SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB
                            ANNUAL REPORT PURSUANT TO
                      SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                   For the Fiscal Year Ended October 31, 1998

Commission File Number
     000-23115

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

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

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

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

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

                                                   Name of each exchange
        Title of Class                              on which registered:  
        --------------                              -------------------- 
        Common Stock, .065 par value               NASDAQ SmallCap Market

         Check whether the Registrant  (1) has filed all reports  required to be
filed by Section 13 or 15(d) of the  Securities  Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports),  and (2) has been subject to such filing requirements for
the past 90 days.
                  |X| Yes    |_| No

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

         The  Registrant's  revenues for the fiscal year ended October 31, 1998,
were $19,953,000.

         Based upon the closing price of $2.188 per share of Registrant's Common
Stock as reported on NASDAQ  SmallCap  Market at January 15, 1999, the aggregate
market value of the voting stock held by  non-affiliates  of the  Registrant was
then   approximately   $4,496,331.25.   (Determination  of  stock  ownership  by
non-affiliates was made solely for the purpose of responding to the requirements
of the Form and the Registrant is not bound by this  determination for any other
purpose).

         The number of shares of the Registrant's Common Stock outstanding as of
January 15, 1999 was  2,735,831  (excluding  treasury  shares) and the number of
shares of Class B Common Stock outstanding as of that date was 1,098,901.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Portions of Registrant's Proxy Statement for the 1999 Annual Meeting of
Stockholders  to be filed  with  the  Commission  within  120 days of the end of
Registrant's last fiscal year is incorporated by reference into Part III.

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


<PAGE>



PART I

Item No. 1        Description of Business

Background.

         CTI  Industries   Corporation   (the  "Company")  was  incorporated  as
Container  Merger  Company,  Inc.  under  the laws of the State of  Delaware  on
October 14, 1983, and changed its name to CTI  Industries  Corporation on August
2, 1985. A predecessor company,  Creative Technology,  Inc., was organized as an
Illinois  corporation  on  December  9, 1975 and was merged  into the Company in
February,  1984. 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.

         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.

         In  July,   1997,  the  Company   effected  a   recapitalization   (the
"Recapitalization")   without   a   formal   reorganization.   As  part  of  the
Recapitalization, the Board of Directors approved the creation of Class B Common
Stock,  approved a 1 for 2.6 reverse  stock  split on both the Common  Stock and
Preferred Stock,  and negotiated a conversion of all then outstanding  shares of
the Company's  Convertible Preferred Stock into an aggregate of 1,098,901 shares
of Class B Common Stock.  The  conversion  was effective  upon the closing of an
initial  public  offering of 1,725,000  shares of the Company's  Common Stock on
November 5, 1997. 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,   initial   public   offering  and  related
transactions were approved by written consent of the shareholders.







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Business Overview

         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, Safeway and Winn Dixie grocery chains, card and gift
shops, such as Hallmark and Factory Card Outlet stores,  and party goods stores,
as well as through florists and balloon decorators.

         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(R) characters,  Garfield(R), Precious Moments(R)
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 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.

         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 has recently entered into an agreement
with the Mexican supplier whereby the Company has acquired an equity interest in
and has made loans to the Mexican  firm.  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 the printing of
latex balloons.


The Industry

         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

                                                         




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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.

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


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.

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

         o        Superloons(R)  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(R) are 34" balloons made to be filled  with  helium
                                                      




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<PAGE>




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

         o        Card-B-Loons(R)  (4  1/2")  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(R)  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(R) are helium filled shaped balloons with attached
                  arms and legs.

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

         o        You Name It(R) 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(R),
Garfield(R),  Precious Moments(R), Hallmark, Ziggy(R), Grimmy(R),  Elephantz(R),
Paddington(R),  Gibson Greetings(R),  Postman Pat(R), NASCAR(R),  Betty Boop(R),
and several others. See "Patent, Trademarks and Copyrights" below.

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

         Toys and Novelty. The Company also manufactures or sells additional and
related  novelty  items  including  mugs and banners.  With its standard line of
latex balloons, punch balls and water bombs, the Company has made entry into the
toy market.

         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,  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 bags for the storage of clothing items.







                                        4

<PAGE>



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
15 individuals and a customer  service  department of 14  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. 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.
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.  During the 1998 fiscal year,  Eckerd Drug Stores  accounted
for approximately 15.2% of the Company's total sales revenues.  The Company also
sells its balloons to individual retail outlets  generally  through  coordinated
efforts with its distributors.

         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.

         The Company  markets its custom film products,  including its "dunnage"
bags (inflatable film products) directly.  During the 1998 fiscal year, a single
customer  of  the  Company's   custom  film  product   business   accounted  for
approximately 11.06% of the Company's total sales revenues.

                                                         




                                       5

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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.  At the  Barrington  facility,  the  Company  also  owns and  operates
laminating machines.

         A new  extruder  machine was custom  made for the Company in 1998,  and
increased  the  Company's  capacity  to produce  enough  film to make as many as
85,000 metallized balloons per hour as opposed to previously existing equipment,
which  afforded the Company the capacity to produce 12,000  metallized  balloons
per hour.

         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.

         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 (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(R).

         On January 26,  1998,  the Company and P&TF  entered  into an agreement
whereby,  (i) the Company subscribed for 45% of the outstanding capital stock of
P&TF for  $800,000,  (ii) the  Company  loaned to P&TF  $850,000,  which loan is
collateralized  by certain latex balloon  manufacturing  equipment and (iii) the
1995 equipment purchase agreement between the parties






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was cancelled with respect to 2 pieces of latex balloon manufacturing equipment,
which  equipment  is now owned by CTI and leased to P&TF.  The  purchase  of the
capital stock was  consummated  on February 1, 1998,  and the purchase price for
the capital  stock was paid by (i)  applying$400,000  of  advances  made to P&TF
prior to closing and (ii) a cash  payment for the  balance.  The  $400,000  debt
owing to the Company from the 1995  acquisition was  extinguished as a result of
the cancellation of the sale of the two pieces of equipment to P&TF.

         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.

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.  In 1998,  Anagram  International,  Inc.  was
acquired by Amscan.

         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.


                                                        




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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(R) characters for over 11 years,
on Garfield(R) 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  fiscal  years  1997 and 1998,  the
Company  estimates  that the total  amount  spent on  research  and  development
activities was approximately $238,000 and $252,000, respectively.


Employees

         As of October 31, 1998, the Company had 186 full-time  employees in the
United States, of whom 11 are executive or supervisory, 29 are in sales, 134 are
in manufacturing  and 12 are clerical.  As of that same date, the Company had 12
full time employees in England, of whom 2 are executive or supervisory, 3 are in
sales, 6 are in warehousing and 1 is 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.


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

                                                      




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the  handling and disposal of hazardous  materials.  As the  Company's  printing
operations  utilize only  water-based  ink, the waste generated by the Company's
production  process is not  deemed  hazardous.  The  Company  believes  it is in
material  compliance  with applicable  environmental  rules and  regulations.  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.


Item No. 2        Description of 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.

         In August, 1998, the Company also purchased a building that is adjacent
to its  principal  plant and offices.  The new facility  includes  approximately
29,000  square  feet of  combined  office and  warehouse  space.  The Company is
presently leasing  approximately 11,000 square feet of this office and warehouse
space to a tenant  for $ 7,000 in monthly  rent  under a lease  that  expires in
November of 1999.

         In addition,  the Company  leases  approximately  62,500 square feet of
space in Cary,  Illinois  expiring  December 31, 1999. The Company has subleased
approximately  90% of this space through  December,  1999. The Company's monthly
rent (net of subleases) is approximately  $1,000.  The facility is utilized as a
warehouse.

         The Company  also  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.


Item No. 3        Legal Proceedings

Not Applicable.


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

Not Applicable.








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PART II

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

         Market Information.  The Company's Common Stock was admitted to trading
on the NASDAQ SmallCap  Market under the symbol CTIB on November 5, 1997.  Prior
to that time,  there was no established  public trading market for the Company's
Common Stock. As a result there is no available  trading  information for fiscal
year 1997 or prior years.  There is no public market for the  Company's  Class B
Common Stock which is convertible into Common Stock on a share per share basis.

         The high  and low  sales  prices  for the last  four  fiscal  quarters,
according to the NASDAQ Stock Market's Stock Price History report, were:

                                                        High          Low
                                                        ----          ---

         November 5, 1997 to January 31, 1998           6.719        5.000
         February 1, 1998 to April 30, 1998             6.156        4.250
         May 1, 1998 to July 31, 1998                   5.625        3.750
         August 1, 1998 to October 31, 1998             4.250        2.188


         As of January 15, 1999,  there were  approximately 45 holders of record
of the Company's Common Stock and 2 holders of record of Class B Common Stock.

         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.

         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.  One other  accredited  investor  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.  The shares of  Preferred  Stock were
subsequently converted into 1,098,901 shares of Class B Common Stock.


                                                       




                                       10

<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 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.

         In July, 1998, John H. Schwan and Stephen M. Merrick  exercised a total
of 19,396 of their warrants to purchase shares of the Company's  Common Stock at
an exercise price of $.91 per share (15,000 and 4,396 warrants, respectively).

