EXHIBIT
10.4

      
         

        Security
Agreement

         

        This
Security Agreement (the “Agreement”) is dated as of
April 29, 2010, between CTI
Industries Corporation, an Illinois corporation (the “Debtor”), with its mailing
address as set forth in Section 12(b) hereof, and Harris
N.A., a national banking association (the “Secured Party”), with its
mailing address as set forth in Section 12(b) hereof.

         

        Preliminary
Statement

         

        A.    The
Debtor has requested that the Secured Party from time to time extend credit or
otherwise make financial accommodations available to or for the account of the
Debtor, including, without limitation, pursuant to the terms of that certain
Credit Agreement dated as of April 29, 2010, between Debtor and Secured Party,
as the same may from time to time be amended, modified or restated (the “Credit Agreement”;
capitalized terms used herein and not otherwise defined shall have the meanings
given such terms in the Credit Agreement).

         

        B.    As
a condition to extending credit or otherwise making financial accommodations
available to or for the account of the Debtor, the Secured Party requires, among
other things, that the Debtor grant the Secured Party a security interest in the
Debtor’s personal property described herein subject to the terms and conditions
hereof.

         

        Now,
Therefore, in consideration of the benefits accruing to the Debtor, and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:

         

        Section 1.    Grant of Security
Interest.  The Debtor hereby grants to the Secured Party a lien
on and security interest in, and acknowledges and agrees that the Secured Party
has and shall continue to have a continuing lien on and security interest in,
all right, title, and interest of the Debtor, whether now owned or existing or
hereafter created, acquired, or arising, in and to all of the
following:

         

        (a)      Accounts
(including Health-Care-Insurance Receivables, if any);

         

        (b)      Chattel
Paper;

         

        (c)      Instruments
(including Promissory Notes);

         

        (d)     
Documents;

         

        (e)     
General Intangibles (including Payment Intangibles and Software, patents,
trademarks, tradestyles, copyrights, and all other intellectual property rights,
including all applications, registration, and licenses therefor, and all
goodwill of the business connected therewith or represented
thereby);

         

        
          
             

          

          
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        (f)      
Letter-of-Credit Rights;

         

        (g)     
Supporting Obligations;

         

        (h)      Deposit
Accounts;

         

        (i)     
Investment Property (including certificated and uncertificated Securities,
Securities Accounts, Security Entitlements, Commodity Accounts, and Commodity
Contracts);

         

        (j)      
Inventory;

         

        (k)     
Equipment (including all software, whether or not the same constitutes embedded
software, used in the operation thereof);

         

        (l)    
  Fixtures;

         

        (m)   
 Commercial Tort Claims (as described on Schedule G hereto or on one
or more supplements to this Agreement);

         

        (n)    
 Rights to merchandise and other Goods (including rights to returned or
repossessed Goods and rights of stoppage in transit) which is represented by,
arises from, or relates to any of the foregoing;

         

        (o)  
  Monies, personal property, and interests in personal property of the
Debtor of any kind or description now held by the Secured Party or at any time
hereafter transferred or delivered to, or coming into the possession, custody,
or control of, the Secured Party, or any agent or affiliate of the Secured
Party, whether expressly as collateral security or for any other purpose
(whether for safekeeping, custody, collection or otherwise), and all dividends
and distributions on or other rights in connection with any such
property;

         

        (p)    
Supporting evidence and documents relating to any of the above-described
property, including, without limitation, computer programs, disks, tapes and
related electronic data processing media, and all rights of the Debtor to
retrieve the same from third parties, written applications, credit information,
account cards, payment records, correspondence, delivery and installation
certificates, invoice copies, delivery receipts, notes, and other evidences of
indebtedness, insurance certificates and the like, together with all books of
account, ledgers, and cabinets in which the same are reflected or
maintained;

         

        (q)   
 Accessions and additions to, and substitutions and replacements of, any
and all of the foregoing; and

         

        (r)   
  Proceeds and products of the foregoing, and all insurance of the
foregoing and proceeds thereof;

         

        
          
             

          

          
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        all of
the foregoing being herein sometimes referred to as the “Collateral”.   All
terms which are used in this Agreement which are defined in the Uniform
Commercial Code of the State of Illinois as in effect from time to time (“UCC”) shall have the same
meanings herein as such terms are defined in the UCC, unless this Agreement
shall otherwise specifically provide.  For purposes of this Agreement,
the term "Receivables"
means all rights to the payment of a monetary  obligation, whether or
not earned by performance, and whether evidenced by an Account, Chattel Paper,
Instrument, General Intangible, or otherwise.

         

        Section 2.    Obligations Hereby
Secured.  The lien and security interest herein granted and
provided for is made and given to secure, and shall secure, the payment and
performance of (a) any and all indebtedness, obligations and liabilities of
whatsoever kind and nature of the Debtor to the Secured Party (whether arising
before or after the filing of a petition in bankruptcy), whether direct or
indirect, absolute or contingent, due or to become due, and whether now existing
or hereafter arising and howsoever held, evidenced or acquired, and whether
several, joint or joint and several and (b) any and all expenses and
charges, legal or otherwise, suffered or incurred by the Secured Party in
collecting or enforcing any of such indebtedness, obligations or liabilities or
in realizing on or protecting or preserving any security therefor, including,
without limitation, the lien and security interest granted hereby (all of the
foregoing being hereinafter referred to as the “Obligations”).

         

        Section 3.    Covenants, Agreements,
Representations and Warranties.  The Debtor hereby covenants
and agrees with, and represents and warrants to, the Secured Party
that:

         

        (a)    The
Debtor is a corporation duly organized and validly existing in good standing under
the laws of the jurisdiction of its organization. The Debtor shall not change
its jurisdiction of organization without the Secured Party’s prior written
consent.  The Debtor is the sole and lawful owner of the Collateral,
and has full right, power and authority to enter into this Security Agreement
and to perform each and all of the matters and things herein provided
for.  The execution and delivery of this Security Agreement, and the
observance and performance of each of the matters and things herein set forth,
will not (i) contravene or constitute a default under any provision of law
or any judgment, injunction, order or decree binding upon the Debtor or any
provision of the Debtor’s organizational documents (e.g., charter, articles or
certificate of incorporation and by-laws, articles or certificate of formation
and limited liability company operating agreement, partnership agreement, or
similar organizational documents) or any covenant, indenture or agreement of or
affecting the Debtor or any of its property or (ii) result in the creation
or imposition of any lien or encumbrance on any property of the Debtor except
for the lien and security interest granted to the Secured Party
hereunder.  The Debtor’s organizational registration number (if any)
is 61786341.

         

        (b)    The
Debtor’s chief executive office and principal place of business is at, and the
Debtor keeps and shall keep all of its books and records relating to Receivables
only at, 22160 North Pepper Road, Barrington, Illinois; and the Debtor has no
other executive offices or places of business other than those listed under
Item 1 on Schedule A.  The Collateral is and shall remain in
the Debtor’s possession or control at the locations listed under Item 2 on
Schedule A attached hereto (collectively, the “Permitted Collateral
Locations”), except for (i) Collateral which in the ordinary course
of the Debtor’s business is in transit between Permitted Collateral Locations
and (ii) Collateral aggregating less than $50,000 in fair market value
outstanding at any one time.   If for any reason any
Collateral is at any time kept or located at a location other than a Permitted
Collateral Location, the Secured Party shall nevertheless have and retain a lien
on and security interest therein.  The Debtor owns and
shall at all times own all Permitted Collateral Locations, except to the extent
otherwise disclosed under Item 2 on Schedule A.  The Debtor
shall not move its chief executive office or maintain a place of business at a
location other than those specified under Item 1 on Schedule A or
permit the Collateral to be located at a location other than those specified
under Item 2 on Schedule A, in each case without first providing the
Secured Party 30 days’ prior written notice of the Debtor’s intent to do
so; provided that the
Debtor shall at all times maintain its chief executive office and, unless
otherwise specifically agreed to in writing by the Secured Party, Permitted
Collateral Locations in the United States of America and, with respect to any
new chief executive office or place of business or location of Collateral, the
Debtor shall have taken all action requested by the Secured Party to maintain
the lien and security interest of the Secured Party in the Collateral at all
times fully perfected and in full force and effect.

