Corporation and subsidiary as of October 31, 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended October 31, 1995 and 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
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
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CTI
Industries Corporation and subsidiary as of October 31, 1996, and the results
of its operations, stockholders' equity and its cash flows for the years ended
October 31, 1995 and 1996 in conformity with generally accepted accounting
principles.

/s/ Coopers & Lybrand L.L.P.
----------------------------
COOPERS & LYBRAND L.L.P.

Chicago, Illinois
July 22, 1997

F-2
<PAGE>

CTI Industries Corporation and Subsidiary
Consolidated Balance Sheet

<TABLE>
<CAPTION>
October 31, July 31, 1997
1996 Actual Pro Forma
------------- --------------- -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash .............................................................................. $ 130,818 $ 262,522
Accounts receivable (less allowance for doubtful accounts of $129,998 at
October 31, 1996 and $116,328 at July 31, 1997) ................................. 1,665,097 2,066,873
Inventories ..................................................................... 4,582,593 5,059,442
Other ........................................................................... 218,879 531,454
------------ -------------
Total current assets ......................................................... 6,597,387 7,920,291
------------ -------------
Property and equipment:
Machinery and equipment ......................................................... 6,352,054 6,561,773
Building ........................................................................ 2,168,563 2,168,563
Office furniture and equipment ................................................... 1,082,665 1,263,115
Land .............................................................................. 250,000 250,000
Leasehold improvements ............................................................ 147,128 147,128
------------ -------------
10,000,410 10,390,579
Less: accumulated depreciation ................................................... (6,418,486) (6,684,620)
------------ -------------
Total property and equipment, net ............................................. 3,581,924 3,705,959
------------ -------------
Other assets:
Deferred financing costs, net ...................................................... 106,224 69,258
Investment in joint venture ...................................................... -- 60,260
------------ -------------
106,224 129,518
------------ -------------
Total assets .................................................................. $ 10,285,535 $ 11,755,768
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................................. $ 2,755,700 $ 2,684,411
Line of credit ..................................................................... 2,058,816 2,559,481
Stock redemption contract payable -- current portion .............................. 100,000 --
Advances from related parties ...................................................... -- 47,199
Notes payable -- current portion ................................................... 402,798 554,315
Accrued liabilities ............................................................... 932,575 844,570
------------ -------------
Total current liabilities ...................................................... 6,249,889 6,689,976
------------ -------------
Stock redemption contract payable ................................................... 47,908 --
Notes payable ..................................................................... 3,056,923 2,804,559
Subordinated debt .................................................................. -- 865,000
------------ -------------
Total long-term liabilities ................................................... 3,104,831 3,669,559
------------ -------------
Redeemable common stock ............................................................ 450,000 450,000
Stockholders' equity:
Convertible Preferred stock -- $.91 par value, 2,000,000 shares authorized,
1,098,901 shares issued and outstanding, including accumulated dividends of
$27,625 (October 31, 1996) and $63,917 (July 31, 1997) ........................... 1,027,625 1,063,917 $ --
Common stock -- $.065 par value, 11,000,000 shares authorized,
1,131,507 (October 31, 1996) and 1,154,585 (July 31, 1997) shares issued,
987,125 (October 31, 1996) and 1,010,202 (July 31, 1997) shares outstanding . 73,548 75,048 75,048
Class B Common stock -- $.91 par value, 1,100,000 shares authorized,
1,098,901 shares outstanding ................................................... -- -- 1,000,000
Paid-in-capital .................................................................. 230,348 248,348 248,348
Retained earnings ............................................................... 137,194 386,820 386,820
Less:
Treasury stock -- 144,382 shares at cost ....................................... (370,700) (370,700) (370,700)
Redeemable common stock ......................................................... (450,000) (450,000) (450,000)
Stock subscription receivable ................................................... (167,200) (7,200) (7,200)
------------ ------------- -----------
Total stockholders' equity ................................................... 480,815 946,233 882,316
------------ ------------- ===========
Total liabilities and stockholders' equity .................................... $ 10,285,535 $ 11,755,768
============ =============
</TABLE>

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

F-3
<PAGE>

CTI Corporation and Subsidiary

Consolidated Statements of Operations

<TABLE>
<CAPTION>
Years Ended Nine Months Ended
October 31, July 31,
1995 1996 1996 1997
---------------- ------------- ------------- ---------------
(unaudited)
<S> <C> <C> <C> <C>

Net sales .............................. $ 22,783,780 $13,910,104 $10,768,327 $12,082,091
Cost of sales ........................... 15,077,979 8,558,053 6,547,001 7,346,119
------------ ----------- ----------- -----------
Gross profit on sales ............... 7,705,801 5,352,051 4,221,326 4,735,972
------------ ----------- ----------- -----------
Operating expenses:
Administrative ........................ 2,899,640 2,054,780 1,603,359 1,335,518
Selling .............................. 3,770,462 2,387,027 1,862,906 2,042,852
Advertising and marketing ............ 2,356,255 592,309 488,511 624,579
Plant shutdown expense ............... 850,000 -- -- --
Loss on disposition of latex equipment 822,439 -- -- --
------------ ----------- ----------- -----------
Total operating expenses ............ 10,698,796 5,034,116 3,954,776 4,002,949
------------ ----------- ----------- -----------
Income (loss) from operations ......... (2,992,995) 317,935 266,550 733,023
------------ ----------- ----------- -----------
Other income (expense):
Interest expenses ..................... (799,839) (553,027) (449,412) (471,218)
Other ................................. 125,516 57,986 54,741 85,328
------------ ----------- ----------- -----------
Total other expense ............... (674,323) (495,041) (394,671) (385,890)
------------ ----------- ----------- -----------
Income (loss) before income taxes ...... (3,667,318) (177,106) (128,121) 347,133
Income tax expense (benefit) ............ (774,143) 5,934 -- --
------------ ----------- ----------- -----------
Net income (loss) .................. (2,893,175) (183,040) (128,121) 347,133
Dividends applicable to convertible
preferred stock ........................ -- (74,211) (41,711) (97,500)
------------ ----------- ----------- -----------
Income (loss) applicable to
common shares ........................ $ (2,893,175) $ (257,251) $ (169,832) $ 249,633
============ =========== =========== ===========
Primary income (loss) per common and
common equivalent shares ............... $ (2.18) $ (0.20) $ (0.13) $ 0.20
============ =========== =========== ===========
Fully diluted income (loss) per common
and common equivalent shares ......... $ -- $ -- $ -- $ 0.16
============ =========== =========== ===========
</TABLE>

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

F-4
<PAGE>
CTI Industries Corporation and Subsidiary

Consolidated Statements of Stockholders' Equity
for the years ended October 31, 1995 and 1996