         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, purchased $50,000, $350,000, $315,000 and $150,000, respectively,
of the notes and  warrants.  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.


                                                        



























                                       11

<PAGE>




Item No. 6       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)
formulating  and  implementing  plans and  programs to increase  revenues,  (ii)
achieving  liquidity,  (iii)  reducing  costs of operations  and (iv)  achieving
profitability.  While net sales decreased 39% in fiscal 1996 to $13,910,000 from
$22,784,000  in  fiscal  1995,  net  sales  for  fiscal  1997  increased  18% to
$16,431,000.   In  fiscal  1998,  net  sales  increased  an  additional  21%  to
$19,953,000.  Operating  expenses  were  reduced  from  1995  to 1996 by over $5
million,  a reduction of approximately  50% and the Company was able to maintain
the lower  operating  cost figures in fiscal  1997.1 In fiscal  1998,  operating
expenses increased by $1,523,000,  primarily from an increase in advertising and
marketing costs of $822,000 and an increase in administrative costs of $489,000.
While the  increase in  marketing  costs  contributed  to the growth of sales in
1998, the Company  anticipates  reducing  marketing  expenses and administrative
expenses in 1999. A portion of these expenses were of a non-recurring  nature as
described in greater detail below.  The net loss of the Company was reduced from
the 1995 level of  $2,893,0002  to $183,000 for fiscal 1996 and for fiscal 1997,
the Company had net income of  $1,140,000.  Included in income for fiscal  1997,
was a tax benefit of $550,000  resulting  from the  reversal of a tax  valuation
allowance  created in prior  years.3  Despite  increased  sales,  as a result of
higher than expected  operating  costs, net income for fiscal 1998 was $122,000.
Working  capital  increased  from  $347,000  on October  31, 1996 to $942,000 on
October 31, 1997 and to $3,313,000 on October 31, 1998.

         In November of 1997, the Company  completed an initial public  offering
of  1,725,000  shares of its Common  Stock,  for net  proceeds of  approximately
$5,500,000.  The Company applied the proceeds to capital items and operations to
improve  the  products,   production   capacity,   marketing  efforts,   product
development  and  operations  of the  Company.  Specifically,  the Company  made
capital  investments  of  approximately  $5.3  million,  a portion  of which was
financed  through  equipment  loans  or  otherwise,  in plant  improvements  and
equipment which will increase  production capacity in the mylar product line and
the laminated and printed  films  business.  A new extruder has been custom made




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

       1. Included in the expense  reduction in 1996, was a $200,000 decrease in
depreciation  expense  related to a change in accounting  estimate of the useful
life of certain equipment.

       2. $1,672,000 of the loss in fiscal 1995 related to the shutdown and sale
of the Company's latex balloon manufacturing operation.

       3. The reversal  was based  upon  management's  determination that it was
more likely than not that the deferred tax benefits would be utilized.

                                                    




                                       12

<PAGE>


for the  Company,  and has the  capacity  to produce  enough film to make 85,000
metallized  balloons per hour as opposed to existing  equipment  which  produces
12,000 metallized balloons per hour. The Company has purchased additional office
and warehouse space adjacent to its headquarters located in Barrington, Illinois
allowing for increases in production and growth. During fiscal 1998, the Company
invested $1,350,000 in its Mexican supplier of latex balloons and has engaged in
active  marketing of latex  balloons.  The Company has invested a portion of the
proceeds of the  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.  These  commitments  in the Company's  three  principal  sales
areas, mylar balloons,  latex balloons,  and laminations and specialty packaging
will allow the Company to continue to expand sales.

         The following  table sets forth selected  financial data of the Company
for the three years ended October 31, 1998, 1997 and 1996 (in thousands,  except
per share data):

                                                   Year Ended October 31, 
                                              --------------------------------
                                                 1996        1997        1998
                                               -------     -------     -------
                                                       
Considated Statement of Operations Data:
Net sales.................................    $ 13,910    $ 16,431    $ 19,953  
Cost of sales.............................       8,558      10,265      12,707  
                                               -------     -------     ------- 
Gross profit..............................       5,352       6,166       7,246
          
Operating Expenses:
 General and administrative...............       2,055       1,864       2,353 
 Selling..................................       2,387       2,375       2,587 
 Advertising and marketing................         592         983       1,805 
                                               -------     -------     ------- 
    Total operating expenses..............       5,034       5,222       6,745
                                               -------     -------     ------- 

Operating income (loss)...................         318         944         501
                                               -------     -------     ------- 

Other income (expense)....................        (495)       (354)       (319)
                                               -------     -------     ------- 
Income (loss) before income taxes.........        (177)        590         182
Income tax benefit (expense)..............          (6)        550         (60)
                                               -------     -------     -------
Net income (loss).........................        (183)      1,140         122
Dividends applicable to Convertible
 Preferred Stock..........................         (74)        (98)        ---
                                               -------     -------     -------
Net income (loss) applicable to
 common shares............................    $   (257)   $  1,042    $    122
                                               =======     =======     =======

Net income (loss) per share     
     Basic ...............................    $   (.25)   $   1.04    $    .03
                                               =======     =======     =======
     Diluted .............................    $   (.25)   $    .51    $    .03 
                                               =======     =======     ======= 
Weighted average number of common and
common equivalent shares outstanding
     Basic ...............................   1,026,572     999,625   3,798,010
                                             =========   =========   =========
     Diluted .............................   1,026,572   2,225,335   4,121,366
                                             =========   =========   =========
                                              

   




                                       13

<PAGE>



Results of Operation

         Net  Sales.  For the fiscal  year ended  October  31,  1998,  net sales
increased  to  $19,953,000  from  $16,431,000  for fiscal  1997,  an increase of
approximately  21%. This increase in net sales was a reflection  principally  of
increases  in  the  sales  of  latex  balloons  and  laminations  and  specialty
packaging.  Sales also increased as a result of the Company's  continued efforts
to solidify and expand its distribution network. For fiscal 1998,  international
sales were $2,498,000 or 12.5% of net sales,  as compared to $2,622,000,  or 16%
of net sales for fiscal 1997.

         During fiscal 1998,  mylar  balloons  represented  71% of sales,  latex
balloons  12% of sales and  laminated  and  printed  films 17% of sales.  During
fiscal 1997,  mylar  balloons  represented  77% of sales,  latex balloons 10% of
sales and laminated and printed films 13% of sales. The Company anticipates that
the percentage of sales  represented by latex balloons and laminated and printed
films will continue to increase  during fiscal 1999. For fiscal 1998, the profit
margins on mylar  balloons,  latex balloons and laminated and printed  materials
were 35%, 27%, and 39%, respectively.

         Cost of Sales.  For fiscal 1998,  cost of sales  increased  slightly to
63.9%  of net  sales as  compared  to 62.5% of net  sales in  fiscal  1997.  The
increase  was the result of a number of items  including an increase in overhead
in connection  with the  acquisition  and  operation of an  additional  facility
purchased in August, 1998, including increased real estate taxes.

         Administrative.   For  fiscal  1998,   administrative   expenses   were
$2,353,000  or 11.8% of sales as compared to  $1,864,000,  or 11.3% of sales for
fiscal 1997.  Administrative expenses increased in 1998 as a result of a medical
insurance expense of $120,000,  which is not expected to recur. The Company also
incurred higher professional costs in 1998,  principally accounting fees, due in
part to the Company's status as a public company, and other costs as a result of
being publicly held.

         Selling.  For fiscal 1998,  selling  expenses were $2,587,000 or 13% of
net sales, as compared to $2,375,000, or 14.5% of net sales for fiscal 1997. The
increase was due  primarily to increased  costs  associated  with the holding of
certain licenses.

         Advertising and Marketing.  For fiscal 1998,  advertising and marketing
expenses were $1,806,000 or 9.1% of sales as compared to $983,000 or 6% of sales
for fiscal 1997.  The increase in these expenses in 1998 was a result of service
fees and  promotional  costs  paid on certain  national  accounts.  The  Company
expects to reduce  advertising  and  marketing  costs  both in dollars  and as a
percentage of net sales in 1999.  The Company has already  reduced its servicing
and promotional costs on certain national account programs.




                                                       




                                       14

<PAGE>



         Other Income and Expenses.  The Company had lease income of $86,000 and
interest  income of $161,000 in fiscal 1998,  areas of income it did not have in
1997. For fiscal 1998, interest expense was $765,000 as compared to $667,000 for
fiscal 1997.  The increase in interest  expense for fiscal 1998,  as compared to
1997,  is a result of interest paid on the new  facility,  new  extruder,  and a
higher balance on the revolving line of credit.