         

        
          
             

          

          
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        (c)    The
Debtor’s legal name and jurisdiction of organization is correctly set forth in
the first paragraph of this Agreement.  The Debtor has not transacted
business at any time during the immediately preceding five-year period, and does
not currently transact business, under any other legal names or trade names
other than the prior legal names and trade names (if any) set forth on
Schedule B attached hereto.  The Debtor shall not change its
legal name or transact business under any other trade name without first giving
30 days’ prior written notice of its intent to do so to the Secured
Party.

         

        (d)    The
Collateral and every part thereof is and shall be free and clear of all security
interests, liens (including, without limitation, mechanics’, laborers’ and
statutory liens), attachments, levies, and encumbrances of every kind, nature
and description, whether voluntary or involuntary, except for the lien and
security interest of the Secured Party therein and as otherwise provided on
Schedule C attached hereto.  The Debtor shall warrant and defend
the Collateral against any claims and demands of all persons at any time
claiming the same or any interest in the Collateral adverse to the Secured
Party.

         

        (e)    The
Debtor shall promptly pay when due all taxes, assessments and governmental
charges and levies upon or against the Debtor or any of the Collateral, in each
case before the same become delinquent and before penalties accrue thereon,
unless and to the extent that the same are being contested in good faith by
appropriate proceedings which prevent foreclosure or other realization upon any
of the Collateral and preclude interference with the operation of the Debtor’s
business in the ordinary course, and the Debtor shall have established adequate
reserves therefor.

         

        (f)    The
Debtor shall not use, manufacture, sell, or distribute any Collateral in
violation of any statute, ordinance, or other governmental
requirement.  The Debtor shall not waste or destroy the Collateral or
any part thereof or be negligent in the care or use of any
Collateral.  The Debtor shall perform its obligations under any
contract or other agreement constituting part of the Collateral, it being
understood and agreed that the Secured Party has no responsibility to perform
such obligations.

         

        (g)    Subject
to Sections 4(b), 6(b), 6(c), and 7(c) hereof, the Debtor shall not, without the
Secured Party’s prior written consent, sell, assign, mortgage, lease or
otherwise dispose of the Collateral or any interest therein.

         

        
          
             

          

          
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        (h)    The
Debtor shall at all times insure the Collateral consisting of tangible personal
property against such risks and hazards as other persons similarly situated
insure against, and including in any event loss or damage by fire, theft,
burglary, pilferage, loss in transit and such other hazards as the Secured Party
may specify.  All insurance required hereby shall be maintained in
amounts and under policies and with insurers reasonably acceptable to
the Secured Party, and all such policies shall contain loss payable clauses
naming the Secured Party as loss payee as its interest may appear (and, if the
Secured Party requests, naming the Secured Party as an additional insured
therein) in a form reasonably acceptable to the Secured Party.  All
premiums on such insurance shall be paid by the Debtor.  Certificates
of insurance evidencing compliance with the foregoing and, at the Secured
Party’s request, the policies of such insurance shall be delivered by the Debtor
to the Secured Party.  All insurance required hereby shall provide
that any loss shall be payable to the Secured Party notwithstanding any act or
negligence of the Debtor, shall provide that no cancellation thereof shall be
effective until at least 30 days after receipt by the Debtor and the
Secured Party of written notice thereof, and shall be reasonably satisfactory to the
Secured Party in all other respects.  In case of any material loss,
damage to, or destruction of the Collateral or any part thereof, the Debtor
shall promptly give written notice thereof to the Secured Party generally
describing the nature and extent of such damage or destruction.  In
case of any loss, damage to or destruction of the Collateral or any part
thereof, the Debtor, whether or not the insurance proceeds, if any, received on
account of such damage or destruction shall be sufficient for that purpose, at
the Debtor’s cost and expense, shall promptly repair or replace the Collateral
so lost, damaged, or destroyed, except to the extent such Collateral, prior to
its loss, damage, or destruction, had become uneconomical, obsolete or worn out
and is not necessary for or of importance to the proper conduct of the Debtor’s
business in the ordinary course.  In the event the Debtor shall
receive any proceeds of such insurance, the Debtor shall immediately pay over
such proceeds to the Secured Party.  The Debtor hereby authorizes the
Secured Party, at the Secured Party’s option, to adjust, compromise and settle
any losses under any insurance afforded at any time during the existence of any
Event of Default or any other event or condition which with the lapse of time or
the giving of notice, or both, would constitute an Event of Default, and the
Debtor does hereby irrevocably constitute the Secured Party, and each of its
nominees, officers, agents, attorneys, and any other person whom the Secured
Party may designate, as the Debtor’s attorneys-in-fact, with full power and
authority to effect such adjustment, compromise and/or settlement and to endorse
any drafts drawn by an insurer of the Collateral or any part thereof and to do
everything necessary to carry out such purposes and to receive and receipt for
any unearned premiums due under policies of such insurance.  Unless
the Secured Party elects to adjust, compromise or settle losses as aforesaid,
any adjustment, compromise and/or settlement of any losses under any insurance
shall be made by the Debtor subject to final approval of the Secured Party
(regardless of whether or not an Event of Default shall have occurred) in the
case of losses exceeding $100,000.  Net insurance proceeds received by
the Secured Party under the provisions hereof or under any policy of insurance
covering the Collateral or any part thereof shall be applied to the reduction of
the Obligations (whether or not then due); provided, however, that the
Secured Party may in its sole discretion release any or all such insurance
proceeds to the Debtor.  All
insurance proceeds shall be subject to the lien and security interest of the
Secured Party hereunder.

         

        Unless
the Debtor provides the Secured Party with evidence of the insurance coverage
required by this Security Agreement, the Secured Party may purchase insurance at
the Debtor’s expense to protect the Secured party’s interests in the
Collateral.  This insurance may, but need not, protect the debtor’s
interests in the Collateral.  The coverage purchased by the Secured
Party may not pay any claims that the Debtor makes or any claim that is made
against the Debtor in connection with the Collateral.  The Debtor may
later cancel any such insurance purchased by the Secured Party, but only after
providing the Secured Party with evidence that the Debtor has obtained insurance
as required by this Security Agreement.  If the Secured Party
purchases insurance for the Collateral, the Debtor will be responsible for the
costs of that insurance, including interest and any other charges that the
Secured Party may impose in connection with the placement of the insurance,
until the effective date of the cancellation or expiration of the
insurance.  The costs of the insurance may be added to the Obligations
secured hereby.  The costs of the insurance may be more than the cost
of insurance the Debtor may be able to obtain on its own.

         

        
          
             

          

          
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        (i)   
 The Debtor shall at all times allow the Secured Party and its
representatives free access to and right of inspection of the Collateral; provided that, unless the
Secured Party believes in good faith an Event of Default, or any other event or
condition which with the lapse of time or the giving of notice, or both, would
constitute an Event of Default, exists, any such access or inspection shall only
be required during the Debtor’s normal business hours.

         

        (j) 
   If any Collateral is in the possession or control of any of
the Debtor’s agents or processors and the Secured Party so requests, the Debtor
agrees to notify such agents or processors in writing of the Secured Party’s
security interest therein and instruct them to hold all such Collateral for the
Secured Party’s account and subject to the Secured Party’s
instructions.  The Debtor shall, upon the request of the Secured
Party, authorize and instruct all bailees and other parties, if any, at any time
processing, labeling, packaging, holding, storing, shipping or transferring all
or any part of the Collateral to permit the Secured Party and its
representatives to examine and inspect any of the Collateral then in such
party’s possession and to verify from such party’s own books and records any
information concerning the Collateral or any part thereof which the Secured
Party or its representatives may seek to verify.  As to any premises
not owned by the Debtor wherein any of the Collateral is located, the Debtor
shall, at the Secured Party’s request, cause each party having any right, title
or interest in, or lien on, any of such premises to enter into an agreement (any
such agreement to contain a legal description of such premises) whereby such
party disclaims any right, title and interest in, and lien on, the Collateral
and allows the removal of such Collateral by the Secured Party and is otherwise
in form and substance acceptable to the Secured Party; provided, however, that no
such agreement need be obtained with respect to any one location wherein the
value of the Collateral as to which such agreement has not been obtained
aggregates less than $50,000 at any one time.