<TABLE>
<CAPTION>
Common Stock Preferred Stock
---------------------- Paid-In -------------------------
Shares Amount Capital Shares Amount
<S> <C> <C> <C> <C> <C>
Balance, October 31, 1994 ... 1,131,507 $73,548 $230,348
Net loss .....................
--------- ------- --------

Balance, October 31, 1995 ... 1,131,507 73,548 230,348
Payment on stock
subscription receivable ......
Preferred stock
subscription receivable ......
Issuance of preferred stock 1,098,901 $1,000,000
Accumulated preferred
stock dividends ............ 27,625
Redeemable common
stock .....................
Acquisition of treasury
stock .....................
Net loss .....................
Preferred dividends .........
--------- ------- -------- --------- ----------
Balance, October 31, 1996 ... 1,131,507 $73,548 $230,348 1,098,901 $1,027,625
========= ======= ======== ========= ==========
</TABLE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Less
--------------------------------------------------
Redeemable Stock
Retained Treasury Stock Common Subscription
Earnings Shares Amount Stock Receivable Total
<S> <C> <C> <C> <C> <C> <C>
Balance, October 31, 1994 ..... $ 3,287,620 41,818 $170,700 $ $ 126,450 $ 3,294,366
Net loss ..................... (2,893,175) (2,893,175)
------------ ------ -------- ---------- ------------
Balance, October 31, 1995 ..... 394,445 41,818 170,700 126,450 401,191
Payment on stock
subscription receivable ...... (119,250) 119,250
Preferred stock
subscription receivable ...... 160,000 (160,000)
Issuance of preferred stock 1,000,000
Accumulated preferred
stock dividends ............ 27,625
Redeemable common
stock ..................... $450,000 (450,000)
Acquisition of treasury
stock ..................... 102,564 200,000 (200,000)
Net loss ..................... (183,040) (183,040)
Preferred dividends ......... (74,211) (74,211)
------------ ------- -------- -------- ---------- ------------
Balance, October 31, 1996 ..... $ 137,194 144,382 $370,700 $450,000 $ 167,200 $ 480,815
============ ======= ======== ======== ========== ============
</TABLE>

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

F-5
<PAGE>
CTI Industries Corporation and Subsidiary

Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
Years Ended Nine Months Ended
--------------------------------- --------------------------------
October 31, July 31,
1995 1996 1996 1997
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) .................................... $ (2,893,175) $ (183,040) $ (128,121) $ 347,133
Adjustments to reconcile net loss to cash provided
by (used in) operating activities:
Depreciation and amortization ........................ 755,638 371,893 388,296 383,936
Gain on sale of property and equipment ............... (8,500) (20,712) (21,452) (42,942)
Loss on disposition of latex equipment ............... 822,439 -- -- --
Provision for losses on accounts receivable and
inventory .......................................... 150,000 255,738 154,523 89,554
Deferred income taxes .............................. (211,300) -- -- --
Change in assets and liabilities:
Accounts receivable ................................. 1,136,740 1,006,439 1,085,964 (478,945)
Inventories ....................................... 902,389 486,483 825,249 (489,234)
Other assets ....................................... 361,195 (12,526) (230,054) (312,575)
Accounts payable and accrued expenses ............... (474,072) (1,064,584) (626,972) (139,492)
------------ ------------ ------------ ------------
Net cash provided by (used in) operating
activities .................................... 541,354 839,691 1,447,433 (642,565)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of property and equipment ......... 8,500 45,415 29,500 2,942
Purchases of property and equipment .................. (478,637) (495,880) (257,490) (471,312)
Cash surrender value -- officers' life insurance ...... -- 10,700 -- --
Investment in joint venture ........................... -- -- -- (60,260)
------------ ------------ ------------ ------------
Net cash used in investing activities ............ (470,137) (439,765) (227,990) (528,630)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Stock redemption contract payments ..................... -- (52,092) (35,034) (60,709)
Advances on line of credit ........................... 3,232,942 3,270,970 3,304,022 4,813,520
Repayments on line of credit ........................... (3,731,857) (4,843,239) (4,573,718) (4,312,855)
Proceeds from issuance of long-term debt ............... 1,910,273 3,300,000 -- 218,000
Repayment of long-term debt ........................... (1,535,236) (2,694,358) (575,473) (318,847)
Proceeds from debt issued to related parties ......... -- -- -- 865,000
Proceeds from issuance of preferred stock ............ -- 840,000 800,000 160,000
Payment of debt issue costs ........................... -- (110,400) -- --
Dividends paid ....................................... -- (46,586) (30,335) (61,210)
------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities .................................... (123,878) (335,705) (1,110,538) 1,302,899
------------ ------------ ------------ ------------
Net increase (decrease) in cash ........................ (52,661) 64,221 108,905 131,704
Cash at beginning of period ........................... 119,258 66,597 66,597 130,818
------------ ------------ ------------ ------------
Cash at end of period ................................. $ 66,597 $ 130,818 $ 175,502 $ 262,522
============ ============ ============ ============
Supplemental disclosures:
Cash paid for interest ................................. $ 777,227 $ 617,952 $ 499,903 $ 432,272
Cash paid for income taxes ........................... $ 5,776
Noncash financing activities:
Purchase of treasury stock through issuance of
stock redemption contract payable .................. $ 200,000 $ 200,000
Assets exchanged for settlement of debt ............... $ 40,000
Common stock warrants exercised in exchange for
contractual services received ........................ $ 19,500
</TABLE>

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

F-6
<PAGE>

CTI Industries Corporation and Subsidiary

Notes to Consolidated Financial Statements

(Information presented for the nine month periods ended July 31, 1996 and 1997
is unaudited)

1. Nature of Operations

CTI Industries Corporation (the "Company") and its United Kingdom
subsidiary (CTI Balloons, Ltd.) design, manufacture and distribute balloon
products throughout the world. The Company also operates systems for the
production, lamination and printing of films used for food packaging and other
commercial uses.

Basis of Presentation

The accompanying interim financial statements as of July 31, 1997 and for
the nine months ended July 31, 1997 and 1996 and the related disclosures have
not been audited by independent accountants. However, they have been prepared
in conformity with the accounting principles stated in the audited financial
statements for the two years in the period ended October 31, 1996 and include
all adjustments, which were of a normal and recurring nature, which in the
opinion of management are necessary to present fairly the financial position of
the Company and results of operations and cash flows for the periods presented.
The operating results for the interim periods are not necessarily indicative of
results expected for the full year.

2. Summary of Significant Accounting Policies

Principle of Consolidation

The consolidated financial statements include the accounts of CTI
Industries Corporation and its subsidiary. All significant intercompany
accounts and transactions have been eliminated.