         Net Income or Loss.  For fiscal 1998, the Company had net income before
income  taxes of  $182,000,  as compared to net income  before  income  taxes of
$589,000 in fiscal 1997. Net income for fiscal 1998, was $122,000 as compared to
net income of $1,140,000  for 1997.  Included in income for 1997 was $550,000 of
tax benefit  resulting from a reversal of a tax valuation  allowance  created in
prior periods.  The reversal was based upon management's  determination  that it
was more likely than not that the deferred tax benefits  would be utilized.  The
Company  anticipates  that its advertising  and marketing  efforts will generate
increased  sales in 1999. As a result of increased  balloon  production in 1998,
the  Company  experienced  reduced  unit costs which  should  result in improved
margins during the first two fiscal quarters of 1999.

         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 year ended October 31, 1998 was
$2,384,000. This resulted primarily from increased sales and resulting increases
in accounts  receivable  and inventory of  $3,170,000.  During fiscal 1997,  the
Company  used cash  flows  from  operations  of  $537,000  mainly as a result of
increases in accounts receivable and inventory of $2,161,000.

         At October 31, 1998, the Company maintained a cash balance of $235,000.
The Company's current cash management strategy includes maintaining minimal cash
balances and utilizing the revolving  line of credit for  liquidity.  At October
31, 1997, the Company had cash and cash equivalents of $237,000.  At October 31,
1998,  the Company  had working  capital of  $3,313,000.  Working  capital as of
October 31, 1997 was $942,000.

         In November of 1997,  the Company sold  1,725,000  shares of its Common
Stock at $4.00 per share in an initial  public  offering.  The net proceeds from
the offering to the Company were approximately $5,500,000.

         During the eighteen  months  preceding the  completion of the Company's
initial public  offering of Common Stock in November of 1997, the Company 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


                                                       




                                       15

<PAGE>



Stock included a cumulative preferred dividend at the rate of 13%. The shares of
Preferred  Stock were converted  into  1,098,901  shares of Class B Common Stock
upon the closing of the public offering.

         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  (increased to $4,500,000 in September,  1998), of which $322,000 was
unused at October 31, 1998. The second term loan is due on September 1, 2001 and
bears an  interest  rate of 8.25%.  The  revolving  line of  credit,  bearing an
interest rate of prime plus 1/2%,  was due on July 1, 1998, and has been renewed
until May 1, 1999. During 1998, the Company restructured its debt with the Bank.
The first term loan was  consolidated  with two other term loans,  forming a new
term loan bearing an interest rate of 8.25%,  due May 1, 2002. In May 1998,  the
Company's bank provided a term loan in the amount of $2,258,000 for the purchase
of new extrusion  equipment.  This term loan bears an interest rate of 8.25% and
is due  February  1,  2004.  In August  1998,  the bank  provided  financing  of
$1,268,000 for the purchase of the facility adjacent to the Company's Barrington
headquarters.  The term loan  bears an  interest  rate of 8.25% and  matures  on
September  1, 2003.  All these loans are  secured by all assets of the  Company.
Three principal  shareholders of the Company,  John H. Schwan,  Howard W. Schwan
and Stephen M. Merrick have guaranteed these obligations.

         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.

         During fiscal 1998,  the Company  invested  $5,254,000 in machinery and
equipment, a new facility,  and merchandise displays at customer locations.  The
Company also invested in and made advances of $1,419,000 to its Mexican supplier
of latex  balloons.  During  fiscal  1997,  the  Company  invested  $838,000  in
machinery  and  equipment  and made  advances to its  Mexican  supplier of latex
balloons in the amount of $300,000.

         During  fiscal  1998,  the Company  generated  $9,082,000  in financing
activities,  primarily  as a result of the  proceeds  of the  Company's  initial
public  offering  of its Common  Stock in  November  1997,  and the  proceeds of
long-term debt.  Cash flow provided by financing  activities for fiscal 1997 was
$1,857,000,  resulting  primarily  from the  proceeds of a private  placement of
notes to related parties, and advances on the line of credit.

         The Company believes that existing capital resources and cash generated
from  operations  will be sufficient to meet the Company's  requirements  for at
least 12 months.


                                                     



   


                                       16

<PAGE>



Seasonality

         In the mylar product line, sales have  historically  been seasonal with
approximately  20% to 30% of annual  sales of mylar being  generated in December
and January and 11% to 13% 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.


Year 2000 Issues

         Most  computer  databases,  as  well  as  embedded  microprocessors  in
computer  systems  and  industrial  equipment,  have  been  programmed  to use a
two-digit number to represent the year.  Computer programs that recognize a date
using "00" as the year 1900 rather than the year 2000 could  result in errors or
system failures.  Accordingly, all companies must analyze their systems and make
the  necessary  changes  to  ensure  that  automated  processes  will  correctly
distinguish between years before and after the year 2000.

         Based on a recent  assessment,  the  Company  does not believe the Year
2000 issue will have a material effect on its operations.  The Company's current
computer  hardware and software systems are Year 2000 compliant.  The Company is
in the  process  of  initiating  communications  with the  manufacturers  of its
manufacturing and warehouse equipment to ensure this equipment will be Year 2000
ready.

         Formal  communications will be made with all significant  suppliers and
large  customers  of the  Company  during the balance of 1999 to  determine  the
extent to which the Company may be vulnerable to those third parties' failure to
remediate  their  own  potential  Year  2000  problems.  If the  Company's  most
significant  vendors of goods and  services,  or the  suppliers of the Company's
necessary energy,  telecommunications  and transportation needs, fail to provide
the Company  with the  materials  and services  which are  necessary to produce,
distribute  and sell its products,  such failure  could have a material  adverse
effect on the results of  operations,  liquidity and financial  condition of the
Company. There can be no guarantee that the systems of these suppliers,  vendors
and customers of the Company will be timely  converted to year 2000  compliance.
Nor is there any guarantee that the Company would experience no material adverse
effects  should any of the  significant  vendors,  suppliers or customers of the
Company fail to remediate  their  potential year 2000 problems.  The Company has
determined it has no exposure to contingencies  related to the Year 2000 for the
products it sells.

         The cost of attaining Year 2000 compliance will not be material for the
Company.  It is anticipated  that no warehouse or  manufacturing  equipment will
need to be replaced. The Company is currently assessing its telephone system and
will decide in the second quarter of 1999 whether to replace the current system.
The Company will primarily  utilize  internal  resources to manage the Year 2000
issue.


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

         The Company operates in a dynamic and rapidly changing environment that
involves  numerous  risks  and  uncertainties.  The  market  for mylar and latex
balloon products is generally characterized by intense competition, frequent new
product  introductions  and changes in customer tastes which can render existing
products unmarketable. The statements contained in 

                                                        





                                       17

<PAGE>



Item 1  (Description  of  Business)  and  Item 6  (Management's  Discussion  and
Analysis  of  Financial  Condition  and  Results  of  Operations)  that  are not
historical facts may be forward- looking  statements (as such term is defined in
the rules promulgated  pursuant to the Securities Exchange Act of 1934) that are
subject to a variety of risks and  uncertainties  more  fully  described  in the
Company's filings with the Securities and Exchange Commission including, without
limitation,  those  described  under "Risk  Factors" in the Company's  Form SB-2
Registration  Statement  (File No.  333-31969)  effective  November 5, 1997. The
forward-looking statements are based on the beliefs of the Company's management,
as well as  assumptions  made by, and  information  currently  available  to the
Company's management.  Accordingly,  these statements are subject to significant
risks,  uncertainties and  contingencies  which could cause the Company's actual
growth,  results,  performance and business  prospects and opportunities in 1999
and beyond to differ materially from those expressed in, or implied by, any such
forward-looking  statements.  Wherever  possible,  words  such as  "anticipate,"
"plan," "expect," "believe,"  "estimate," and similar expressions have been used
to identify these forward-looking statements, but are not the exclusive means of
identifying  such  statements.  These  risks,  uncertainties  and  contingencies
include,  but are not limited to, the  Company's  limited  operating  history on
which expectations  regarding its future  performance can be based,  competition
from,  among others,  national and regional  balloon,  packaging and custom film
product  manufacturers  and sellers that have greater  financial,  technical and
marketing  resources  and  distribution   capabilities  than  the  Company,  the
availability of sufficient capital,  the maturation and success of the Company's
strategy to develop, market and sell its products,  risks inherent in conducting
international business, risks associated with securing licenses,  changes in the
Company's product mix and pricing, the effectiveness of the Company's efforts to
control operating expenses,  general economic and business conditions  affecting
the Company and its customers in the United States and other  countries in which
the Company  sells and  anticipates  selling its  products  and services and the
Company's ability to (i) adjust to changes in technology,  customer preferences,
enhanced competition and new competitors; (ii) protect its intellectual property
rights from  infringement  or  misappropriation;  (iii)  maintain or enhance its
relationships with other businesses and vendors; and (iv) attract and retain key
employees.  There can be no assurance that the Company will be able to identify,
develop,  market, sell or support new products  successfully,  that any such new
products  will  gain  market  acceptance,  or that the  Company  will be able to
respond  effectively  to  changes  in  customer  preferences.  There  can  be no
assurance  that the Company will not encounter  technical or other  difficulties
that could delay  introduction of new or updated products in the future.  If the
Company is unable to introduce  new products and respond to industry  changes or
customer  preferences  on a timely  basis,  its  business  could  be  materially
adversely  affected.  The  Company is not  obligated  to update or revise  these
forward-looking statements to reflect new events or circumstances.