         

        (k)
   The Debtor agrees from time to time to deliver to the Secured
Party such evidence of the existence, identity and location of the Collateral
and of its availability as collateral security pursuant hereto (including,
without limitation, schedules describing all Receivables created or acquired by
the Debtor, copies of customer invoices or the equivalent and original shipping
or delivery receipts for all merchandise and other goods sold or leased or
services rendered, together with the Debtor’s warranty of the genuineness
thereof, and reports stating the book value of Inventory and Equipment by major
category and location), in each case as the Secured Party may
request.  The Secured Party shall have the right to verify all or any
part of the Collateral in any manner, and through any medium, which the Secured
Party considers appropriate (including, without limitation, the verification of
Collateral by use of a fictitious name), and the Debtor agrees to furnish all
assistance and information, and perform any acts, which the Secured Party may
require in connection therewith.  The Debtor shall promptly notify the
Secured Party of any Collateral which the Debtor has determined to have been
rendered obsolete, stating the prior book value of such Collateral, its type and
location.

         

        (l)  
  The Debtor shall comply with the terms and conditions of all leases,
easements, right-of-way agreements and other similar agreements binding upon the
Debtor or affecting the Collateral or any part thereof, and all orders,
ordinances, laws and statutes of any city, state or other governmental entity,
department, or agency having jurisdiction with respect to the premises wherein
such Collateral is located or the conduct of business thereon.

         

        
          
             

          

          
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        (m)    Schedule D
attached hereto contains a true, complete, and current listing of all patents,
trademarks, tradestyles, copyrights, and other intellectual property rights
(including all registrations and applications therefor) owned by the Debtor as
of the date hereof that are registered with any governmental
authority.  The Debtor shall promptly notify the Secured Party in
writing of any additional intellectual property rights acquired or arising after
the date hereof, and shall submit to the Secured Party a supplement to Schedule
D to reflect such additional rights (provided the Debtor’s failure to do so
shall not impair the Secured Party’s security interest therein).  The
Debtor owns or possesses rights to use all franchises, licenses, patents,
trademarks, trade names, tradestyles, copyrights, and rights with respect to the
foregoing which are required to conduct its business.  No event has
occurred which permits, or after notice or lapse of time or both would permit,
the revocation or termination of any such rights, and the Debtor is not liable
to any person for infringement under applicable law with respect to any such
rights as a result of its business operations.

         

        (n) 
  Schedule G attached hereto contains a true, complete and
current listing of all Commercial Tort Claims held by the Debtor as of the date
hereof, each described by reference to the specific incident given rise to the
claim.  The Debtor agrees to execute and deliver to the Secured Party
a supplement to this Agreement in the form attached hereto as Schedule H,
or in such other form acceptable to the Secured Party, promptly upon becoming
aware of any other Commercial Tort Claim held or maintained by the Debtor
arising after the date hereof (provided the Debtor’s failure to do so shall not
impair the Secured Party’s security interest therein).

         

        (o) 
  The Debtor agrees to execute and deliver to the Secured Party such
further agreements, assignments, instruments, and documents and to do all such
other things as the Secured Party may deem necessary or appropriate to assure
the Secured Party its lien and security interest hereunder, including, without
limitation, (i) such financing statements, and amendments thereof or
supplements thereto, and such other instruments and documents as the Secured
Party may from time to time require in order to comply with the UCC and any
other applicable law, (ii) such agreements with respect to patents,
trademarks, copyrights, and similar intellectual property rights as the Secured
Party may from time to time require to comply with the filing requirements of
the United States Patent and Trademark Office and the United States Copyright
Office, and (iii) such control agreements with respect to Deposit Accounts,
Investment Property, Letter-of-Credit Rights, and electronic Chattel Paper, and
to cause the relevant depository institutions, financial intermediaries, and
issuers to execute and deliver such control agreements, as the Secured Party may
from time to time require.  The Debtor hereby agrees that a carbon,
photographic or other reproduction of this Security Agreement or any such
financing statement is sufficient for filing as a financing statement by the
Secured Party without notice thereof to the Debtor wherever the Secured Party in
its sole discretion desires to file the same.  The Debtor hereby
authorizes the Secured Party to file any and all financing statements covering
the Collateral or any part thereof as the Secured Party may require, including
financing statements describing the Collateral as “all assets” or “all personal
property” or words of like meaning.  The Secured Party may order lien
searches from time to time against the Debtor and the Collateral, and the Debtor
shall promptly reimburse the Secured Party for all costs and expenses incurred
in connection with such lien searches.  In the event for any reason
the law of any jurisdiction other than Illinois becomes or is applicable to the
Collateral or any part thereof, or to any of the Obligations, the Debtor agrees
to execute and deliver all such instruments and documents and to do all such
other things as the Secured Party in its sole discretion deems necessary or
appropriate to preserve, protect, and enforce the lien and security interest of
the Secured Party under the law of such other jurisdiction.  The
Debtor agrees to mark its books and records to reflect the lien and security
interest of the Secured Party in the Collateral.

            

        
          
             

          

          
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        (p)
   On failure of the Debtor to perform any of the covenants and
agreements herein contained, the Secured Party may, at its option, perform the
same and in so doing may expend such sums as the Secured Party may deem
advisable in the performance thereof, including, without limitation, the payment
of any insurance premiums, the payment of any taxes, liens and encumbrances,
expenditures made in defending against any adverse claims, and all other
expenditures which the Secured Party may be compelled to make by operation of
law or which the Secured Party may make by agreement or otherwise for the
protection of the security hereof.  All such sums and amounts so
expended shall be repayable by the Debtor immediately without notice or demand,
shall constitute additional Obligations secured hereunder and shall bear
interest from the date said amounts are expended at the rate per annum (computed
on the basis of a 360-day year for the actual number of days elapsed) determined
by adding 2% to the per annum interest rate applicable to Base Rate Portions
under the Credit Agreement from time to time (such rate per annum as so
determined being hereinafter referred to as the “Default
Rate”).  No such performance of any covenant or agreement by
the Secured Party on behalf of the Debtor, and no such advancement or
expenditure therefor, shall relieve the Debtor of any default under the terms of
this Security Agreement or in any way obligate the Secured Party to take any
further or future action with respect thereto.  The Secured Party, in
making any payment hereby authorized, may do so according to any bill, statement
or estimate procured from the appropriate public office or holder of the claim
to be discharged without inquiry into the accuracy of such bill, statement or
estimate or into the validity of any tax assessment, sale, forfeiture, tax lien
or title or claim.  The Secured Party, in performing any act
hereunder, shall be the sole judge of whether the Debtor is required to perform
same under the terms of this Security Agreement.  The Secured Party is
hereby authorized to charge any account of the Debtor maintained with the
Secured Party for the amount of such sums and amounts so expended.

         

        Section
4.    Special Provisions Re: Receivables.

         

        (a)  
  As of the time any Receivable becomes subject to the security
interest provided for hereby, and at all times thereafter, the Debtor shall be
deemed to have warranted as to each and all of such Receivables that all
warranties of the Debtor set forth in this Security Agreement are true and
correct with respect to each such Receivable; that each Receivable and all
papers and documents relating thereto are genuine and in all respects what they
purport to be; that each Receivable is valid and subsisting; that no such
Receivable is evidenced by any Instrument or Chattel Paper unless such
Instrument or Chattel Paper has theretofore been endorsed by the Debtor and
delivered to the Secured Party (except to the extent the Secured Party
specifically requests or authorizes the Debtor not to do so with respect to any
such Instrument or Chattel Paper); that no surety bond was required or given in
connection with such Receivable or the contracts or purchase orders out of which
the same arose; that the amount of the Receivable represented as owing is the
correct amount actually and unconditionally owing, except for normal cash
discounts on normal trade terms in the ordinary course of business; and that the
amount of such Receivable represented as owing is not disputed and is not
subject to any set-offs, credits, deductions or countercharges other than those
arising in the ordinary course of the Debtor’s business which are disclosed to
the Secured Party in writing promptly upon the Debtor becoming aware
thereof.  Without limiting the foregoing, if any Receivable arises out
of a contract with the United States of America, or any state or political
subdivision thereof, or any department, agency or instrumentality of any of the
foregoing, the Debtor agrees to notify the Secured Party and, at the Secured
Party’s request, execute whatever instruments and documents are required by the
Secured Party in order that such Receivable shall be assigned to the Secured
Party and that proper notice of such assignment shall be given under the federal
Assignment of Claims Act (or any successor statute) or any similar state or
local statute, as the case may be.