Foreign Currency Translation

The financial statements of foreign operations are translated into U.S.
dollars in accordance with Statement of Financial Accounting Standards (SFAS)
No. 52. Accordingly, all assets and liabilities are translated at current rates
of exchange, and operating transactions are translated at weighted average
rates during the year. The translation gains and losses, to the extent
material, are accumulated as a component of stockholders' equity.

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.

Property and Equipment

Property and equipment is stated at cost. Depreciation is computed using
the straight-line and declining-balance methods over estimated useful lives of
the related assets. The estimated useful lives range as follows:

Building 25 years
Machinery and equipment 3-15 years
Office furniture and equipment 5-8 years
Leasehold improvements 5-8 years

Depreciation expense was $755,636 and $367,717 for the years ended October
31, 1995 and 1996, respectively. Effective November 1, 1995, management
determined that the useful life of certain equipment was longer than originally
estimated. A change in accounting estimate was recognized to reflect this
decision, resulting in a reduction in depreciation expense of $196,318 in 1996.

F-7
<PAGE>

CTI Industries Corporation and Subsidiary

Notes to Consolidated Financial Statements -- (Continued)

(Information presented for the nine month periods ended July 31, 1996 and 1997
is unaudited)

2. Summary of Significant Accounting Policies -- (Continued)

Plant Shutdown Expenses

During the fiscal year ended October 31, 1995, the Company ceased latex
manufacturing operations at its Cary, Illinois facility. Shutdown expenses
totaling $850,000 were provided for in 1995. The Company also recorded a loss
on the disposition of latex manufacturing equipment of $822,439.

Deferred Financing Costs

Deferred financing costs consist of unamortized financing costs incurred
in connection with the refinancing of long-term debt during fiscal 1996. These
costs are being amortized on a straight-line basis over the term of the loans.
Amortization expense was $4,176 for the year ended October 31, 1996.

Income Taxes

The provision for income taxes and corresponding balance sheet accounts
are determined in accordance with SFAS No. 109, "Accounting for Income Taxes"
("SFAS 109"). Under SFAS 109, deferred tax assets and liabilities are
determined based on temporary differences between the basis of certain assets
and liabilities for income tax and financial reporting purposes, if any. The
deferred tax assets and liabilities are classified according to the financial
statement classification of the assets and liabilities generating the
differences. Income tax expense (benefit) is comprised of the current tax
payable for the period and the change during the period in the deferred tax
assets and liabilities. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.

Revenue Recognition

The Company recognizes revenue using the accrual method of accounting when
title transfers upon shipment.

Concentration of Credit Risk

Concentration of credit risk with respect to trade accounts receivable is
generally diversified due to the number of entities comprising the Company's
customer base. The Company performs ongoing credit evaluations and provides an
allowance for potential credit losses against the portion of accounts
receivable which is estimated to be uncollectible. Such losses have
historically been within management's expectations.

Use of Estimates

In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Unaudited Pro Forma Stockholders' Equity

The pro forma stockholders' equity as reflected on the consolidated
balance sheet at July 31, 1997 presents estimated effects of the anticipated
conversion of all outstanding shares of Preferred Stock into shares of Class B
Common Stock on a one-to-one ratio in conjunction with an initial public
offering (Note 16).

F-8
<PAGE>

CTI Industries Corporation and Subsidiary

Notes to Consolidated Financial Statements -- (Continued)

(Information presented for the nine month periods ended July 31, 1996 and 1997
is unaudited)

2. Summary of Significant Accounting Policies -- (Continued)

Fair Value of Financial Instruments

The Company utilizes a line of credit to finance short-term obligations.
Management believes that this instrument bears interest at a rate which
approximates prevailing market rates for instruments with similar
characteristics, and accordingly, that the carrying value for this instrument
is a reasonable estimate of fair value.

Impairment of Long-Lived Assets

The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The Company assesses the impairment of
its long-lived assets, including goodwill and property, plant and equipment,
whenever economic events or changes in circumstances indicate that the carrying
amounts of the assets may not be recoverable. Long-lived assets are considered
to be impaired when the sum of the expected future operating cash flows,
undiscounted and without interest charges, is less than the carrying amounts of
the related assets.

Accounting for Stock Options

The Company intends to apply the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", for its employee
stock-based compensation programs. Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation" encourages, but does
not require, companies to recognize compensation expense for grants of stock,
stock options and other equity instruments to employees based on new fair value
accounting rules. Although expense recognition for employee stock based
compensation is not mandatory, SFAS No. 123 requires companies that choose not
to adopt the new fair value accounting to disclose pro-forma net income and
earnings per share under the new method.

Computation of Income (Loss) Per Share

The computation of income (loss) per share as reflected on the
consolidated statement of operations is based on the weighted average number of
common and common equivalent shares outstanding during the period. Common stock
equivalents consist of outstanding stock options, which pursuant to Staff
Accounting Bulletin No. 83 of the Securities and Exchange Commission, are
included in the weighted average shares as if they were outstanding for the
entire period to the extent granted within the twelve months preceding the
contemplated public offering date, using the treasury stock method until such
time as shares are issued. The primary weighted average number of common and
equivalent shares outstanding was 1,328,952 and 1,265,835 for the years ended
October 31, 1995 and 1996 and 1,277,670 and 1,235,626 for the nine months ended
July 31, 1996 and 1997.

<PAGE>

The following information regarding income (loss) per share has been
computed on a historical basis under the provisions of Accounting Principles
Board Opinion No. 15.
<TABLE>
<CAPTION>

Years ended October 31,
---------------------------
1995 1996
<S> <C> <C>
Net loss per share ............................................... $ (2.66) $ (0.25)
========== ==========
Weighted average shares outstanding ............................. 1,089,699 1,026,572
========== ==========
</TABLE>

<TABLE>
<CAPTION>
Nine months ended July 31,
--------------------------
1996 1997
<S> <C> <C>
Primary earnings per share:
Net income (loss) per share ................................. $ (0.16) $ 0.20
========== ===========
Weighted average common and common equivalent shares outstanding 1,038,407 1,235,626
========== ===========
Fully diluted earnings per share:
Net income per share .......................................... $ 0.16
===========
Weighted average common and common equivalent shares outstanding 2,238,373
===========
</TABLE>

F-9
<PAGE>

CTI Industries Corporation and Subsidiary

Notes to Consolidated Financial Statements -- (Continued)

(Information presented for the nine month periods ended July 31, 1996 and 1997
is unaudited)

2. Summary of Significant Accounting Policies -- (Continued)

For the years ended October 31, 1995 and 1996 and for the nine month
period ended July 31, 1996, fully diluted earnings per share has not been
presented as the result would be anti-dilutive to the net loss per share.