Item No. 7        Financial Statements

         Reference is made to the  Consolidated  Financial  Statements  attached
hereto.


Item No. 8        Changes in and Disagreements with  Accountants  on  Accounting
                  and Financial Disclosure

         Not Applicable.





                                       18
<PAGE>



PART III


Item No. 9        Directors, Executive Officers, Promoters and  Control Persons;
                  Compliance with Section 16(a) of the Exchange Act

         Information  called  for by Item No. 9 of Part III is  incorporated  by
reference  to the  definitive  Proxy  Statement  for the 1999 Annual  Meeting of
Stockholders  to be filed with the Commission  within 120 days of the end of the
Company's last fiscal year.


Item No. 10       Executive Compensation

         Information  called for by Item No. 10 of Part III is  incorporated  by
reference  to the  definitive  Proxy  Statement  for the 1999 Annual  Meeting of
Stockholders  to be filed with the Commission  within 120 days of the end of the
Company's last fiscal year.


Item No. 11       Security Ownership of Certain Beneficial Owners and Management

         Information  called for by Item No. 11 of Part III is  incorporated  by
reference  to the  definitive  Proxy  Statement  for the 1999 Annual  Meeting of
Stockholders  to be filed with the Commission  within 120 days of the end of the
Company's last fiscal year.


Item No. 12       Certain Relationships and Related Transactions

         Information  called for by Item No. 12 of Part III is  incorporated  by
reference  to the  definitive  Proxy  Statement  for the 1999 Annual  Meeting of
Stockholders  to be filed with the Commission  within 120 days of the end of the
Company's last fiscal year.


Item No. 13       Exhibits and Reports on Form 8-K


Exhibits

   Exhibit
   Number         Description
   ------         -----------

   * 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                 
   *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










                                       19

<PAGE>



   Exhibit
   Number         Description
   ------         -----------

   *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  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 & Terminados Finos S.A. de C.V.
   *10.14         Consulting  Agreement dated March, 1996 between CTI Industries
                  Corporation and Michael R. Miller
    10.15         Amended and Restated Loan and Security  Agreement dated May 1,
                  1998 between the Company and First American Bank
    10.16         First  Term  Note in the sum of  $1,788,328  dated May 1, 1998
                  made by CTI Industries Corporation to First American Bank.
    10.17         First  Amendment to Second Term Note dated May 1, 1998 made by
                  CTI Industries Corporation to First American Bank.
    10.18         Third  Term  Note in the sum of  $2,258,000  dated May 1, 1998
                  made by CTI Industries Corporation to First American Bank.
    10.19         Revolving Note in the sum of $4,000,000 dated May 1, 1998 made
                  by the Company to First American Bank.
    10.20         First  Amendment to Loan and Security  Agreement  dated August
                  24,  1998,  between  CTI  Industries   Corporation  and  First
                  American Bank.
    10.21         Fourth  Term Note in the sum of  $1,268,000  dated  August 24,
                  1998 made by CTI  Industries  Corporation  and First  American
                  Bank.
    10.22         Mortgage  dated August 24, 1998 for benefit of First  American
                  Bank.
    10.23         Second  Amendment to Loan and Security  Agreement dated August
                  27, 1998 between CTI Industries Corporation and First American
                  Bank.
    10.24         Third Amendment to Loan and Security Agreement dated September
                  1, 1998 between CTI Industries  Corporation and First American
                  Bank.
    10.25         First  Amendment  to Third Term Note dated  September  1, 1998
                  made by CTI Industries Corporation to First American Bank.
    10.26         Revolving  Note in the sum of  $4,500,000  dated  September 1,
                  1998  made by CTI  Industries  Corporation  to First  American
                  Bank.
    10.27         Guaranty  dated  September  1, 1998,  by  Stephen M.  Merrick,
                  Howard W.  Schwan  and John H.  Schwan  for  benefit  of First
                  American Bank.
   *10.28         Form of Financial Advisory and Consulting Agreement.
  **10.29         Subscription  and  Loan  Agreement  dated  January  26,  1998,
                  between CTI  Industries  Corporation  and Pulidos & Terminados
                  Finos S.A. de C.V.

                                                        

                                       20
<PAGE>


   Exhibit
   Number         Description
   ------         -----------
     21           Subsidiaries (incorporate  description  in  Form 10-KSB  under
                  Item No. 1)
     27           Financial Data Schedule


*        Incorporated by reference to Exhibits,  contained in Registrant's  Form
         SB-2 Registration  Statement (File No. 333-31969) effective November 5,
         1997.
**       Incorporated by reference to Exhibit  contained in Registrant's Form 10
         KSB Annual Report, for year ended October 31, 1997.


Reports on Form 8-K

         There were no Reports on Form 8-K filed by the Company  during the last
quarter of fiscal 1998.

                                                      



























                                       21

<PAGE>


                                   SIGNATURES

         In  accordance  with  Section  13 or  15(d)  of the  Exchange  Act  the
Registrant  caused  this  report to be signed on its  behalf by the  undersigned
thereunto duly authorized on February 16, 1999.


                                            CTI INDUSTRIES CORPORATION



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

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

Signatures                   Title                             Date
----------                   -----                             ----

 /s/ Howard W. Schwan        President and Director            February 16, 1999
-----------------------
Howard W. Schwan

 /s/ John H. Schwan          Chairman and Director             February 16, 1999
-----------------------
John H. Schwan

 /s/ Stephen M. Merrick      Chief Executive Officer,          February 16, 1999
-----------------------
Stephen M. Merrick           Secretary, Chief Financial
                             Officer and Director

 /s/ John C. Davis           Vice President and Director       February 16, 1999
-----------------------
John C. Davis

 /s/ Stanley M. Brown        Director                          February 16, 1999
-----------------------
Stanley M. Brown

 /s/ Bret Tayne              Director                          February 16, 1999
-----------------------
Bret Tayne



      









                                       


                                       22

<PAGE>




CTI Industries Corporation and Subsidiary


Table of Contents


                                                                         Page(s)

Report of Independent Accountants                                           F-2

Consolidated Financial Statements:
  Consolidated Balance Sheets as of October 31, 1997 and 1998         F-3 - F-4

  Consolidated Statements of Operations for the
      years ended October 31, 1997 and 1998                                 F-5

  Consolidated Statements of Stockholders' Equity
      for the years ended October 31, 1997 and 1998                   F-6 - F-8

  Consolidated Statements of Cash Flows for the years
      ended October 31, 1997 and 1998                                       F-9

  Notes to Consolidated Financial Statements                         F-10 - F-25










































                                      F-1
<PAGE>





Report of Independent Accountants


To the Board of Directors and
Shareholders of CTI Industries Corporation

In our opinion,  the  accompanying  consolidated  balance sheets and the related
consolidated statements of operations and stockholders' equity and of cash flows
present  fairly,  in  all  material  respects,  the  financial  position  of CTI
Industries  Corporation and its subsidiary at October 31, 1998 and 1997, and the
results  of their  operations  and their cash flows for each of the two years in
the period  ended  October 31,  1998,  in  conformity  with  generally  accepted
accounting principles.  These financial statements are the responsibility of the
Company's  management;  our  responsibility  is to  express  an opinion on these
financial  statements  based on our  audits.  We  conducted  our audits of these
statements  in accordance  with  generally  accepted  auditing  standards  which
require that we plan and perform the audit to obtain reasonable  assurance about
whether the financial  statements  are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for the opinion expressed above.





PricewaterhouseCoopers LLP



Chicago, Illinois
February 16, 1999


























                                      F-2
<PAGE>


CTI Industries Corporation and Subsidiary

Consolidated Balance Sheet
as of October 31, 1997 and 1998

<TABLE>
<CAPTION>

                         ASSETS                                          1997            1998

<S>                                                                <C>             <C>  
Current assets:       
    Cash                                                           $    237,230    $    235,333
    Accounts receivable (less allowance for doubtful accounts
         of $136,050 and $132,211 at October 31, 1997 and 1998)       3,045,696       3,276,894
    Inventories                                                       5,073,861       7,641,381
    Deferred tax assets                                                 327,035         176,549
    Other                                                               483,652       1,089,058
                                                                   ------------    ------------

             Total current assets                                     9,167,474      12,419,215
                                                                   ------------    ------------

Property and equipment:
    Machinery and equipment                                           5,481,380       6,812,069
    Building                                                          2,175,713       3,503,801
    Office furniture and equipment                                    1,058,150       1,556,742
    Land                                                                250,000         535,000
    Leasehold improvements                                              147,128         161,885
    Fixtures and equipment at customer locations                      1,230,598       1,907,358
    Projects under construction                                         402,714       1,522,893
                                                                   ------------    ------------

                                                                     10,745,683      15,999,748
    Less:  accumulated depreciation                                  (6,851,148)     (7,674,299)
                                                                   ------------    ------------

             Total property and equipment, net                        3,894,535       8,325,449
                                                                   ------------    ------------