         

        
          
             

          

          
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        (b)
   Unless and until an Event of Default occurs, any merchandise
or other goods which are returned by a customer or account debtor or otherwise
recovered may be resold by the Debtor in the ordinary course of its business as
presently conducted in accordance with Section 6(b) hereof; and, during the
existence of any Event of Default, such merchandise and other goods shall be set
aside at the request of the Secured Party and held by the Debtor as trustee for
the Secured Party and shall remain part of the Secured Party’s
Collateral.  Unless and until an Event of Default occurs, the Debtor
may settle and adjust disputes and claims with its customers and account
debtors, handle returns and recoveries and grant discounts, credits and
allowances in the ordinary course of its business as presently conducted for
amounts and on terms which the Debtor in good faith considers advisable; and,
during the existence of any Event of Default, at the Secured Party’s request,
the Debtor shall notify the Secured Party promptly of all returns and recoveries
and, on the Secured Party’s request, deliver any such merchandise or other goods
to the Secured Party.  During the existence of any Event of Default,
at the Secured Party’s request, the Debtor shall also notify the Secured Party
promptly of all disputes and claims and settle or adjust them at no expense to
the Secured Party, but no discount, credit or allowance other than on normal
trade terms in the ordinary course of business as presently conducted shall be
granted to any customer or account debtor and no returns of merchandise or other
goods shall be accepted by the Debtor without the Secured Party’s
consent.  The Secured Party may, at all times during the existence of
any Event of Default, settle or adjust disputes and claims directly with
customers or account debtors for amounts and upon terms which the Secured Party
considers advisable.

         

        (c) 
   Unless delivered to the Secured Party or its agent, all
tangible Chattel Paper and Instruments shall contain a legend acceptable to the
Secured Party indicating that such Chattel Paper or Instrument is subject to the
security interest of the Secured Party contemplated by this Security
Agreement.

         

        Section 5.    Collection
of Receivables.

         

        (a) 
  Except as otherwise provided in this Security Agreement, the Debtor
shall make collection of all Receivables and may use the same to carry on its
business in accordance with sound business practice and otherwise subject to the
terms hereof.

         

        (b)    Whether
or not any Event of Default has occurred and whether or not the Secured Party
has exercised any or all of its rights under other provisions of this
Section 5, in the event the Secured Party requests the Debtor to do
so:

         

        (i) 
   all Instruments and Chattel Paper at any time constituting
part of the Receivables or any other Collateral (including any postdated checks)
shall, upon receipt by the Debtor, be immediately endorsed to and deposited with
the Secured Party; and/or

         

        
          
             

          

          
            -9-

            
              

            

          

          
             

          

        

        
           

          (ii)    the
Debtor shall instruct all customers and account debtors to remit all payments in
respect of Receivables or any other Collateral to a lockbox or lockboxes under
the sole custody and control of the Secured Party and which are maintained at
post office(s) in Chicago, Illinois selected by the Secured
Party.

        

         

        (c)  
 Whether or not any Event of Default has occurred and whether or not the
Secured Party has exercised any or all of its rights under other provisions of
this Section 5, the Secured Party or its designee may notify the Debtor’s
customers and account debtors at any time that Receivables or any other
Collateral have been assigned to the Secured Party or of the Secured Party’s
security interest therein, and either in its own name, or the Debtor’s name, or
both, demand, collect (including, without limitation, through a lockbox
analogous to that described in Section 5(b)(ii) hereof), receive, receipt
for, sue for, compound and give acquittance for any or all amounts due or to
become due on Receivables or any other Collateral, and in the Secured Party’s
discretion file any claim or take any other action or proceeding which the
Secured Party may deem necessary or appropriate to protect or realize upon the
security interest of the Secured Party in the Receivables or any other
Collateral.

         

        (d)
   Any proceeds of Receivables or other Collateral transmitted to
or otherwise received by the Secured Party pursuant to any of the provisions of
Sections 5(b) or 5(c) hereof may be handled and administered by the Secured
Party in and through a remittance account at the Secured Party, and the Debtor
acknowledges that the maintenance of such remittance account by the Secured
Party is solely for the Secured Party’s convenience and that the Debtor does not
have any right, title or interest in such remittance account or any amounts at
any time standing to the credit thereof. The Secured Party may, after the
occurrence and during the continuation of any Event of Default or of any event
or condition which with the lapse of time or the giving of notice, or both,
would constitute an Event of Default, apply all or any part of
any proceeds of Receivables or other Collateral received by it from any source
to the payment of the Obligations (whether or not then due and payable), such
applications to be made in such amounts, in such manner and order and at such
intervals as the Secured Party may from time to time in its discretion
determine, but not less often than once each week.  The Secured Party
need not apply or give credit for any item included in proceeds of Receivables
or other Collateral until the Secured Party has received final payment therefor
at its office in cash or final solvent credits current in Chicago, Illinois,
acceptable to the Secured Party as such.  However, if the Secured
Party does give credit for any item prior to receiving final payment therefor
and the Secured Party fails to receive such final payment or an item is charged
back to the Secured Party for any reason, the Secured Party may at its election
in either instance charge the amount of such item back against the remittance
account or any account of the Debtor maintained with the Secured Party, together
with interest thereon at the Default Rate.  Concurrently with each
transmission of any proceeds of Receivables or other Collateral to the
remittance account, the Debtor shall furnish the Secured Party with a report in
such form as the Secured Party shall require identifying the particular
Receivable or other Collateral from which the same arises or
relates.  Unless and until an Event of Default or an event or
condition which with the lapse of time or the giving of notice, or both, would
constitute an Event of Default shall have occurred and be continuing, the
Secured Party will release proceeds of Collateral which the Secured Party has
not applied to the Obligations as provided above from the remittance account
from time to time promptly after receipt thereof.  The Debtor hereby
indemnifies the Secured Party from and against all liabilities, damages, losses,
actions, claims, judgments, costs, expenses, charges and reasonable attorneys’
fees suffered or incurred by the Secured Party because of the maintenance of the
foregoing arrangements; provided, however, that the
Debtor shall not be required to indemnify the Secured Party for any of the
foregoing to the extent they arise solely from the gross negligence or willful
misconduct of the Secured Party.  The Secured Party
shall have no liability or responsibility to the Debtor for accepting any check,
draft or other order for payment of money bearing the legend “payment in full”
or words of similar import or any other restrictive legend or endorsement
whatsoever or be responsible for determining the correctness of any
remittance.

         

        
          
             

          

          
            -10-

            
              

            

          

          
             

          

        

         

        Section 6.    Special
Provisions Re:  Inventory and Equipment.

         

        (a) 
   The Debtor shall at its own cost and expense maintain, keep
and preserve the Inventory in good and merchantable condition and keep and
preserve the Equipment in good repair, working order and condition, ordinary
wear and tear excepted, and, without limiting
the foregoing, make all necessary and proper repairs, replacements and additions
to the Equipment so that the efficiency thereof shall be fully preserved and
maintained.

         

        (b) 
  The Debtor may, until an Event of Default has occurred and is
continuing and thereafter until otherwise notified by
the Secured Party, use, consume and sell the Inventory in the ordinary course of
its business, but a sale in the ordinary course of business shall not under any
circumstance include any transfer or sale in satisfaction, partial or complete,
of a debt owing by the Debtor.