Reverse Stock Split

Effective July 22, 1997, the Company approved a reverse stock split of 1
share for every 2.6 shares of common stock outstanding. All share information
retroactively reflects the effect of this split.

3. Inventory

Inventory is comprised of the following:

October 31, July 31,
1996 1997
------------- ------------
(unaudited)
Raw materials ......... $ 278,976 $ 374,780
Work in process ......... 510,098 475,000
Finished goods ......... 3,793,519 4,209,662
------------ -----------
Total inventory ...... $ 4,582,593 $5,059,442
============ ===========

4. Line of Credit

The Company has a bank line of credit, due July 1, 1998, which provides
for a maximum borrowing limit of $3,000,000 of which $941,184 and $440,519 was
available at October 31, 1996 and July 31, 1997, respectively. Advances under
the line of credit are subject to a borrowing base, as defined in the line of
credit agreement. Interest is payable monthly at prime plus 1% (prime was 8.25%
and 8.5% at October 31, 1996 and July 31, 1997, respectively). The line of
credit is collateralized by all assets of the Company. The line of credit
agreement contains, among other provisions, certain covenants relating to the
maintenance of tangible net worth.

5. Stock Redemption

In March 1996, the Company entered into a Stock Redemption Agreement with
a shareholder which was subsequently amended June 27, 1997. Under the amended
Stock Redemption Agreement the Company was obligated to redeem 102,564 shares
of Common Stock and has the right but not the obligation to redeem up to an
additional 230,769 shares of Common Stock owned by the shareholder at the price
of $1.95 per share at any time through January 31, 1998. Commencing March 1,
1998 through February 28, 2000, the Company is obligated to pay to the
shareholder, for the redemption of shares at $1.95 per share (i) an amount
equal to 2% of the Company's pretax profits each fiscal quarter (beginning with
the quarter ended February 28, 1998) and (ii) an amount equal to 2% (but not to
exceed $8,000) of the amount the latex and mylar balloon revenues exceed $1.3
million in any month. The Company's obligations terminate once a total of
333,333 shares of Common Stock have been redeemed under the Stock Redemption
Agreement. The Company also has the right to redeem additional shares of Common
Stock from the shareholder during this period at $1.95 per share, provided
total number of shares subject to redemption under the Stock Redemption
Agreement does not exceed 333,333. Redeemable common stock has been reflected
as a liability and a contra equity account on the balance sheet. As of the date
of this report, 102,564 shares of Common Stock have been redeemed under the
Stock Redemption Agreement.

F-10
<PAGE>

CTI Industries Corporation and Subsidiary

Notes to Consolidated Financial Statements -- (Continued)

(Information presented for the nine month periods ended July 31, 1996 and 1997
is unaudited)

6. Notes Payable

Long-term debt at October 31, 1996 consists of:

<TABLE>
<S> <C>
First Term Loan, payable in monthly installments of $18,333 including
interest at prime plus 1% due September 1, 2001. Collateralized by all
assets of the Company. ................................................ $ 1,063,333
Second Term Loan, payable in monthly installments of $19,617 with interest
at 8.75% due at various times through September 1, 2001. Collateralized
by all assets of the Company. .......................................... 2,190,663
Installment Loan, payable in monthly installments of $9,583 plus interest at
10.5% due May 1, 1998. Collateralized by equipment purchased. ......... 172,495
Installment Loans, payable in monthly installments of $2,067 including
interest at 8.25% and 8.5% due at various times through May 18, 1998.
Collateralized by vehicles purchased. ................................. 33,230
------------
Total ............................................................... 3,459,721
Less current portion ...................................................... 402,798
------------
Total long-term debt ................................................ $ 3,056,923
============
</TABLE>

Future minimum principal payments for amounts outstanding under long-term
debt agreements are as follows for the years ended October 31:

1997 ...... $ 402,798
1998 ...... 331,840
1999 ...... 270,708
2000 ...... 275,392
2001 ...... 2,178,983
-----------
$3,459,721
===========

The loan agreements contain, among other provisions, certain covenants
relating to the maintenance of tangible net worth.

7. Convertible Preferred Stock

The Company restated its certificate of incorporation to provide for two
classes of capital stock, Common and Preferred.

The total number of shares of Preferred Stock authorized is 2,000,000,
with a par value of ninety-one cents ($.91) per share. The preferred shares are
entitled to preferential cumulative dividends at the rate of 13% per annum of
the par value, payable only when, as, and if declared by the Board of
Directors. As long as the Preferred Stock is outstanding, there shall be no
dividends declared or paid on any shares of Common Stock. Preferred shares may
be converted by the holder into common shares at any time (See Note 13).

F-11
<PAGE>

CTI Industries Corporation and Subsidiary

Notes to Consolidated Financial Statements -- (Continued)

(Information presented for the nine month periods ended July 31, 1996 and 1997
is unaudited)

8. Income Taxes

The income tax provisions (benefits) as of October 31, are comprised of
the following:

<TABLE>
<CAPTION>
1995 1996
--------------- ----------
<S> <C> <C>
Current:
Federal ....................................... $ (427,843) $ (34)
State ....................................... (135,000) 192
Foreign ....................................... -- 5,776
----------- -------
(562,843) 5,934
----------- -------
Deferred:
Federal ....................................... (172,291) --
State ....................................... (39,009) --
----------- -------
(211,300) --
----------- -------
Total income tax provision (benefit) ...... $ (774,143) $ 5,934
=========== =======
</TABLE>

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

<TABLE>
<CAPTION>
October 31, July 31,
1996 1997
------------- ------------
(unaudited)
<S> <C> <C>
Deferred tax assets:
Accounts receivable allowance ..................... $ 43,331 $ 40,538
Inventory valuation .............................. 54,826 66,819
Accrued liabilities .............................. 220,964 135,651
Net operating loss carryforwards .................. 452,178 455,629
Alternative minimum tax credit carry forwards ...... 291,759 291,759
----------- ---------
Total deferred tax assets ..................... 1,063,058 990,396
Deferred tax liabilities:
Book over tax basis of capital assets ............... 458,706 485,259
Less: Valuation allowance ........................... 604,352 505,137
----------- ---------
Net deferred tax asset (liability) ............ $ -- $ --
=========== =========
</TABLE>

The valuation allowance relates principally to deferred tax assets that
the Company estimates may not be realizable, including net operating loss
carryforwards and tax credit carryforwards. At October 31, 1996 and July 31,
1997, the Company has net operating loss carryforwards for tax purposes of
approximately $1,200,000. These carryforwards expire in the years 2010 and
2011. In addition, the Company has approximately $292,000 in alternative
minimum tax credits which have no expiration date.