Other assets:
    Deferred IPO costs                                                  445,067            --
    Deferred financing costs, net                                        56,671          44,383
    Investment in joint venture                                          81,816          77,975
    Investment in subsidiary                                               --           879,800
    Note receivable                                                     300,000         715,422
    Deferred tax assets                                                 272,063         391,377
                                                                   ------------    ------------

                                                                      1,155,617       2,108,957
                                                                   ------------    ------------

             Total assets                                          $ 14,217,626    $ 22,853,621
                                                                   ============    ============

</TABLE>



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



                                       F-3
<PAGE>



CTI Industries Corporation and Subsidiary

Consolidated Balance Sheet, Continued
as of October 31, 1997 and 1998

<TABLE>
<CAPTION>


              LIABILITIES AND STOCKHOLDERS' EQUITY                        1997            1998

Current liabilities:
<S>                                                                 <C>             <C>         
    Accounts payable                                                $  3,725,500    $  3,070,545
    Line of credit                                                     3,017,940       4,178,246
    Stock redemption contract payable - current portion                   30,533            --
    Advances from related parties                                          3,750            --
    Notes payable - current portion                                      580,097         817,569
    Accrued liabilities                                                  867,432       1,039,742
                                                                    ------------    ------------

             Total current liabilities                                 8,225,252       9,106,102
                                                                    ------------    ------------

    Notes payable                                                      2,885,151       5,280,692
    Subordinated debt                                                    865,000         865,000
                                                                    ------------    ------------

             Total long-term liabilities                               3,750,151       6,145,692
                                                                    ------------    ------------

Redeemable common stock                                                  450,000         413,406

Stockholders' equity:
    Convertible Preferred stock - $.91 par value,
        2,000,000 shares  authorized, 1,098,901 shares
        issued and outstanding, including accumulated
        dividends of $63,917 (October 31, 1997)                        1,063,917            --
    Common stock - $.065 par value,
        11,000,000 shares authorized,
        1,154,584 (October 31, 1997),
        2,898,980 (October 31, 1998) shares
        issued, 1,010,202 (October 31, 1997),
        2,735,831 (October 31, 1998) shares outstanding                   75,048         188,434
    Class B Common stock - $.91 par value, 1,100,000 shares
        authorized, 1,098,901 shares issued and outstanding                 --         1,000,000
    Paid-in-capital                                                      248,348       5,554,332
    Retained earnings                                                  1,179,274       1,301,134
    Foreign currency translation adjustment                               51,036          26,377
      Less:
        Treasury stock - 144,382 (October 31, 1997) and
             163,149 (October 31, 1998)                                 (370,700)       (407,294)
        Redeemable common stock                                         (450,000)       (413,406)
        Stock subscription receivable                                     (4,700)         (4,700)
        Notes receivable from stockholders                                  --           (56,456)
                                                                    ------------    ------------

             Total stockholders' equity                                1,792,223       7,188,421
                                                                    ------------    ------------

             Total liabilities and stockholders' equity             $ 14,217,626    $ 22,853,621
                                                                    ============    ============

</TABLE>


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



                                      F-4
<PAGE>


CTI Industries Corporation and Subsidiary

Consolidated Statements of Operations
for the years ended October 31, 1997 and 1998

<TABLE>
<CAPTION>


                                                                   1997            1998

<S>                                                          <C>             <C>         
Net sales                                                    $ 16,431,418    $ 19,952,823

Cost of sales                                                  10,265,117      12,706,460
                                                             ------------    ------------

             Gross profit on sales                              6,166,301       7,246,363
                                                             ------------    ------------

Operating expenses:
    Administrative                                              1,864,304       2,352,959
    Selling                                                     2,375,293       2,586,798
    Advertising and marketing                                     983,161       1,805,603
                                                             ------------    ------------

             Total operating expenses                           5,222,758       6,745,360
                                                             ------------    ------------

Income from operations                                            943,543         501,003
                                                             ------------    ------------

Other income (expense):
    Interest expense                                             (667,060)       (765,425)
    Interest income                                                  --           161,201
    Other                                                         312,911         285,094
                                                             ------------    ------------

             Total other expense                                 (354,149)       (319,130)
                                                             ------------    ------------

Income before income taxes                                        589,394         181,873

Income tax expense (benefit)                                     (550,184)         60,013
                                                             ------------    ------------

             Net income                                         1,139,578         121,860

Dividends applicable to convertible preferred stock               (97,500)           --
                                                             ------------    ------------

Income applicable to common shares                           $  1,042,078    $    121,860
                                                             ============    ============

Basic income per common and common equivalent shares         $       1.04    $       0.03
                                                             ============    ============

Diluted income per common and common equivalent shares   $           0.51    $       0.03
                                                             ============    ============

Weighted average number of shares and
      equivalent shares of common stock outstanding:
        Basic                                                     999,625       3,798,010
                                                             ============    ============

        Diluted                                                 2,225,335       4,121,366
                                                             ============    ============


</TABLE>



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


                                      F-5
<PAGE>

CTI Industries Corporation and Subsidiary

Consolidated Statements of Stockholders' Equity
for the years ended October 31, 1997 and 1998



<TABLE>              
<CAPTION>
                   
                                                                                                
                                                                                                 Less
                                                                                    --------------------------------------- 
                   Common Stock           Preferred Stock                            Treasury Stock Redeemable   Stock   
                 --------------- Paid-In  ----------------    Retained Translation    -------------    Common  Subscription      
                 Shares   Amount Capital  Shares    Amount    Earnings Adjustment   Shares   Amount    Stock    Receivable  Total
<S>            <C>       <C>     <C>      <C>       <C>        <C>         <C>     <C>      <C>      <C>      <C>       <C>    
                                            
Balance, 
 October 31,  
  1996        1,131,507 $73,548 $230,348 1,098,901 $1,027,625 $ 137,194            144,382 $(370,700)$(450,000)$(167,200)  $480,815
 Payment on 
  stock
  subscription 
  receivable                                                                                                     162,500    162,500
 
 Common stock 
  warrants   
  exercised      23,077   1,500   18,000                                                                                     19,500 

 Accumulated 
  preferred
  stock
  dividends                                             36,292                                                               36,292

 Net income                                                    1,139,580                                                  1,139,580

 Foreign 
  currency
  translation 
  adjustment                                                              $51,036                                            51,036

 Dividends 
  paid                                                           (97,500)                                                   (97,500)
              ---------  ------ -------- --------- ---------- ----------  -------   -------  -------- --------   ------- ----------
Balance, 
 October 31,
  1997        1,154,584  75,048  248,348 1,098,901  1,063,917  1,179,274   51,036   144,382 (370,700) (450,000)   (4,700) 1,792,223 
              --------- ------- -------- --------- ---------- ----------  -------   -------  -------- --------   -------  ----------
               
</TABLE>




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





                                      F-6
<PAGE>


CTI Industries Corporation and Subsidiary

Consolidated Statements of Stockholders' Equity, Continued
for the years ended October 31, 1997 and 1998


<TABLE>
<CAPTION>

                                                                                        
                                                                                                             
                                        Class B           Paid-In                                            
                  Common Stock        Common Stock        Capital   Preferred Stock                          
              ------------------   -------------------    -------   ----------------    Retained Translation 
               Shares     Amount     Shares   Amount                Shares    Amount    Earnings Adjustment  
                                                                                        

<S>           <C>          <C>    <C>        <C>           <C>     <C>        <C>       <C>           <C>    
Balance, 
 October 31,
 1997        1,154,584    75,048        -           -     248,348 1,098,901  1,063,917 1,179,274     51,036 

Conversion of
 preferred
 stock into
 Class B 
 common                           1,098,901  $1,000,000           (1,098,901)(1,063,917)                     

Issuance of
 common stock 1,725,000   112,125                        5,289,594                                           

Common stock
 warrant
 exercised      19,396      1,261                           16,390                                           

Acquisition 
 of treasury
 stock                                                                                                       

Notes
 receivable
 from 
 stockholders                                                                                                

Foreign
 currency
 Translation
 adjustment                                                                                          (24,659)

Net income                                                                                121,860            
              ---------   -------- --------- --------- ----------- ---------  -------  ----------    -------                     

Balance,
 October 31,
 1998         2,898,980   $188,434 1,098,901 $1,000,000 $5,554,332        -        -   $1,301,134    $26,377 
              =========   ======== ========= ========== ==========  ========  =======  ==========    ======= 
                                                            
</TABLE>




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





                                      F-7
<PAGE>

CTI Industries Corporation and Subsidiary

Consolidated Statements of Stockholders' Equity, Continued
for the years ended October 31, 1997 and 1998


<TABLE>
<CAPTION>


                                                                                        
                                     Less                              
                   -----------------------------------------     Notes      
                    Treasury Stock   Redeemable    Stock        Receivable      
                   -----------------   Common   Subscription      From    
                   Shares    Amount     Stock    Receivable   Stockholders    Total              

<S>               <C>      <C>        <C>           <C>         <C>         <C>
Balance, 
 October 31,     
 1997              144,382  (370,700) (450,000)     (4,700)                 1,792,223

Conversion of
 preferred
 stock into
 Class B 
 common                                                                       (63,917)