         

        (c) 
   The Debtor may, until an Event of Default has occurred and is continuing
and thereafter until otherwise notified by
the Secured Party, sell Equipment to the extent permitted under the Credit
Agreement.

         

        (d) 
  As of the time any Inventory or Equipment becomes subject to the
security interest provided for hereby and at all times thereafter, the Debtor
shall be deemed to have warranted as to any and all of such Inventory and
Equipment that all warranties of the Debtor set forth in this Security Agreement
are true and correct with respect to such Inventory and Equipment; that all of
such Inventory and Equipment is located at a location set forth pursuant to
Section 3(b) hereof; and that, in the case of Inventory, such Inventory is
new and unused and in good and merchantable condition.  The Debtor
warrants and agrees that no Inventory is or will be consigned to any other
person without the Secured Party’s prior written consent.

         

        (e)
   Upon the Secured Party’s request, the Debtor shall at its own
cost and expense cause the lien of the Secured Party in and to any portion of
the Collateral subject to a certificate of title law to be duly noted on such
certificate of title or to be otherwise filed in such manner as is prescribed by
law in order to perfect such lien and shall cause all such certificates of title
and evidences of lien to be deposited with the Secured Party.

         

        (f) 
   Except for Equipment from time to time located on the real
estate described on Schedule E attached hereto and as otherwise disclosed
to the Secured Party in writing, none of the Equipment is or will be attached to
real estate in such a manner that the same may become a fixture.

         

        (g) 
   If any of the Inventory is at any time evidenced by a document
of title, such document shall be promptly delivered by the Debtor to the Secured
Party except to the extent the Secured Party specifically requests the Debtor
not to do so with respect to any such document.

         

        
          
             

          

          
            -11-

            
              

            

          

          
             

          

        

         

        Section 7.    Special
Provisions Re:  Investment Property and Deposits.

         

        (a) 
   Unless and until an Event of Default has occurred and is
continuing and thereafter until notified to the contrary by the Secured Party
pursuant to Section 9(d) hereof:

         

        (i) 
   the Debtor shall be entitled to exercise all voting and/or
consensual powers pertaining to the Investment Property or any part thereof, for
all purposes not inconsistent with the terms of this Security Agreement or any
other document evidencing or otherwise relating to any Obligations;
and

         

        (ii) 
   the Debtor shall be entitled to receive and retain all cash
dividends paid upon or in respect of the Investment Property.

         

        (b) 
  All Investment Property (including all securities, certificated or
uncertificated, securities accounts, and commodity accounts) of the Debtor on
the date hereof is listed and identified on Schedule F attached hereto and
made a part hereof. The Debtor shall promptly notify the Secured Party of any
other Investment Property acquired or maintained by the Debtor after the date
hereof, and shall submit to the Secured Party a supplement to Schedule F to
reflect such additional rights (provided the Debtor’s failure to do so shall not
impair the Secured Party’s security interest therein).  Certificates
for all certificated securities now or at any time constituting Investment
Property shall be promptly delivered by the Debtor to the Secured Party duly
endorsed in blank for transfer or accompanied by an appropriate assignment or
assignments or an appropriate undated stock power or powers, in every case
sufficient to transfer title thereto including, without limitation, all stock
received in respect of a stock dividend or resulting from a split-up,
revision or reclassification of the Investment Property or any part thereof or
received in addition to, in substitution of or in exchange for the Investment
Property or any part thereof as a result of a merger, consolidation or
otherwise.  With respect to any uncertificated securities or any
Investment Property held by a securities intermediary, commodity intermediary,
or other financial intermediary of any kind, unless the Secured Party requests
otherwise, the Debtor shall execute and deliver, and shall cause any such issuer
or intermediary to execute and deliver, an agreement among the Debtor, the
Secured Party, and such issuer or intermediary in form and substance reasonably
satisfactory to the Secured Party which provides, among other things, for the
issuer’s or intermediary’s agreement that it shall comply with entitlement
orders, and apply any value distributed on account of any such Investment
Property, as directed by the Secured Party without further consent by the
Debtor.  The
Secured Party may at any time, after the occurrence of an Event of Default or an
event or condition which with the lapse of time or the giving of notice, or
both, would constitute an Event of Default, cause to be transferred into its
name or the name of its nominee or nominees all or any part of the Investment
Property hereunder.

         

        (c) 
   Unless and until an Event of Default, or an event or condition
which with the lapse of time or the giving of notice, or both, would constitute
an Event of Default, has occurred and is continuing, the Debtor may sell or
otherwise dispose of any Investment Property, provided that the Debtor
shall not sell or otherwise dispose of any capital stock of or other equity
interests in any direct or indirect subsidiary without the prior written consent
of the Secured Party.  After the occurrence and during the
continuation of any Event of Default or of any event or condition which with the
lapse of time or the giving of notice, or both, would constitute an Event of
Default, the Debtor shall not sell all or any part of the Investment Property
without the prior written consent of the Secured Party.

         

        
          
             

          

          
            -12-

            
              

            

          

          
             

          

        

         

        (d)
   The Debtor represents that on the date of this Security
Agreement, none of the Investment Property consists of margin stock (as such
term is defined in Regulation U of the Board of Governors of the Federal
Reserve System) except to the extent the Debtor has delivered to the Secured
Party a duly executed and completed Form U-1 with respect to such
stock.  If at any time the Investment Property or any part thereof
consists of margin stock, the Debtor shall promptly so notify the Secured Party
and deliver to the Secured Party a duly executed and completed Form U-1 and
such other instruments and documents reasonably requested by the Secured Party
in form and substance satisfactory to the
Secured Party.

         

        (e) 
   Notwithstanding anything to the contrary contained herein, in
the event any Investment Property is subject to the terms of a separate security
agreement in favor of the Secured Party, the terms of such separate security
agreement shall govern and control unless otherwise agreed to in writing by the
Secured Party.

         

        (f) 
   All Deposit Accounts of the Debtor on the date hereof are
listed and identified (by account number and depository institution) on
Schedule F attached hereto and made a part hereof. The Debtor shall
promptly notify the Secured Party of any other Deposit Account opened or
maintained by the Debtor after the date hereof, and shall submit to the Secured
Party a supplement to Schedule F to reflect such additional accounts
(provided the Debtor’s failure to do so shall not impair the Secured Party’s
security interest therein).  With respect to any Deposit Account
maintained by a depository institution other than the Secured Party, and as a
condition to the establishment and maintenance of any such Deposit Account
except as otherwise agreed to in writing by the Secured Party, the Debtor, the
depository institution, and the Secured Party shall execute and deliver an
account control agreement in form and substance satisfactory to the Secured
Party which provides, among other things, for the depository institution’s
agreement that it will comply with instructions originated by the Secured Party
directing the disposition of the funds in the Deposit Account without further
consent by such Debtor.

         

        Section 8.    Power of
Attorney.  In addition to any other powers of attorney
contained herein, the Debtor hereby appoints the Secured Party, its nominee, and
any other person whom the Secured Party may designate, as the Debtor’s
attorney-in-fact, with full power and authority upon the occurrence and during
the continuation of any Event of Default to sign the Debtor’s
name on verifications of Receivables and other Collateral; to send requests for
verification of Collateral to the Debtor’s customers, account debtors and other
obligors; to endorse the Debtor’s name on any checks, notes, acceptances, money
orders, drafts and any other forms of payment or security that may come into the
Secured Party’s possession or on any assignments, stock powers, or other
instruments of transfer relating to the Collateral or any part thereof; to sign
the Debtor’s name on any invoice or bill of lading relating to any Collateral,
on claims to enforce collection of any Collateral, on notices to and drafts
against customers and account debtors and other obligors, on schedules and
assignments of Collateral, on notices of assignment and on public records; to
notify the post office authorities to change the address for delivery of the
Debtor’s mail to an address designated by the Secured Party; to receive, open
and dispose of all mail addressed to the Debtor; and to do all things necessary
to carry out this Agreement.  The Debtor hereby ratifies and approves
all acts of any such attorney and agrees that neither the Secured Party nor any
such attorney will be liable for any acts or omissions nor for any error of
judgment or mistake of fact or law other than such person’s gross negligence or
willful misconduct.  The Secured Party may file one or more financing
statements disclosing its security interest in any or all of the Collateral
without the Debtor’s signature appearing thereon.  The Debtor also
hereby grants the Secured Party a power of attorney to execute any such
financing statements, or amendments and supplements to financing statements, on
behalf of the Debtor without notice thereof to the Debtor.  The
foregoing powers of attorney, being coupled with an interest, are irrevocable
until the Obligations have been fully paid and satisfied and all agreements of
the Secured Party to extend credit to or for the account of the Debtor have
expired or otherwise have been terminated.