F-12
<PAGE>

CTI Industries Corporation and Subsidiary

Notes to Consolidated Financial Statements -- (Continued)

(Information presented for the nine month periods ended July 31, 1996 and 1997
is unaudited)

8. Income Taxes -- (Continued)

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

<TABLE>
<CAPTION>
Years ended Nine months ended
-------------------------------- ----------------------------
October 31, July 31,
1995 1996 1996 1997
---------------- ------------- ------------- ------------
(unaudited)
<S> <C> <C> <C> <C>
Taxes at statutory rate ............ $ (1,246,889) $ (60,216) $ (57,611) $ 79,078
State income taxes .................. (114,846) 127 -- --
Foreign taxes paid .................. -- 5,776 -- --
Increase in valuation allowance ...... 467,707 59,164 51,928 (86,495)
Other .............................. 119,885 1,083 5,683 7,417
------------ --------- --------- ---------
Income tax provision ............... $ (774,143) $ 5,934 $ -- $ --
============ ========= ========= =========
</TABLE>

9. Employee Benefit Plan

Effective January 1, 1993, the Company established a defined contribution
plan for substantially all employees. The plan provides 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 are
employees on the last day of the plan year. Profit sharing contributions may
also be made at the discretion of the Board of Directors. Employer
contributions to the plan totaled $86,595 and $52,369 for the years ended
October 31, 1995 and 1996, respectively.

10. Related Party Transactions

The Company obtains legal services from a law firm in which several
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 $95,217 and $123,872 for the
years ended October 31, 1995 and 1996 and $84,351 and $105,093 for the nine
months ended July 31, 1996 and 1997.

The Company purchases packaging materials from entities in which
shareholders of the Company maintain an ownership interest. Purchases from
these affiliates were $1,106,649 and $184,154 for the periods ended October 31,
1996 and July 31, 1997, respectively.

11. Joint Venture

Effective September 16, 1996, the Company entered into a joint venture
agreement with a manufacturer in Mexico. The joint venture will engage in the
production and packaging of balloons. Under the agreement, both entities will
hold a 50% interest in the joint venture. As of October 31, 1996, the joint
venture has not commenced operations and the Company has made no capital
investment in the joint venture.

12. Commitments and Contingencies

Operating Leases

The Company leases certain production facilities under a noncancelable
lease with monthly payments of $21,432 expiring December 31, 1999. The Company
subleases approximately 70% of this facility through August, 1998. The
Company's United Kingdom subsidiary also maintains a lease for office and
warehouse space which expires in 2013.

The Company leases a computer system, software, office equipment and
automobiles on operating leases which expire on various dates between May 1997
and May 1999.

F-13
<PAGE>

CTI Industries Corporation and Subsidiary

Notes to Consolidated Financial Statements -- (Continued)

(Information presented for the nine month periods ended July 31, 1996 and 1997
is unaudited)

12. Commitments and Contingencies -- (Continued)

The net rent expense of all leases was $502,603 in 1995 and $528,654 in
1996

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

Lease Sublease
Payments Income Net
------------ ---------- -----------
1997 ............ $ 556,420 $155,726 $ 400,694
1998 ............ 334,366 139,280 195,086
1999 ............ 326,587 326,587
2000 ............ 99,564 99,564
Thereafter ...... 1,026,000 1,026,000

Litigation

The Company is a defendant in business-related litigation. Management does
not believe the outcome of such litigation will have a material adverse effect
on the Company's financial position and results of operations.

Licenses

The Company has certain merchandising license agreements 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 October 31, are as follows:

1997 ...... $ 270,792
1998 ...... 142,594
1999 ...... 21,042

13. Recapitalization

In July 1997, the Company authorized 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 and negotiated a conversion of all then outstanding shares of the
Company's Convertible Preferred Stock into an aggregate of 1,098,901 shares of
Class B Common Stock effective with the proposed initial public offering. The
shares of the Class B Common Stock contain rights identical to shares of Common
Stock, except that shares of Class B Common Stock, voting separately as a
class, have the right to elect four of the Company's seven directors. Shares of
the 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 Board
of Directors also approved a 1 for 2.6 reverse stock split on both the Common
Stock and Class B Common Stock. The recapitalization and related transactions
were approved by written consent of the shareholders.

14. Stock Option Plan

Under the Company's 1997 Stock Option Plan (effective July 1, 1997), a
total of 300,000 shares of Common Stock are reserved for issuance under the
Stock Option Plan. 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, directors, and employees of, and consultants to,
the Company or any parent or

F-14
<PAGE>

CTI Industries Corporation and Subsidiary

Notes to Consolidated Financial Statements -- (Continued)

(Information presented for the nine month periods ended July 31, 1996 and 1997
is unaudited)

14. Stock Option Plan -- (Continued)

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.

15. Private Placement

In June 1997, the Company issued notes in the principal amount of
$865,000, together with warrants to purchase 277,244 shares of the Company's
Common Stock at $3.12 per share. A substantial portion of these notes and
warrants were purchased by an investor group comprised principally of members
of Company management.

16. Public Offering of Common Stock and Warrants

In June, 1997 the Company's Board of Directors (the "Board") authorized
the filing of a registration statement on Form SB-2 with the Securities and
Exchange Commission relating to an initial public offering ("IPO") by the
Company of 1,500,000 shares of common stock. The offering also includes up to
an additional 225,000 shares of Common Stock to cover over allotments, if any.

In connection with the offering, the Company has agreed to sell to the
underwriter, for nominal consideration, underwriter's warrants to purchase an
additional 150,000 shares of Common Stock.

17. Future Adoption of Recently Issued Accounting Standards

During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share", SFAS No.
129, "Disclosure of Information about Capital Structure," SFAS No. 130,
"Reporting Comprehensive Income Summary," and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information".

SFAS No. 128 establishes standards for the computation, presentation, and
disclosure requirements for earnings per share and is effective for both
interim and annual periods ending after December 15, 1997. SFAS No. 129
consolidates the existing requirements relating to disclosure of certain
information about an entity's capital structure. SFAS No. 130 establishes
standards for reporting comprehensive income to present a measure of all
changes in equity that result from renegotiated transactions and other economic
events of the period other than transactions with owners in their capacity as
owners. Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from nonowner sources and includes net income. SFAS No. 131 specifies revised
guidelines for determining an entity's operating segments and the type and
level of financial information to be disclosed. This standard requires that
management identify operating segments based on the way that management
disaggregates the entity for making internal operating decisions.

F-15
<PAGE>

CTI Industries Corporation and Subsidiary

Notes to Consolidated Financial Statements -- (Continued)

(Information presented for the nine month periods ended July 31, 1996 and 1997
is unaudited)

17. Future Adoption of Recently Issued Accounting Standards -- (Continued)

With the exception of SFAS No. 128, all of the aforementioned statements
are effective for fiscal years beginning after December 15, 1997. Management
has not determined what impact these standards, when adopted, will have on the
Company's financial statements.