Issuance of
 common stock                                                               5,401,719

Common stock
 warrant
 exercised                                                                     17,651

Acquisition 
 of treasury
 stock              18,767    36,594   (36,594)                                     -

Notes
 receivable
 from 
 stockholders                                                    (56,456)     (56,456)

Foreign
 currency
 Translation
 adjustment                                                                   (24,659)

Net income                                                                    121,860
                  -------- --------- ---------     -------      --------   ---------                       

Balance,
 October 31,
 1998              125,615 $(334,106)$(486,594)    $(4,700)     $(56,456)  $7,188,421
                  ======== ========= =========     =======      ========   ==========
              

</TABLE>






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







                                      F-8
<PAGE>


CTI Industries Corporation and Subsidiary

Consolidated Statements of Cash Flows
for the years ended October 31, 1997 and 1998

<TABLE>
<CAPTION>


                                                                          1997            1998
<S>                                                                 <C>             <C>  
Cash flows from operating activities:       
    Net income                                                      $  1,139,580    $    121,860
    Adjustments to reconcile net income
       (loss) to cash  provided
        by (used in) operating activities:
      Depreciation and amortization                                      575,434         835,439
      Gain on sale of property and equipment                             (42,942)           --
      Equity in loss of subsidiary and joint venture                        --             9,466
      Gain on settlement of legal claim                                 (188,768)           --
      Provision for losses on accounts receivable and inventory          289,537         371,569
      Deferred income taxes                                             (599,098)         27,963
      Change in assets and liabilities:
        Accounts receivable                                           (1,458,699)       (305,645)
        Inventories                                                     (702,706)     (2,864,641)
        Other assets                                                    (709,841)        (96,795)
        Accounts payable and accrued expenses                          1,160,540        (483,351)
                                                                    ------------    ------------

             Net cash used in operating activities                      (536,963)     (2,384,135)
                                                                    ------------    ------------

Cash flows from investing activities:
    Proceeds from sale of property and equipment                           2,942            --
    Purchases of property and equipment                                 (838,491)     (5,254,065)
    Investment in joint venture                                          (81,816)         (1,529)
    Investment in and advances to P&TF                                  (300,000)     (1,419,318)
                                                                    ------------    ------------

             Net cash used in investing activities                    (1,217,365)     (6,674,912)
                                                                    ------------    ------------

Cash flows from financing activities:
    Stock redemption contract payments                                   (77,375)        (30,533)
    Advances on line of credit                                         8,408,078      19,235,217
    Repayments on line of credit                                      (7,448,954)    (18,074,747)
    Proceeds from issuance of long-term debt                             440,465       4,158,959
    Repayment of long-term debt                                         (431,188)     (1,525,946)
    Proceeds from  issuance of short-term debt                              --           850,000
    Repayment of short-term debt                                            --          (850,000)
    Proceeds from debt issued to related parties                         865,000            --
    Proceeds from issuance of preferred stock                            160,000            --
    Proceeds from issuance of common stock                                  --         5,401,719
    Proceeds from warrants exercised                                        --            17,650
    Purchase of treasury stock                                              --           (36,594)
    Payment on stock subscription receivable                               2,500            --
    Dividends paid                                                       (61,208)        (63,917)
                                                                    ------------    ------------

<S>                                                                    <C>             <C>      
             Net cash provided by financing activities                 1,857,318       9,081,808
                                                                    ------------    ------------

Effect of exchange rate changes on cash                                    3,422         (24,658)
                                                                    ------------    ------------

Net increase (decrease) in cash                                          106,412          (1,897)

Cash at beginning of period                                              130,818         237,230
                                                                    ------------    ------------

Cash at end of period                                               $    237,230    $    235,333
                                                                    ============    ============

Supplemental disclosures:
    Cash paid for interest                                          $    606,040    $    750,565

    Cash paid for income taxes                                              --      $    215,000

Noncash financing activities:
    Assets exchanged for settlement of debt                         $     40,000            --
    Common stock warrants exercised in exchange for contractual
        services received                                           $     19,500            --
    Conversion of preferred stock into Class B common stock                 --      $  1,000,000

</TABLE>


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



                                       F-9
<PAGE>



CTI Industries and Corporation and Subsidiary

Notes to Consolidated Financial Statements


  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.



  2.   Summary of Significant Accounting Policies

       Principles of Consolidation

       The  consolidated  financial  statements  include  the  accounts  of  CTI
       Industries  Corporation  and its wholly  owned  subsidiary  CTI  Balloons
       Limited. All significant intercompany accounts and transactions have been
       eliminated upon consolidation.

       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.  Expenditures  for  maintenance
       and  repairs are  charged to  operations  as  incurred.  Depreciation  is
       computed  using the  straight-line  and  declining-balance  methods  over
       estimated useful lives of the related assets.  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  $525,880  and  $823,151  for the years  ended
       October 31, 1997 and 1998, respectively.









                                      F-10
<PAGE>

CTI Industries and Corporation and Subsidiary

Notes to Consolidated Financial Statements, Continued



  2.   Summary of Significant Accounting Policies, continued

       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  $49,554 and $12,288 for the years
       ended October 31, 1997 and 1998, respectively.

       Income Taxes

       Income taxes are accounted for as prescribed in SFAS No. 109 - Accounting
       for Income Taxes.  Under the asset and liability  method of Statement No.
       109, the Company  recognizes the amount of income taxes currently payable
       and deferred tax assets and liabilities are recognized for the future tax
       consequences  attributable to differences between the financial statement
       carrying amounts of existing assets and liabilities, and their respective
       tax bases. Deferred tax assets and liabilities are measured using enacted
       tax  rates  expected  to apply  to  taxable  income  in the  years  these
       temporary differences are expected to be recovered or settled.

       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 limited due to the number of entities  comprising the Company's
       customer  base.  The Company  performs  ongoing  credit  evaluations  and
       provides an allowance for potential  credit losses against the portion of
       accounts  receivable which is estimated to be uncollectible.  Such losses
       have historically  been within  management's  expectations.  For the year
       ended  October 31, 1998, the Company had two customers that accounted for
       approximately 15.2% and 11.06%, respectively,  of consolidated net sales.
       Corresponding  percentages of  consolidated  net sales generated by these
       customers  for the year ended  October 31,  1997,  were  less  than  10%,
       respectively.  At October 31, 1998, the  outstanding  account  receivable
       balances  due  from  these two  customers  were  $428,760  and  $781,292,
       respectively.

       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 and disclosures of
       contingent   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.






                                      F-11
<PAGE>

CTI Industries and Corporation and Subsidiary

Notes to Consolidated Financial Statements, Continued


  2.   Summary of Significant Accounting Policies, continued

       Stock-Based Compensation

       Effective  for the fiscal  year  ending  October  31,  1997,  the Company
       adopted SFAS No. 123,  "Accounting  for  Stock-Based  Compensation".  The
       pronouncement  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.  The
       Company did not adopt the new fair value accounting, but instead chose to
       comply with the disclosure requirements of SFAS No. 123. Accordingly, the
       adoption of SFAS No. 123 did not have a material  impact on the Company's
       financial statements.

       Earnings Per Share

       The Company adopted SFAS No. 128, "Earnings Per Share" for the year ended
       October  31,  1998.   The   pronouncement   specifies  the   computation,
       presentation,   and  disclosure  requirements  for  earnings  per  share.
       Adoption  of this  pronouncement,  which  was  applied  to prior  periods
       presented,  did not have a  material  impact on the  Company's  financial
       statements.

       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 cash flows, undiscounted and without interest charges, is
       less than the carrying amounts of the related assets.



  3.   Inventory

       Inventory is comprised of the following:

                                                October 31,    October 31,
                                                     1997           1998

        Raw materials                           $   243,858    $   223,530
        Work in process                           1,008,296        874,994
        Finished goods                            3,821,707      6,542,857
                                                ------------   ------------

                Total inventory                 $ 5,073,861    $ 7,641,381
                                                ============   ============








                                      F-12
<PAGE>

CTI Industries and Corporation and Subsidiary

Notes to Consolidated Financial Statements, Continued



  4.   Line of Credit

       During  1998,  the  Company  increased  its  bank  line  of  credit  from
       $3,250,000 to $4,500,000 of which, $230,061 and $321,754 was available at
       October  31,  1997 and  1998,  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 .5% (prime was 8.5%
       and 8.0% at October 31, 1997 and 1998, respectively).  The line of credit
       is  collateralized  by all  assets  of the  Company.  The line of  credit
       agreement  is due on May 1, 1999 and  contains,  among other  provisions,
       certain financial  covenants  relating to the maintenance of tangible net
       worth and the ratio of debt to equity.



  5.   Notes Payable

       During the year ended  October 31,  1998,  the Company  restructured  its
       existing  debt  agreements  with its  principal  lender  resulting in the
       consolidation  of certain  term loans as well as the issuance of new term
       loans.