         

        
          
             

          

          
            -13-

            
              

            

          

          
             

          

        

         

        Section 9.    Defaults
and Remedies.

         

        (a) 
   The occurrence of any “Event of Default” (as defined in the
Credit Agreement) shall constitute an “Event of Default”
hereunder.

         

        (b) 
   Upon the occurrence and during the continuation of any Event of Default,
the Secured Party shall have, in addition to all other rights provided herein or
by law, the rights and remedies of a secured party under the UCC (regardless of
whether the UCC is the law of the jurisdiction where the rights or remedies are
asserted and regardless of whether the UCC applies to the affected Collateral),
and further the Secured Party may, without demand and without advertisement,
notice, hearing or process of law, all of which the Debtor hereby waives, at any
time or times, sell and deliver all or any part of the Collateral (and any other
property of the Debtor attached thereto or found therein) held by or for it at
public or private sale, for cash, upon credit or otherwise, at such prices and
upon such terms as the Secured Party deems advisable, in its sole
discretion.  In addition to all other sums due the Secured Party
hereunder, the Debtor shall pay the Secured Party all costs and expenses
incurred by the Secured Party, including reasonable attorneys’ fees and
court costs, in obtaining, liquidating or enforcing payment of Collateral or the
Obligations or in the prosecution or defense of any action or proceeding by or
against the Secured Party or the Debtor concerning any matter arising out of or
connected with this Security Agreement or the Collateral or the Obligations,
including, without limitation, any of the foregoing arising in, arising under or
related to a case under the United States Bankruptcy Code (or any successor
statute).  Any requirement of reasonable notice shall be met if such
notice is personally served on or mailed, postage prepaid, to the Debtor in
accordance with Section 12(b) hereof at least 10 days before the time
of sale or other event giving rise to the requirement of such notice; provided however, no
notification need be given to the Debtor if the Debtor has signed, after an
Event of Default has occurred, a statement renouncing any right to notification
of sale or other intended disposition.  The Secured Party shall not be
obligated to make any sale or other disposition of the Collateral regardless of
notice having been given.  The Secured Party may be the purchaser at
any such sale.  The Debtor hereby waives all of its rights of
redemption from any such sale.  The Secured Party may postpone or
cause the postponement of the sale of all or any portion of the Collateral by
announcement at the time and place of such sale, and such sale may, without
further notice, be made at the time and place to which the sale was postponed or
the Secured Party may further postpone such sale by announcement made at such
time and place.  The Secured Party has no obligation to prepare the
Collateral for sale.  The Secured Party may sell or otherwise dispose
of the Collateral without giving any warranties as to the Collateral or any part
thereof, including disclaimers of any warranties of title or the like, and the
Debtor acknowledges and agrees that the absence of such warranties shall not
render the disposition commercially unreasonable.

         

        
          
             

          

          
            -14-

            
              

            

          

          
             

          

        

         

        (c) 
   Without in any way limiting the foregoing, upon the occurrence
and during the continuation of any Event of Default,
the Secured Party shall have the right, in addition to all other rights provided
herein or by law, to take physical possession of any and all of the Collateral
and anything found therein, the right for that purpose to enter without legal
process any premises where the Collateral may be found (provided such entry be
done lawfully), and the right to maintain such possession on the Debtor’s
premises (the Debtor hereby agreeing to lease such premises without cost or
expense to the Secured Party or its designee if the Secured Party so requests)
or to remove the Collateral or any part thereof to such other places as the
Secured Party may desire.  Upon the occurrence and during the
continuation of any Event of Default, the Secured Party shall have the right to
exercise any and all rights with respect to all Deposit Accounts of the Debtor,
including, without limitation, the right to direct the disposition of the funds
in each Deposit Account and to collect, withdraw and receive all amounts due or
to become due or payable under each such Deposit Account.  Upon the
occurrence and during the continuation of any Event of Default, the Debtor
shall, upon the Secured Party’s demand, promptly assemble the Collateral and
make it available to the Secured Party at a place designated by the Secured
Party.  If the Secured Party exercises its right to take possession of
the Collateral, the Debtor shall also at its expense perform any and all other
steps requested by the Secured Party to preserve and protect the security
interest hereby granted in the Collateral, such as placing and maintaining signs
indicating the security interest of the Secured Party, appointing overseers for
the Collateral and maintaining Collateral records.

         

        (d)
   Without in any way limiting the foregoing, upon the
occurrence and
during the continuation of any Event of Default, all rights of the Debtor to
exercise the voting and/or consensual powers which it is entitled to exercise
pursuant to Section 7(a)(i) hereof and/or to receive and retain the
distributions which it is entitled to receive and retain pursuant to
Section 7(a)(ii) hereof, shall, at the option of the Secured Party, cease
and thereupon become vested in the Secured Party, which, in addition to all
other rights provided herein or by law, shall then be entitled solely and
exclusively to exercise all voting and other consensual powers pertaining to the
Investment Property (including, without limitation, the right to deliver notice
of control with respect to any Investment Property held in a securities account
or commodity account and deliver all entitlement orders with respect thereto)
and/or to receive and retain the distributions which the Debtor would otherwise
have been authorized to retain pursuant to Section 7(a)(ii) hereof and
shall then be entitled solely and exclusively to exercise any and all rights of
conversion, exchange or subscription or any other rights, privileges or options
pertaining to any Investment Property as if the Secured Party were the absolute
owner thereof.  Without limiting the foregoing, the Secured Party
shall have the right to exchange, at its discretion, any and all of the
Investment Property upon the merger, consolidation, reorganization,
recapitalization or other readjustment of the respective issuer thereof or upon
the exercise by or on behalf of any such issuer or the Secured Party of any
right, privilege or option pertaining to any Investment Property and, in
connection therewith, to deposit and deliver any and all of the Investment
Property with any committee, depositary, transfer agent, registrar or other
designated agency upon such terms and conditions as the Secured Party may
determine.  In the event the Secured Party in good faith believes any
of the Collateral constitutes restricted securities within the meaning of any
applicable securities laws, any disposition thereof in compliance with such laws
shall not render the disposition commercially unreasonable.

         

        (e) 
   Without in any way limiting the foregoing, the Debtor hereby
grants to the Secured Party a royalty-free irrevocable license and right to use
all of the Debtor’s patents, patent applications, patent licenses, trademarks,
trademark registrations, trademark licenses, trade names, trade styles,
copyrights, copyright applications, copyright licenses, and similar intangibles
in connection with any foreclosure or other realization by the Secured Party on
all or any part of the Collateral.  The license and right granted the
Secured Party hereby shall be without any royalty or fee or charge
whatsoever.

         

        
          
             

          

          
            -15-

            
              

            

          

          
             

          

        

         

        (f)  
  The powers conferred upon the Secured Party hereunder are solely to
protect its interest in the Collateral and shall not impose on it any duty to
exercise such powers.  The Secured Party shall be deemed to have
exercised reasonable care in the custody and preservation of the Collateral in
its possession or control if such Collateral is accorded treatment substantially
equivalent to that which the Secured Party accords its own property, consisting
of similar type assets, it being understood, however, that the Secured Party
shall have no responsibility for ascertaining or taking any action with respect
to calls, conversions, exchanges, maturities, tenders or other matters relating
to any such Collateral, whether or not the Secured Party has or is deemed to
have knowledge of such matters.  This Security Agreement constitutes
an assignment of rights only and not an assignment of any duties or obligations
of the Debtor in any way related to the Collateral, and the Secured Party shall
have no duty or obligation to discharge any such duty or
obligation.  The Secured Party shall have no responsibility for taking
any necessary steps to preserve rights against any parties with respect to any
Collateral or initiating any action to protect the Collateral against the
possibility of a decline in market value.  Neither the Secured Party
nor any party acting as attorney for the Secured Party shall be liable for any
acts or omissions or for any error of judgment or mistake of fact or law other
than their gross negligence or willful misconduct.