18. Geographic Segment Data (Unaudited)

The Company's operations consist of a single business segment which
designs, manufactures, and distributes balloon products. Transfers between
geographic areas were primarily at cost. The Company's subsidiary has assets
consisting primarily of trade accounts receivable and inventory. Sales and
selected financial information by geographic area for the years ended October
31, 1995 and 1996 are as follows:

<TABLE>
<CAPTION>
United
United States Kingdom Eliminations Consolidated
1995 ---------------- ------------- -------------- ----------------
<S> <C> <C> <C> <C>
Revenues ..................... $ 21,807,836 $ 1,544,384 $ (568,440) $ 22,783,780
Operating income (loss) ...... (2,172,089) 1,533 (2,170,556)
Net income (loss) ............ (2,894,708) 1,533 (2,893,175)
Total assets .................. 10,997,898 767,766 11,765,664
1996
Revenues ..................... $ 13,055,900 $ 1,408,683 $ (554,479) $ 13,910,104
Operating income ............ 289,521 28,414 317,935
Net income (loss) ............ (208,784) 25,744 (183,040)
Total assets .................. 9,613,062 672,473 10,285,535
</TABLE>

F-16

<PAGE>

[Photographs of latex and mylar "Coordinated Balloon Products," "Laminated and
Printed Packaging Films," product "Displays" and mylar "Licensed Balloon
Products." Text in quotes above and copyright symbols of licensed products
accompanies photographs.]

<PAGE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No underwriter, dealer, sales representative or any other person has
been authorized to give any information or to make any representations other
than those contained in this Prospectus and, if given or made, such information
or representations must not be relied upon as having been authorized by the
Company or the Underwriter. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create any implication that
there has been no change in the affairs of the Company since the date hereof or
that the information contained herein is correct as of any date subsequent to
the date hereof. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities offered hereby by anyone in any
jurisdiction in which such offer or solicitation is not authorized or in which
the person making such offer or solicitation is not qualified to do so or to
anyone to whom it is unlawful to make such offer or solicitation.

--------------------------

TABLE OF CONTENTS

Page
---------
Prospectus Summary ........................ 3
Risk Factors .............................. 8
The Company .............................. 13
Use of Proceeds ........................... 14
Dividend Policy ........................... 15
Capitalization ........................... 15
Dilution ................................. 16
Selected Financial Data .................. 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ........................... 19
Business ................................. 23
Management .............................. 30
Principal Stockholders .................. 33
Certain Transactions ..................... 34
Description of Capital Stock ............ 35
Securities Eligible for Future Sale ...... 36
Underwriting .............................. 36
Legal Matters ........................... 38
Experts ................................. 38
Change in Independent Accountants ......... 38
Available Information ..................... 39
Index to Financial Statements ............ F-1

Until ________, 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligations of dealers to
deliver a Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

[LOGO]

CTI INDUSTRIES
CORPORATION

1,500,000 Shares
of

Common Stock

---------------------------------
PROSPECTUS
---------------------------------

JOSEPH STEVENS & COMPANY, INC.

, 1997

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 24. Indemnification of Directors and Officers.

The Company's Certificate of Incorporation eliminates the personal
liability of directors to the Company or its stockholders for monetary damages
for breach of fiduciary duty to the extent permitted by Delaware law. The
Company's Certificate of Incorporation and By-Laws provide that the Company
shall indemnify its officers and directors to the extent permitted by
Subsection 145 of the General Corporation Law of the State of Delaware, which
authorizes a corporation to indemnify directors, officers, employees or agents
of the Corporation in non-derivative suits if such party acted in good faith
and in a manner such party reasonably believed to be in or not opposed to the
best interest of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection 145 further provides that indemnification shall be provided if the
party in question is successful on the merits or otherwise.

Reference is hereby made to the caption "Management -- Limitation of
Liability and Indemnification" in the Prospectus which is a part of this
Registration Statement for a description of indemnification arrangements
between the Company and its directors.

The form of Underwriting Agreement, included as Exhibit 1.1, provides for
indemnification of the Company and certain controlling persons under certain
circumstances, including liabilities under the Securities Act of 1933, as
amended ("Securities Act"). Insofar as indemnification for liabilities under
the Securities Act may be permitted to directors, officers or persons
controlling the Company pursuant to the foregoing provisions of the
Underwriting Agreement, the Company has been informed that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and therefore is unenforceable.

Item 25. Other Expenses of Issuance and Distribution.

The estimated expenses of the distribution other than compensation paid to
the Underwriter, all of which are to be borne by the Company, are as follows:

SEC Registration Fee .................. $ 5,700.00
NASD Fee .............................. 2,500.00
NASDAQ Fees ........................... 10,000.00
*Blue Sky Fees and Expenses ............ 45,000.00
*Transfer Agent Fees .................. 10,000.00
*Accounting Fees and Expenses ......... 125,000.00
*Legal Fees and Expenses ............... 125,000.00
*Printing and Engraving Expenses ...... 100,000.00
*Miscellaneous Fees and Expenses ...... 26,800.00
------------
Total .............................. $450,000.00
============

- ------------
* All amounts are estimates.

Item 26. Recent Sales of Unregistered Securities.

In March and May of 1996, a group of investors made an equity investment
of $1,000,000 in the Company in return for 1,098,901 shares of Preferred Stock,
$.91 par value. CTI Investors, L.L.C., an Illinois limited liability company,
invested $900,000 in the shares of Preferred Stock. Members of CTI Investors,
L.L.C. include Howard W. Schwan, John H. Schwan and Stephen M. Merrick, members
of management, and one other accredited investor, Frances A. Rohlen. One other
accredited investor, Philip W. Colburn, invested the remaining $100,000. The
sale was exempt from registration under Section 4(2) of the Securities Act of
1933, as amended (the "Securities Act") as a transaction not involving a public
offering as sales were made to a small number of accredited investors,
including members of management, who were sophisticated and had access to
information about the Company. Upon the closing of this Offering, the shares of
Preferred Stock will be converted into 1,098,901 shares of Class B Common
Stock.

II-1
<PAGE>

In December, 1996, Howard W. Schwan, John H. Schwan and Stephen M.
Merrick, members of management, were each issued warrants to purchase 76,923
shares of the Company's Common Stock at an exercise price of $.91 per share in
consideration of their facilitating and guaranteeing a bank loan to the Company
in the amount of $6.3 million. The issuance was exempt from regulation under
Section 4(2) of the Securities Act as a transaction not involving a public
offering as all participants were members of management who were sophisticated
and had access to information about the Company.