       Long-term debt at October 31, 1998 consists of:

<TABLE>
<CAPTION>
<S>                                                                             <C>    
                First Term Loan,  payable in monthly  installments of
                    $43,979 including interest at 8.25% due May, 2002    
                    Collateralized by all assets of the Company.                $ 1,628,934

                Second Term Loan, payable in monthly installments of
                    $19,617 including interest at 8.25% due September,
                    2001.  Collateralized by all assets of the Company.           2,100,291

                Third Term Loan,  payable in monthly  installments of 
                    $46,195 including interest at 8.25% due February, 2004
                    Collateralized by all assets of the Company.                  1,092,000

                Fourth Term Loan, payable in monthly installments of
                    $10,919 including interest at 8.25% due September,
                    2003.  Collateralized by all assets of the Company.           1,268,000

                Installment Loan, payable in monthly installments
                    of $565 including interest at 7.99% due March, 2000
                    Collateralized by company vehicle.                                9,036
                                                                                -----------

                    Total                                                         6,098,261

                Less current portion                                               (817,569)
                                                                                -----------

                    Total long-term debt                                        $ 5,280,692
                                                                                ===========

</TABLE>








                                      F-13
<PAGE>

CTI Industries and Corporation and Subsidiary

Notes to Consolidated Financial Statements, Continued



  5.   Notes Payable, continued

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

               1999                                          $   817,569
               2000                                            1,049,924
               2001                                            2,748,719
               2002                                              332,517
               2003 and thereafter                             1,149,532
                                                             ------------

                                                             $ 6,098,261
                                                             ============




       The loan agreements  contain,  among other provisions,  certain financial
       covenants relating to the maintenance of tangible net worth and the ratio
       of debt to equity. The agreements impose  limitations on the Company with
       respect  to  dividends  and  also  contains  a  clause  allowing  for the
       subjective   acceleration  of  amounts  due  under  the  loan  agreement.
       Additionally,  the Company received a waiver of the investments  covenant
       which enabled the Company to comply with the loan agreement  covenants at
       October 31,  1998.  Borrowings  under the line of credit (Note 4) and the
       respective  term loans  have been  guaranteed  by three of the  principal
       officers of the Corporation.



  6.   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 has the right but not the
       obligation  to redeem up to 333,333  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 redeem  shares at $1.95 per share.  The number of shares
       required  to be redeemed  quarterly  is based on the sum of (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  $3,000) of the amount the latex and mylar
       balloon  revenues exceed $1.3 million in any month.  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 with a contra equity  account on the balance  sheet.  As of the
       date of this report,  121,331  shares of Common Stock have been  redeemed
       under the Stock Redemption Agreement.









                                      F-14
<PAGE>

CTI Industries and Corporation and Subsidiary

Notes to Consolidated Financial Statements, Continued



  7.   Income Taxes

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

<TABLE>
<CAPTION>
                                                                        1997        1998

<S>                                                                  <C>         <C>   
           Current: 
               Federal                                               $   3,209   $    --
               State                                                      --          --
               Foreign                                                  45,705      32,208
                                                                      --------    --------

                                                                        48,914      32,208
                                                                      --------    --------

           Deferred:
               Federal                                                (551,630)     22,672
               State                                                   (47,468)      5,133
                                                                      --------    --------

                                                                      (599,098)     27,805
                                                                      --------    --------

                      Total income tax provision (benefit)           $(550,184)  $  60,013
                                                                      ========    ========
</TABLE>



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

<TABLE>
<CAPTION>

                                                                        1997          1998

<S>                                                                 <C>           <C>  
        Deferred tax assets:   
          Accounts receivable allowance                             $   51,369    $   50,349
          Inventory valuation                                           78,519        56,784
          Accrued liabilities                                          150,294        49,979
          Net operating loss carryforwards                             570,542       695,062
          Alternative minimum tax credit carry forwards                341,979       338,612
                                                                    -----------   -----------

                 Total deferred tax assets                           1,192,703     1,190,786

        Deferred tax liabilities:
          Book over tax basis of capital assets                        593,605       622,859
                                                                    -----------   -----------

                 Net deferred tax asset                             $  599,098    $  567,927
                                                                    ===========   ===========
</TABLE>




       At  October  31,  1997  and  1998  the  Company  has net  operating  loss
       carryforwards   for  tax  purposes  of   approximately   $1,500,000   and
       $1,800,000.  These  carryforwards  expire in the years 2011 and 2012.  In
       addition,   the  Company  has  approximately  $342,000  and  $339,000  of
       alternative  minimum  tax  credits as of October  31, 1997 and 1998 which
       have no expiration date. Unremitted earnings of foreign subsidiaries have
       been indefinitely  reinvested. A valuation allowance against the deferred
       tax asset at October 31, 1998 is not considered  necessary  because it is
       more likely than not that the deferred tax asset will be fully utilized.






                                      F-15
<PAGE>

CTI Industries and Corporation and Subsidiary

Notes to Consolidated Financial Statements, Continued



  7.   Income Taxes, continued

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

                                                             Years Ended
                                                        --------------------- 
                                                           1997        1998

           Taxes at statutory rate                      $ 200,395   $  61,838
           State income taxes                             (31,455)      3,388
           Foreign taxes paid                              45,705      32,208
           Foreign income                                 (68,078)    (51,194)
           Increase (decrease)
              in valuation allowance                     (564,276)       --
           Correction of prior estimates                 (141,592)       --
           Other                                            9,117      13,773
                                                         --------    --------

                   Income tax provision (benefit)       $(550,184)  $  60,013
                                                         ========    ========





  8.   Research and Development

       The Company  conducts product  development and research  activities which
       includes (I) creative product development,  (ii) creative marketing,  and
       (iii)  engineering  development.  During the years ended October 31, 1997
       and 1998,  the Company  estimates that the total amount spent on research
       and  development  activities  was  approximately  $238,000 and  $252,000,
       respectively.



  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 $52,903 and $58,188
       for the years ended  October 31, 1997 and 1998,  respectively.  The total
       expense  charged to  operations  relating to this plan amounted to $6,050
       and $9,995 for the years ended October 31, 1997 and 1998, respectively.














                                      F-16
<PAGE>

CTI Industries and Corporation and Subsidiary

Notes to Consolidated Financial Statements, Continued



 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
       $236,071 and $195,200 for the years ended October 31, 1997 and 1998.

       The  Company  purchases   packaging  materials  from  entities  in  which
       shareholders  of the Company  maintain an ownership  interest.  Purchases
       from these  affiliates  were  $233,842  and  $458,347 for the years ended
       October 31, 1997 and 1998.

       In 1998 the Company  advanced funds  totaling  $81,352 to officers of the
       Company. $56,456 of these funds were used to purchase common stock of the
       Company and is reflected as a contra equity account at October 31, 1998.



 11.   Joint Venture

       Effective  September 16, 1996,  the Company  entered into a joint venture
       agreement with a manufacturer in Mexico.  The joint venture was formed to
       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, 1998, the Company has made a total capital  investment in the
       joint  venture of $77,975 and  accounts  for its  proportionate  share of
       income or loss using the equity method.



 12.   Investment in Subsidiary

       On January 26, 1998, the Company and Pulidos of Terminados  Finos S.A. de
       C.V.  ("P&TF")  entered  into an  agreement  under  which (i) the Company
       subscribed for 45% of the outstanding capital stock of P&TF for $800,000,
       (ii) the Company loaned to P&TF $850,000  collateralized by certain latex
       balloon  manufacturing  equipment,  and (iii) the 1995 equipment purchase
       agreement  between the parties was cancelled  with respect to 2 pieces of
       latex  balloon  manufacturing  equipment,  which is now  owned by CTI and
       leased to P&TF. The purchase of the capital stock was effective  February
       1, 1998. The Company accounts for the investment using the equity method.









                                      F-17
<PAGE>

CTI Industries and Corporation and Subsidiary

Notes to Consolidated Financial Statements, Continued



 13.   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 90% of this facility through December 31,
       1999. The Company's United Kingdom  subsidiary also maintains a lease for
       office and warehouse space which expires in 2019.

       The Company leases a office  equipment and  automobiles  under  operating
       leases which expire on various dates between  November 1998 and September
       2002.

       The net rent  expense of all leases was  $401,242 in 1997 and $115,519 in
       1998.

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

                                         Lease        Sublease
                                        Payments        Income         Net

            1999                       $  343,631     $ 244,590    $  99,041
            2000                          116,608        38,834       77,774
            2001                           71,044                     71,044
            2002                           71,044                     71,044
            2003                           51,700                     51,700
            Therefter                     827,200                    827,200




       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:


            1999                                   $  660,510
            2000                                      558,352
            2001                                      516,643
            2002                                       84,396












                                      F-18
<PAGE>

CTI Industries and Corporation and Subsidiary

Notes to Consolidated Financial Statements, Continued



 14.   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.  The  conversion was effective
       upon the closing of an initial public offering of 1,500,000 shares of the
       Company's  Common  Stock on November  5, 1997.  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.



 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 Securities

       In November of 1997, the Company issued  1,500,000 shares of common stock
       to the  public  at  $4.00  per  share.  The  underwriting  discounts  and
       commissions  against the sale were $868,443 and the direct costs incurred
       by the Company were $445,067.