         

        (g)  
  Failure by the Secured Party to exercise any right, remedy or option
under this Security Agreement or any other agreement between the Debtor and the
Secured Party or provided by law, or delay by the Secured Party in exercising
the same, shall not operate as a waiver; and no waiver by the Secured Party
shall be effective unless it is in writing and then only to the extent
specifically stated.  The rights and remedies of the Secured Party
under this Security Agreement shall be cumulative and not exclusive of any other
right or remedy which the Secured Party may have.

         

        Section 10.    Application of
Proceeds.  The proceeds and avails of the Collateral at any
time received by the Secured Party after the occurrence and during the
continuation of any Event of Default shall, when received by the Secured Party
in cash or its equivalent, be applied by the Secured Party as
follows:

         

        (i) 
   first, to the payment and satisfaction of all sums paid and
costs and expenses incurred by the Secured Party hereunder or otherwise in
connection herewith, including such monies paid or incurred in connection with
protecting, preserving or realizing upon the Collateral or enforcing any of the
terms hereof, including reasonable attorneys’ fees and court costs, together
with any interest thereon (but without preference or priority of principal over
interest or of interest over principal), to the extent the Secured Party is not
reimbursed therefor by the Debtor; and

         

        (ii)   
second, to the payment and satisfaction of the remaining Obligations, whether or
not then due (in whatever order the Secured Party elects), both for interest and
principal.

         

        The
Debtor shall remain liable to the Secured Party for any
deficiency.  Any surplus remaining after the full payment and
satisfaction of the foregoing shall be returned to the Debtor or to whomsoever
the Secured Party reasonably determines is lawfully entitled
thereto.

         

        Section 11.    Continuing
Agreement.  This Security Agreement shall be a continuing
agreement in every respect and shall remain in full force and effect until all
of the Obligations, both for principal and interest, have been fully paid and
satisfied and all agreements of the Secured Party to extend credit to or for the
account of the Debtor have expired or otherwise have been
terminated.  Upon such termination of this Security Agreement, the
Secured Party shall, upon the request and at the expense of the Debtor,
forthwith release its security interest hereunder.

         

        
          
             

          

          
            -16-

            
              

            

          

          
             

          

        

         

        Section 12.    Miscellaneous.

         

        (a)
    This Security Agreement cannot be changed or terminated
orally.  All of the rights, privileges, remedies and options given to
the Secured Party hereunder shall inure to the benefit of its successors and
assigns, and all the terms, conditions, covenants, agreements, representations
and warranties of and in this Security Agreement shall bind the Debtor and its
legal representatives, successors and assigns, provided that the Debtor may not
assign its rights or delegate its duties hereunder without the Secured Party’s
prior written consent.

         

        (b)
    Except as otherwise specified herein, all notices hereunder
shall be in writing (including, without limitation, notice by telecopy) and
shall be given to the relevant party at its address or telecopier number set
forth below (or, if no such address is set forth below, at the address of the
Debtor as shown on the records of the Secured Party), or such other address or
telecopier number as such party may hereafter specify by notice to the other
given by courier, by United States certified or registered mail, by telecopy or
by other telecommunication device capable of creating a written record of such
notice and its receipt.  Notices hereunder shall be
addressed:

        


        
          	
                  to
      the Debtor at:

                	
                  to
      the Secured Party at:

                
	 
      	 
      
	
                  CTI
      Industries Corporation

                	
                  Harris
      N.A.

                
	
                  22160
      North Pepper Road

                	
                  111
      West Monroe Street – 5W

                
	
                  Barrington,
      Illinois 60010

                	
                  Chicago,
      Illinois 60603

                
	
                  Attention:          Stephen
      M. Merrick

                	
                  Attention:
                Timothy J.
      Moran

                
	
                  Telephone:       
      (847) 620-1308

                	
                  Telephone:        
      (312) 461-2633

                
	
                  Facsimile:         (847)
      382-1219

                	
                  Facsimile:         
      (312) 502-3922

                
	 
      	 
      
	
                  with
      a copy to:

                	
                  with
      a copy to:

                
	 
      	 
      
	
                  Vanasco,
      Genelly & Miller

                	
                  McGuireWoods
      LLP

                
	
                  33
      North LaSalle Street, Suite 2200

                	
                  77
      West Wacker Drive, Suite 4100

                
	
                  Chicago,
      Illinois 60602

                	
                  Chicago,
      Illinois 60601

                
	
                  Attention:
                Gerald
      Miller

                	
                  Attention:
                Arthur B.
      Muir

                
	
                  Telephone:
              (312)
    786-5100

                	
                  Telephone:         (312)
      750-3595

                
	
                  Facsimile:          (312)
      786-5111

                	
                  Facsimile:          (312)
      698-4568

                


        

         

        Each such
notice, request or other communication shall be effective (i) if given by
telecopier, when such telecopy is transmitted to the telecopier number specified
in this Section and a confirmation of such telecopy has been received by the
sender, (ii) if given by mail, five (5) days after such communication is
deposited in the mail, certified or registered with return receipt requested,
addressed as aforesaid or (iii) if given by any other means, when delivered
at the addresses specified in this Section.

         

        
          
             

          

          
            -17-

            
              

            

          

          
             

          

        

         

        (c) 
   In the event and to the extent that any provision hereof shall
be deemed to be invalid or unenforceable by reason of the operation of any law
or by reason of the interpretation placed thereon by any court, this Security
Agreement shall to such extent be construed as not containing such provision,
but only as to such locations where such law or interpretation is operative, and
the invalidity or unenforceability of such provision shall not affect the
validity of any remaining provisions hereof, and any and all other provisions
hereof which are otherwise lawful and valid shall remain in full force and
effect.

         

        (d)  
  This Security Agreement shall be deemed to have been made in the
State of Illinois and shall be governed by, and construed in accordance with,
the laws of the State of Illinois.  Section headings used in this
Security Agreement are for convenience of reference only and are not a part of
this Agreement for any other purpose.

         

        (e)  
  This Security Agreement may be executed in any number of
counterparts, and by different parties hereto on separate counterpart signature
pages, and all such counterparts taken together shall be deemed to constitute
one and the same instrument.  The Debtor acknowledges that this
Security Agreement is and shall be effective upon its execution and delivery by
the Debtor to the Secured Party, and it shall not be necessary for the Secured
Party to execute this Security Agreement or any other acceptance hereof or
otherwise to signify or express its acceptance hereof.

         

        (f) 
   The Debtor hereby submits to the nonexclusive jurisdiction of
the United States District Court for the Northern District of Illinois and of
any Illinois State court sitting in the City of Chicago for purposes of all
legal proceedings arising out of or relating to this Security Agreement or the
transactions contemplated hereby. The Debtor irrevocably waives, to the fullest
extent permitted by law, any objection which it may now or hereafter have to the
laying of the venue of any such proceeding brought in such a court and any claim
that any such proceeding brought in such a court has been brought in an
inconvenient forum. The
Debtor and the Secured Party each hereby irrevocably waive any and all right to
trial by jury in any legal proceeding arising out of or relating to this
Security Agreement or the transactions contemplated hereby.

         

        [signature
page follows]


        
          
             


          

          
            -18-

            
              

            

          

          
             


          

        

         

        In
Witness Whereof, the Debtor has caused this Security Agreement to be duly
executed and delivered in Chicago, Illinois, as of the date and year first above
written.

