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, 1999

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, .195 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, 1999,
were $18,606,000

         Based upon the closing price of $1.750 per share of Registrant's Common
Stock as reported on NASDAQ  SmallCap  Market at January 20, 2000, the aggregate
market value of the voting stock held by  non-affiliates  of the  Registrant was
then   approximately   $1,406,496.   (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  20,  2000 was  878,610  (excluding  treasury  shares) and the number of
shares of Class B Common Stock outstanding as of that date was 366,300.


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

         In  July,   1997,  the  Company   effected  a   recapitalization   (the
"Recapitalization")   without   a   formal   reorganization.   As  part  of  the
Recapitalization, the Board of Directors approved the creation of Class B Common
Stock,  approved a 1 for 2.6 reverse  stock  split on both the Common  Stock and
Preferred Stock,  and negotiated a conversion of all then outstanding  shares of
the Company's Convertible Preferred Stock into an aggregate of 366,300 shares of
Class B Common  Stock.  The  conversion  was  effective  upon the  closing of an
initial  public  offering of 575,000  shares of the  Company's  Common  Stock on
November 5, 1997. The shares of Class B Common Stock 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.

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





                                       1

<PAGE>



reclassified and changed into one share of the Company's Common Stock with a new
par value of $.195 per share,  and every three shares of the  Company's  Class B
Common Stock were reclassified and changed into one share of the Company's Class
B Common  Stock,  with a new par value of $2.73 per share.  Except as  otherwise
indicated,  share  figures in this  document  have been  restated to reflect the
stock splits described above.

Business Overview
-----------------

         The  Company  manufactures,   markets  and  sells  metalized  ("mylar")
balloons,  latex  balloons and latex toy products  and  produces  laminated  and
specialty  films for food  packaging and other  commercial  uses.  The Company's
mylar and latex balloon 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,  grocery chains, card and gift shops,
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  recently became the owner of a majority
interest of a Mexican  manufacturer  of latex  balloons.  The Company thus has a
competitive  source of supply of quality latex balloon products which it markets
with its mylar balloon line.  The Company has also recently  become the owner of
all of the outstanding  shares of capital stock in another  Mexican  corporation
engaged in 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




                                        2

<PAGE>



cartoon  images for  printing on the  balloons  and  directed  marketing  of the
balloons to retail outlets including grocery, general merchandise and drug store
chains,  card and gift shops, party goods stores as well as florists and balloon
decorators.

         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.

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 450 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
                  and remain buoyant.






                                        3

<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, Elephantz(R), Paddington(R), Postman
Pat(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). The Company also manufactures toy balloon
products including punch balls and water bombs.

         Packaging  Films.  The Company  fabricates  and prints films for use in
food packaging. The Company has developed sophisticated methods for the printing
of films,  including the use of water-based  ink. These  techniques  have proven
desirable for companies engaged in packaging food products,  particularly  candy
and snack items, with the result that the Company now provides printed packaging
films for several  food  packaging  companies,  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
12 individuals  and a customer  service  department of 8  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 1999 fiscal year,  Eckerd Drug Stores  accounted
for approximately 16.2% 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,
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.







                                        5

<PAGE>


         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 1999 fiscal year, a single
customer  of  the  Company's   custom  film  product   business   accounted  for
approximately 14.3% of the Company's total sales revenues.

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 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 56,500 orders annually.

         CTI Mexico. The Company's latex balloons are manufactured for it by CTI
Mexico S.A. de C.V.  ("CTI  Mexico"),  formerly  known as Pulidos et  Terminados
Finos S.A. de C.V., a  Guadalajara,  Mexico company  engaged  principally in the
manufacture of latex  balloons.  In 1995, the Company  entered into an agreement
with CTI Mexico  under which (i) the Company sold to CTI Mexico all of its latex
balloon manufacturing  equipment (for the manufacture of decorator balloons) and
(ii) CTI Mexico 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,  CTI Mexico  agreed to supply to the Company,
exclusively in the United States except as to two other companies,  all balloons
manufactured by CTI Mexico.  Commencing in 1996, CTI Mexico began  manufacturing
the Company's  high-end line of latex balloons  exclusively  for the Company for
the United States and also 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).






                                        6
<PAGE>


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

between the parties was  cancelled  with respect to two pieces of latex  balloon
manufacturing  equipment,  which  equipment  was owned by CTI and  leased to CTI
Mexico.  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 CTI Mexico 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 CTI Mexico.