       Also in November of 1997, in connection with the  underwriting  option to
       purchase additional shares to cover  over-allotments,  the Company issued
       225,000  additional  shares  of common  stock to the  public at $4.00 per
       share.  The underwriting  discount and commissions  against the sale were
       $117,000 with the net proceeds to the Company amounting to $783,000.












                                      F-19
<PAGE>

CTI Industries and Corporation and Subsidiary

Notes to Consolidated Financial Statements, Continued



 17.   Stock Options

       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.  Options to purchase 121,000 and 299,000 shares of
       Common  Stock  have  been  granted  as of  October  31,  1997  and  1998,
       respectively. The options are exercisable immediately upon grant and have
       a term of ten years.  The Plan  provides for the award of options,  which
       may either be  incentive  stock  options  ("ISOs")  within the meaning of
       Section  422A of the  Internal  Revenue  Code of 1986,  as  amended  (the
       "Code")  or  non-qualified  options  ("NQOs")  which are not  subject  to
       special tax treatment  under the Code.  The Plan is  administered  by the
       Board  or a  committee  appointed  by the  Board  (the  "Administrator").
       Officers, 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.

       In September, 1998 the Company issued an option to purchase 30,000 shares
       of the Company's  Common Stock at an exercise price of $2.50 per share to
       Thornhill  Capital LLC in  consideration  for services.  The option has a
       term of 10 years.

       In December,  1996,  certain  members of company  management  were issued
       warrants to purchase  230,769 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.

       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.








                                      F-20
<PAGE>

CTI Industries and Corporation and Subsidiary

Notes to Consolidated Financial Statements, Continued



 17.   Stock Options, continued

       The following is a summary of the activity in the Company's  stock option
       plans and other  options  issued for the year ended  October 31, 1997 and
       1998, respectively.

                                                         1997       1998

           Outstanding, beginning of period                --      629,013
           Granted                                      629,013    212,000
           Exercised                                       --      (19,396)
           Canceled                                        --       (4,000)
                                                       --------   --------

           Outstanding at the end of period             629,013    817,617
                                                       ========   ========

           Weighted average exercise price per share   $   2.57   $   2.33
                                                       ========   ========

           Exercisable at end of period                 629,013    817,617
                                                       ========   ========

           Available for grant at end of period         179,000      1,000
                                                       ========   ========



       The Company applies 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.

       The Company  recognizes  compensation  cost for stock-based  compensation
       awards  equal to the  difference  between the quoted  market price of the
       stock  at the date of  grant  or  award  and the  price to be paid by the
       employee upon exercise in accordance  with the  provisions of APB No. 25.
       Based upon the terms of Company's  current stock option plans,  the stock
       price on the date of grant and price  paid  upon  exercise  are the same,
       thus no compensation charges is required to be recognized.

       As  allowed by SFAS No.  123,  the  Company  will  continue  to apply the
       provisions  of APB No.  25 in  accounting  for its  stock-based  employee
       compensation  arrangements  and will  disclose  pro forma net  income and
       earnings  per share  information  in its  footnotes  as if the fair value
       method suggested in SFAS No. 123 had been applied.










                                      F-21
<PAGE>

CTI Industries and Corporation and Subsidiary

Notes to Consolidated Financial Statements, Continued



 17.   Stock Options, continued

       If  compensation  cost based on fair value method of the options had been
       used,  the Company's net income and earnings per common share (EPS) would
       have been as follows:

                                                           1997         1998

               Net income (loss)         As reported     $ 1,140       $  122
                                         Pro Forma         (312)          (89)

               EPS                       As reported     $  1.04       $  0.03
                                         Pro Forma         (0.31)        (0.02)






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

                                                          1997        1998

               Expected life (years)                         5           5
               Volatility                                   20%         20%
               Risk-free interest rate                      6.5%       5.0%
               Dividend yield                                -           -


       The weighted  average fair value of  options  granted  during  the  years
       ending  October 31,  1998  and  1997  was  $1.00  and  $2.21  per  share,
       respectively.

       Significant option and warrant groups outstanding at October 31, 1998 and
       related  weighted  average price and remaining  life  information  are as
       follows:

                                                                     Remaining
                                                        Exercise       Life
         Grant Date       Outstanding     Exercisable     Price       (Years)

        September 1998       212,000        212,000      $  2.59          9
        September 1997       117,000        117,000      $  2.57          8
        June 1997            277,244        277,244      $  3.12          4
        December 1996        211,373        211,373      $   .91          3













                                      F-22
<PAGE>

CTI Industries and Corporation and Subsidiary

Notes to Consolidated Financial Statements, Continued



 18.   Earnings Per Share

       The  Company  adopted  SFAS No. 128,  "Earnings  per Share," for the year
       ended October 31, 1998. Adoption of this pronouncement, which was applied
       to  prior  periods  presented,  did not  have a  material  impact  on the
       Company's financial statements.

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

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

       Earnings  per share for each of the two fiscal  years in the period ended
       October 31, 1998 was computed as follows:

<TABLE>
<CAPTION>
                                                            Year Ended                Year Ended
                                                         October 31, 1997           October 31, 1998
                                                    -------------------------   ------------------------ 
                                                        Basic       Diluted        Basic      Diluted

<S>                                                    <C>            <C>        <C>          <C>     
          Average shares outstanding:
              Weighted average shares 
                  outstanding                          999,625        999,625    3,798,010    3,798,010
              Common stock
                  equivalents (options/
                  warrants)                               --        1,225,710        --         323,356
                                                    ----------   ------------   ----------   ----------

                                                       999,625      2,225,335    3,798,010    4,121,366

          Earnings:
              Net income                            $1,139,578     $1,139,578    $ 121,860   $  121,860
              Dividends applicable to
                  redeemable preferred
                  stock                                 97,500         --            --           --
                                                    ----------   ------------   ----------   ----------

          Income available to
                common stockholders                 $1,042,078   $  1,139,578   $  121,860   $  121,860
                                                    ==========   ============   ==========   ==========

          Net earnings applicable
                to common shares                         $1.04          $ .51        $0.03       $0.03
                                                    ==========   ============   ==========   ==========

</TABLE>








                                      F-23
<PAGE>

CTI Industries and Corporation and Subsidiary

Notes to Consolidated Financial Statements, Continued



19.    Future Adoption of Recently Issued Accounting Standards

       During 1997, the Financial  Accounting  Standards  Board ("FASB")  issued
       SFAS  No.  130,  "Reporting  Comprehensive  Income"  and  SFAS  No.  131,
       "Disclosures  About  Segments of an Enterprise  and Related  Information.
       SFAS No. 130 establishes standards for reporting  comprehensive income to
       present  a  measurement  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  desegregates  the entity for making  internal  operating
       decisions.  These  statements  are effective  for fiscal years  beginning
       after December 15, 1997 and are not applicable to the Company's financial
       statements as of October 31, 1998.

       In February  1998 the FASB issued  SFAS No. 132  "Employer's  Disclosures
       about  Pensions  and  Other  Post-Retirement   Benefits".  SFAS  No.  132
       standardizes   the   disclosure   requirements   for  pension  and  other
       post-retirement  benefits.  The  statement is effective  for fiscal years
       beginning after December 15, 1997.

       In June 1998,  the FASB issued SFAS No. 133,  "Accounting  for Derivative
       Instruments   and  Hedging   Activities."   This  statement   establishes
       accounting  and  reporting  standards  for  derivative   instruments  and
       requires  recognition of all  derivatives as assets or liabilities in the
       statement of financial  position and measurement of those  instruments at
       fair value.  The statement is effective for fiscal years  beginning after
       June 15, 1999.  Management has not determined  what impact this standard,
       when adopted, will have on the Company's financial statements.
















                                      F-24
<PAGE>

CTI Industries and Corporation and Subsidiary

Notes to Consolidated Financial Statements, Continued



 20.   Geographic Segment Data

       The Company's  operations  consist of a business  segment which  designs,
       manufactures,   and  distributes  balloon  products.   Transfers  between
       geographic  areas were  primarily at cost.  The Company's  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, 1997 and 1998 are as follows:

<TABLE>
<CAPTION>
                                                                     United
                                               United States         Kingdom     Eliminations     Consolidated

<S>                                            <C>               <C>             <C>             <C>   
           1997
           Revenues                            $   15,435,746    $   1,934,451   $    (938,779)  $    16,431,418
           Operating income                           815,771          127,772                           943,543
           Net income                                 985,055          154,523                         1,139,578
           Total assets                            13,814,872        1,057,963        (655,209)       14,217,626

           1998

           Revenues                            $   19,008,359    $   1,751,131   $    (806,667)  $    19,952,823
           Operating income                           363,115          137,888                           501,003
           Net income                                   3,509          118,351                           121,860
           Total assets                            22,454,142          769,092        (369,613)       22,853,621

</TABLE>



 21.   Fourth Quarter Adjustments to Financial Results

       During the fourth quarter of the year ended October 31, 1998, the Company
       recorded net charges  against  pre-tax income of  approximately  $581,000
       primarily related to a revaluation of inventory.




















                                      F-25