        


        
          
            	 
      	 
      	
                    CTI
      Industries Corporation

                  
	 
      	 
      	 
      
	 
      	
                    By: 

                  	
                    /s/ Stephen M. Merrick

                  
	 
      	 
      	
                    Executive
      Vice-President and Chief Financial

                    Officer

                  


          

        

         

        Accepted
and agreed to in Chicago, Illinois, as of the date and year first above
written.

        


        
          
            	 
      	 
      	
                    Harris N.A.

                  
	 
      	 
      	 
      
	 
      	
                    By: 

                  	
                    /s/ Timothy J. Moran        

                  
	 
      	 
      	
                    Senior
      Vice-President

                  


          

        


        
          
             


          

          
            
            

            
              

            

          

          
             


          

        


        Schedule
A

         

        Locations

         

        
          	
                  Item
      1.

                	
                  Places
      of Business (including Debtor’s chief executive office and principal place
      of business):

                


        

         

        22160
N. Pepper Road, Lake Barrington, IL 60010

         

        
          	
                  Item
      2.

                	
                  Permitted
      Collateral Locations:

                


        

         

        2760
Spectrum Drive, Elgin, IL 60124


        
          
             


          

          
            
            

            
              

            

          

          
             


          

        


        Schedule
B

         

        Other
Names

         

        
          	
                  A.

                	
                  Prior
      Legal Names

                


        

         

        Container
Technologies, Inc.

         

        CTI
Merger Corporation

         

        
          	
                  B.

                	
                  Trade
      Names

                


        

        


        NONE.


        
          
             


          

          
            
            

            
              

            

          

          
             


          

        


        Schedule C

         

        Permitted
Encumbrances

        


        
          
            
              
                
                  
                    	
                            Secured Party

                          	
                            Collateral

                          	 	
                            Description of Obligation

                            (including Outstanding

                            Principal Balance)

                          	 
	 
      	 
      	 	 	 
	
                            RBS

                          	
                            leases
      on pouch machines

                          	 	$	948,296.00	 


                  

                

              

            

          

        


        
          
             


          

          
            
            

            
              

            

          

          
             


          

        


        Schedule D

         

        Intellectual
Property Rights


         

        See
attached lists of Patents and Trademarks and License
Agreements.


        
          
             


          

          
            
            

            
              

            

          

          
             


          

        


        Schedule
E

         

        Real
Estate Legal Descriptions

        


        THAT
PART OF THE SOUTH 1/2 OF SECTION 21, TOWNSHIP 43 NORTH, RANGE 9, EAST OF THE
THIRD PRINCIPAL MERIDIAN, DESCRIBED AS FOLLOWS: COMMENCING AT A POINT IN THE
EAST LINE OF THE WEST 1/2 OF THE SOUTH EAST 1/4 OF SAID SECTION 21, 691.81 FEET
NORTH OF THE SOUTHEAST CORNER THEREOF; THENCE WEST PARALLEL WITH THE SOUTH LINE
OF SAID SOUTH EAST 1/4 746.66 FEET; THENCE NORTH PARALLEL WITH THE EAST LINE OF
THE SAID WEST 1/2 OF THE SOUTH EAST 1/4 291.81 FEET; THENCE EAST PARALLEL WITH
THE SOUTH LINE OF SAID SOUTH EAST 1/4 746.66 FEET TO THE EAST LINE OF THE WEST
1/2 OF THE SOUTH EAST 1/4; THENCE SOUTH 291.81 FEET TO THE POINT OF BEGINNING,
IN LAKE COUNTY, ILLINOIS


        
          
             


          

          
            
            

            
              

            

          

          
             


          

        


        Schedule F

         

        Investment
Property and Deposits

         

        
          
            	
                    A.

                  	
                    Investment
      Property

                  	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
                    Charter
      One Bank

                  	
                    Money
      Market Account

                  	
                    450010-877-6

                  
	 
      	 
      	 
      	 
      
	 
      	
                    Charles
      Schwab

                  	
                    Investment
      Account

                  	
                    6102-5669

                  
	 
      	 
      	 
      	 
      
	 
      	
                    Oppenheimer

                  	
                    Investment
      Account

                  	
                    G40-1397554

                  
	 
      	 
      	 
      	 
      
	
                    B.

                  	
                    Deposits

                  	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
                    Lockbox

                  	 
      	
                    450247-274-2

                  
	 
      	 
      	 
      	 
      
	 
      	
                    CTI
      Industries Operating Acct.

                  	 
      	
                    450010-868-7

                  
	 
      	 
      	 
      	 
      
	 
      	
                    Money
      Market

                  	 
      	
                    450010-877-6

                  


          

        


        
          
             


          

          
            
            

            
              

            

          

          
             


          

        


        Schedule G

         

        Commercial
Tort Claims

         

        NONE.


        
          
             


          

          
            
            

            
              

            

          

          
             


          

        

         

        Schedule H

         

        Supplement
to Security Agreement

         

        This
Supplement to Security Agreement (the "Supplement") is dated
as of this 29th day of April 2010, from CTI
Industries Corporation, an Illinois corporation (the “Debtor”), to
Harris N.A. (the “Secured
Party”).

         

        Preliminary
Statements

         

        A.The Debtor and the Secured Party are
parties to that certain Security Agreement dated as of April 29, 2010 (such
Security Agreement, as the same may from time to time be amended, modified or
restated, being hereinafter referred to as the “Security
Agreement”).  All capitalized terms used herein without
definition shall have the same meanings herein as such terms are defined in the
Security Agreement.

         

        B.Pursuant to the Security Agreement,
the Debtor granted to the Secured Party, among other things, a continuing
security interest in all Commercial Tort Claims.

         

        C.The Debtor has acquired a Commercial
Tort Claim, and executes and delivers this Supplement to confirm and assure the
Secured Party's security interest therein.

         

        Now,
Therefore, in consideration of the benefits accruing to the Debtor, and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:

         

        1.In order to secure payment of the
Obligations, whether now existing or hereafter arising, the Debtor does hereby
grant to the Secured Party a continuing lien on and security interest in the
Commercial Tort Claim described below:

         

        
          
            
              
                
                  
                    
                      
                        	 	 	  
	 	 	  
	 	
                                 

                              	
                                 

                              


                      

                    

                  

                

              

            

          

        

        
          
            	 	 	
                      

                  


          

        

         

        2.Schedule G (Commercial Tort
Claims) to the Security Agreement is hereby amended to include reference to the
Commercial Tort Claim referred to in Section 1 above.  The
Commercial Tort Claim described herein is in addition to, and not in
substitution or replacement for, the Commercial Tort Claims heretofore described
in and subject to the Security Agreement, and nothing contained herein shall in
any manner impair the priority of the liens and security interests heretofore
granted by the Debtor in favor of the Secured Party under the Security
Agreement.

         

        
          
             

          

          
            
            

            
              

            

          

          
             

          

        

         

        3.The Debtor agrees to execute and
deliver such further instruments and documents and do such further acts and
things as the Secured Party may deem necessary or proper to carry out more
effectively the purposes of this Supplement.

         

        4.No reference to this Supplement need
be made in the Security Agreement or in any other document or instrument making
reference to the Security Agreement, any reference to the Security Agreement in
any of such items to be deemed a reference to the Security Agreement as
supplemented hereby.  The Debtor acknowledges that this Supplement
shall be effective upon its execution and delivery by the Debtor to the Secured
Party, and it shall not be necessary for the Secured Party to execute this
Supplement or any other acceptance hereof or otherwise to signify or express its
acceptance hereof.

         

        5.This Agreement shall be governed by
and construed in accordance with the State of Illinois (without regard to
principles of conflicts of law).

         

        [SIGNATURE
PAGE FOLLOWS]


        
          
             


          

          
            2

            
              

            

          

          
             


          

        

         

        
          
            
              	 
      	 
      	
                      CTI
      INDUSTRIES CORPORATION

                    
	 
      	 
      	 
      
	 
      	
                      By: 

                    	
                      /s/ Stephen M. Merrick

                    
	 
      	Executive
      Vice-President and Chief Financial
Officer


            

          

        


        
          
             


          

          
            3