In June, 1997, the Company issued in a private placement notes in the
principal amount of $865,000, together with warrants to purchase up to 277,244
shares of the Company's Common Stock at an exercise price of $3.12 per share.
Howard W. Schwan, John H. Schwan, Stephen M. Merrick and John C. Davis, members
of management. The offering was exempt from registration under Section 4(2) of
the Securities Act as a transaction not involving a public offering as all
participants were members of management who were sophisticated and had access
to information about the Company.

Item 27. Exhibits.

<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>

* 1.1 Amended Form of Underwriting Agreement
* 3.1 Second 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
* 4.2 Amended Form of Underwriter's Warrant Agreement
* 5.1 Opinion, with Consent, of Fishman Merrick Miller Genelly Springer Klimek & Anderson, P.C.
*10.1 CTI Industries Corporation Stock Option Plan
*10.2 Employment Agreement dated April 29, 1996 between CTI Industries Corporation and John C.
Davis
*10.3 Stock Redemption Agreement dated March 1, 1996 between CTI Industries Corporation and John
C. Davis
*10.4 Agreement dated June 27, 1997 between CTI Industries Corporation and John C. Davis
*10.5 Third Amendment to Lease Agreement dated August 15, 1994, for premises located at 675 Indus-
trial Drive, Cary, Illinois
*10.6 Form of Warrant dated December 3, 1996 to purchase shares of Common Stock
*10.7 Form of Subscription Agreement dated March, 1996, for purchase of Preferred Stock
*10.8 Form of Subscription Agreement dated June 20, 1997 for promissory notes and warrants to pur-
chase shares of Common Stock
*10.9 Employment Agreement dated June 30, 1997, between CTI Industries Corporation and Howard W.
Schwan
*10.10 Joint Venture Agreement dated September 16, 1996, between CTI Industries Corporation and
Pulidos & Terminados Finos S.A. de C.V.
*10.11 Agreement for purchase of assets dated September 8, 1995, between CTI Industries Corporation
and Pulidos & Terminados Finos S.A. de C.V.
*10.12 Amendment dated May 24, 1996, to Agreement for purchase of assets between CTI Industries
Corporation and Pulidos & Terminados Finos S.A. de C.V.
*10.13 Form of Agreement dated July 14, 1997 between CTI Industries Corporation and Pulidos & Ter-
minados Finos S.A. de C.V.
*10.14 Consulting Agreement dated March, 1996 between CTI Industries Corporation and Michael R.
Miller
*10.15 Loan and Security Agreement dated August 22, 1996 between the Company and First American
Bank
*10.16 Third Amendment to Loan and Security Agreement dated July 1, 1997, among CTI Industries
Corporation, First American Bank, Stephen M. Merrick, John H. Schwan and Howard W. Schwan
*10.17 First Term Note in the sum of $1,100,000 dated August 22, 1996 made by CTI Industries Corpo-
ration to First American Bank.
*10.18 Second Term Note in the sum of $2,200,000 dated August 22, 1996 made by CTI Industries Cor-
poration to First American Bank.
*10.19 Revolving Note in the sum of $3,000,000 dated August 22, 1996 made by the Company to First
American Bank.
</TABLE>

II-2
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>

*10.20 Mortgage dated August 22, 1996 for benefit of First American Bank.
*10.21 Guaranty dated July 1, 1997, by Stephen M. Merrick, Howard W. Schwan and John H. Schwan
for benefit of First American Bank.
*10.22 Third Term Note in the sum of $275,000 dated July 1, 1997 made by CTI Industries Corporation
to First American Bank.
*10.23 Fourth Term Note in the sum of $200,000 dated July 1, 1997, made by CTI Industries Corpora-
tion to First American Bank.
*10.24 First Amendment to Revolving Note dated July 1, 1997 made by CTI Industries Corporation to
First American Bank.
*10.25 Form of Financial Advisory and Consulting Agreement.
*11.1 Computation of Earnings Per Share - Annual
*11.2 Computation of Earnings Per Share - Nine Months
*15.1 Letter from Detterbeck & Associates, Ltd.
*15.2 Letter from Jacobson, Scott, Gordon & Horewitch
*21 Subsidiaries (incorporate description in Prospectus under "The Company")
23.1 Consent of Coopers and Lybrand L.L.P.
*23.2 Consent of Fishman Merrick Miller Genelly Springer Klimek & Anderson, P.C. (included in
Exhibit 5.1)
*24 Power of Attorney (included in signature page).
27 Financial Data Schedule
</TABLE>

- ------------
* Filed previously.

Item 28. Undertakings.

1. The Registrant hereby undertakes:

(1) That for purposes of determining any liability under the Securities
Act, treat the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant under Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this Registration Statement as of the time
the Commission declared it effective.

(2) That for the purpose of determining any liability under the
Securities Act, treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities offered in the
Registration Statement, and that offering of the securities at that time as the
initial bona fide offering of those securities.

(3) To file, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement:

(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;

(ii) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereto) that, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of Prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in the volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective Registration Statement;

(iii) to include any additional or changed material information on the
plan of distribution.

(4) To remove from registration by means of a post-effective amendment
any of the securities being registered that remain unsold at the termination of
the offering.

(5) To provide to the Underwriter at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriter to permit prompt delivery to each
purchaser.

II-3
<PAGE>

2. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.

The Registrant has agreed to indemnify the Underwriter and its officers,
directors, partners, employees, agents and controlling persons as to any
losses, claims, damages, expenses or liabilities arising out of any untrue
statement or omission of a material fact contained in the Registration
Statement. The Underwriter has agreed to indemnify the Registrant and its
directors, officers and controlling persons as to any losses, claims, damages,
expenses or liabilities arising out of any untrue statement or omission in the
Registration Statement based on information relating to the Underwriter
furnished by it for use in connection with the Registration Statement.

II-4
<PAGE>

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the Village of Barrington, State of Illinois, on the 22nd
day of October, 1997.

CTI INDUSTRIES CORPORATION

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

In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signatures Title Date
- ------------------------------- -------------------------------- -----------------
<S> <C> <C>

/s/ Howard W. Schwan President, Principal Executive October 22, 1997
- ------------------------------- Officer and Director
Howard W. Schwan

/s/ Howard W. Schwan* Chairman and Director October 22, 1997
- -------------------------------
John H. Schwan

/s/ Howard W. Schwan* Chief Executive Officer, October 22, 1997
- ----------------------------- Secretary, Principal Accounting
Stephen M. Merrick Officer and Director

/s/ Howard W. Schwan* Vice President and Director October 22, 1997
- -----------------------------
John C. Davis

/s/ Howard W. Schwan* Manager of Finance and October 22, 1997
- ----------------------------- Administration
Sharon Konny

/s/ Howard W. Schwan* Director October 22, 1997
- -----------------------------
Stanley M. Brown
</TABLE>

* pursuant to lawful power of attorney previously filed with the Commission

II-5
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Description Page
------- ----------- ----
<S> <C> <C>
* 1.1 Amended Form of Underwriting Agreement
* 3.1 Second 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
* 4.2 Amended Form of Underwriter's Warrant Agreement
* 5.1 Opinion, with Consent, of Fishman Merrick Miller Genelly Springer Klimek & Anderson, P.C.
*10.1 CTI Industries Corporation Stock Option Plan
*10.2 Employment Agreement dated April 29, 1996 between CTI Industries Corporation and John C.
Davis
*10.3 Stock Redemption Agreement dated March 1, 1996 between CTI Industries Corporation and
John C. Davis
*10.4 Agreement dated June 27, 1997 between CTI Industries Corporation and John C. Davis
*10.5 Third Amendment to Lease Agreement dated August 15, 1994, for premises located at 675
Industrial Drive, Cary, Illinois
*10.6 Form of Warrant dated December 3, 1996 to purchase shares of Common Stock
*10.7 Form of Subscription Agreement dated March, 1996, for purchase of Preferred Stock
*10.8 Form of Subscription Agreement dated June 20, 1997 for promissory notes and warrants to
purchase shares of Common Stock
*10.9 Employment Agreement dated June 30, 1997, between CTI Industries Corporation and Howard
W. Schwan
*10.10 Joint Venture Agreement dated September 16, 1996, between CTI Industries Corporation and
Pulidos & Terminados Finos S.A. de C.V.
*10.11 Agreement for purchase of assets dated September 8, 1995, between CTI Industries Corpora-
tion and Pulidos & Terminados Finos S.A. de C.V.
*10.12 Amendment dated May 24, 1996, to Agreement for purchase of assets between CTI Industries
Corporation and Pulidos & Terminados Finos S.A. de C.V.
*10.13 Form of Agreement dated July 14, 1997 between CTI Industries Corporation and Pulidos &
Terminados Finos S.A. de C.V.
*10.14 Consulting Agreement dated March, 1996 between CTI Industries Corporation and Michael R.
Miller
*10.15 Loan and Security Agreement dated August 22, 1996 between the Company and First Ameri-
can Bank
*10.16 Third Amendment to Loan and Security Agreement dated July 1, 1997, among CTI Industries
Corporation, First American Bank, Stephen M. Merrick, John H. Schwan and Howard W.
Schwan
*10.17 First Term Note in the sum of $1,100,000 dated August 22, 1996 made by CTI Industries Cor-
poration to First American Bank.
*10.18 Second Term Note in the sum of $2,200,000 dated August 22, 1996 made by CTI Industries
Corporation to First American Bank.
*10.19 Revolving Note in the sum of $3,000,000 dated August 22, 1996 made by the Company to First
American Bank.
*10.20 Mortgage dated August 22, 1996 for benefit of First American Bank.
*10.21 Guaranty dated July 1, 1997, by Stephen M. Merrick, Howard W. Schwan and John H. Schwan
for benefit of First American Bank.
*10.22 Third Term Note in the sum of $275,000 dated July 1, 1997 made by CTI Industries Corpora-
tion to First American Bank.
*10.23 Fourth Term Note in the sum of $200,000 dated July 1, 1997, made by CTI Industries Corpo-
ration to First American Bank.
*10.24 First Amendment to Revolving Note dated July 1, 1997 made by CTI Industries Corporation to
First American Bank.
*10.25 Form of Financial Advisory and Consulting Agreement.
*11.1 Computation of Earnings Per Share - Annual
*11.2 Computation of Earnings Per Share - Nine Months
*15.1 Letter from Detterbeck & Associates, Ltd.
*15.2 Letter from Jacobson, Scott, Gordon & Horewitch
*21 Subsidiaries (incorporate description in Prospectus under "The Company")
23.1 Consent of Coopers and Lybrand L.L.P.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Description Page
------- ----------- ----
<S> <C> <C>
*23.2 Consent of Fishman Merrick Miller Genelly Springer Klimek & Anderson, P.C. (included in
Exhibit 5.1)
*24 Power of Attorney (included in signature page).
27 Financial Data Schedule
</TABLE>

- ------------
* Filed previously.

<PAGE>

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion in the registration statement on Form SB-2 (File
No. 333-31969) of our report dated July 22, 1997, on our audits of the
financial statements of CTI Industries Corporation. We also consent to the
reference to our firm in the "Summary Financial Information," "Selected
Financial Data" and under the caption "Experts."

/s/ COOPERS & LYBRAND L.L.P.
-------------------------------------

COOPERS & LYBRAND L.L.P.

Chicago, Illinois
October 22, 1997

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM SB-2 FOR THE NINE
MONTHS ENDED JULY 31, 1997 AND FOR THE YEAR ENDED OCTOBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM SB-2.
</LEGEND>
<CIK> 0001042187
<NAME> CTI Industries Ciorporation
<MULTIPLIER> 1,000
<CURRENCY> dollars

<S> <C> <C>
<PERIOD-TYPE> 9-MOS 12-MOS
<FISCAL-YEAR-END> JUL-31-1997 OCT-31-1996
<PERIOD-START> NOV-01-1996 NOV-01-1995
<PERIOD-END> JUL-31-1997 OCT-31-1996
<EXCHANGE-RATE> 1.000 1.000
<CASH> 263 131
<SECURITIES> 0 0
<RECEIVABLES> 2,183 1,795
<ALLOWANCES> 116 130
<INVENTORY> 5,059 4,583
<CURRENT-ASSETS> 7,920 6,597
<PP&E> 10,391 10,000
<DEPRECIATION> 6,685 6,416
<TOTAL-ASSETS> 11,756 10,286
<CURRENT-LIABILITIES> 6,690 6,250
<BONDS> 0 0
0 0
1,064 1,028
<COMMON> 75 74
<OTHER-SE> (193) (620)
<TOTAL-LIABILITY-AND-EQUITY> 11,756 10,286
<SALES> 12,082 13,910
<TOTAL-REVENUES> 12,082 13,910
<CGS> 7,346 8,558
<TOTAL-COSTS> 7,346 8,558
<OTHER-EXPENSES> 3,918 4,976
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 471 553
<INCOME-PRETAX> 347 (177)
<INCOME-TAX> 0 6
<INCOME-CONTINUING> 347 (383)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 347 (183)
<EPS-PRIMARY> .20 (.20)
<EPS-DILUTED> .16 (.20)

</TABLE>