         In November,  1999, the Company acquired  additional  shares of capital
stock of CTI Mexico and now owns  approximately 72% of CTI Mexico's  outstanding
capital  stock.  The  transaction  was  concluded  through an  agreement  with a
principal  shareholder of CTI Mexico and by approval of the requisite  number of
CTI Mexico shareholders at a shareholders' meeting held on November 12, 1999. In
the  transaction,  the Company  allowed CTI Mexico to capitalize  certain of CTI
Mexico's  outstanding  indebtedness to the Company,  amounting to  approximately
$975,000,  together with certain  equipment with a total value of  approximately
$745,000,  both in exchange for capital  stock of CTI Mexico.  In addition,  the
Company  agreed to  purchase  additional  shares of stock  from some CTI  Mexico
shareholders,  and has the right to acquire  substantially  all of the remaining
outstanding stock of CTI Mexico from another  shareholder.  At the shareholders'
meeting, the company's name was changed to CTI Mexico S.A. de C.V.

         Through CTI Mexico, the Company 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 CTI Mexico
entered   into  a  joint   venture   agreement   to  organize  and  operate  CTF
International,  a Mexican corporation  ("CTF").  The joint venture was initially
owned in equal  measure by the Company and CTI Mexico.  CTF leases a facility of
15,000  square feet in  Guadalajara,  Mexico.  CTF engages in the  packaging  of
balloons for the Company and CTI Mexico and in the  printing of latex  balloons.
In July,  1999,  the Company  purchased CTI Mexico's stock in CTF for $40,000 in
cash,  and the  assignment to CTI Mexico of three of the Company's  manual latex
silk screening machines.



                                        7

<PAGE>



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

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

Patents, Trademarks and Copyrights
----------------------------------

         In connection  principally with its 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.

         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.





                                        8

<PAGE>

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  1998 and 1999,  the
Company  estimates  that the total  amount  spent on  research  and  development
activities was approximately $252,000 and $257,000, respectively.

Employees
---------

         As of October 31, 1999, the Company had 147 full-time  employees in the
United States, of whom 11 are executive or supervisory, 17 are in sales, 112 are
in  manufacturing  and 7 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. In Mexico as of October 31, 1999,
the Company had 50 full-time employees,  of whom 2 are executive or supervisory,
1 is in sales, 45 are in manufacturing and 2 are clerical.  The Company is not a
party to any  collective  bargaining  agreement,  has not  experienced  any work
stoppages and believes that its relationship with its employees is satisfactory.

Regulatory Matters
------------------

         The  Company's  manufacturing   operations  are  subject  to  the  U.S.
Occupational  Safety and Health Act  ("OSHA").  The  Company  believes  it is in
material compliance with OSHA. The Environmental Protection Agency regulates the
handling  and  disposal  of  hazardous  materials.  As  the  Company's  printing
operations  utilize only  water-based  ink, the waste generated by the Company's
production  process is not  deemed  hazardous.  The  Company  believes  it is in
material  compliance  with applicable  environmental  rules and  regulations.  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.






                                        9
<PAGE>

         In August,  1998, the Company  purchased a building that is adjacent to
its principal plant and offices.  This facility  includes  approximately  29,000
square feet of combined  office and  warehouse  space.  The Company is presently
leasing approximately 11,000 square feet of this office and warehouse space to a
tenant for $7,350 in monthly rent under a lease that expires in May of 2000.

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

         On October 25, 1999, the Company  solicited the written  consent of its
Common  and  Class B Common  stockholders  with  respect  to the  approval  of a
one-for-three  reverse  split of the  Company's  $.065 Common and $.91 par value
Class B Common Stock,  whereby every three shares of the Company's  Common stock
would be reclassified  and changed into one share of the Company's  Common Stock
with a new par value of $.195 per share, and every three shares of the Company's
Class B Common  Stock would be  reclassified  and changed  into one share of the
Company's  Class B Common  Stock,  with a new par value of $2.73 per share.  The
written  consents of the Common and Class B Common  shareholders of record as of
the close of business on October 20, 1999,  were  solicited in lieu of a special
meeting  pursuant  to Section  228 of  Delaware  General  Corporation  Law.  The
requisite  notice of solicitation  and definitive proxy materials were mailed to
said stockholders and filed with the Securities  Exchange  Commission on October
25, 1999.

         On October  20,  1999,  there were  2,635,831  shares of the  Company's
Common Stock,  and 1,098,901 shares of the Company's Class B Common Stock issued
and  outstanding.  A total of 2,445,729  shares of Common  stock were voted;  of
these  2,409,739  shares of Common  Stock  were  voted in favor of the  proposed
1-for-3 reverse stock split, while 33,790 shares were voted against the proposed
1-for-3 reverse stock split. 2,200 of the 2,445,729 shares of voted Common Stock
were abstentions.  A total of 989,011 shares of Class B Common Stock were voted,
all in favor of the proposed 1 for 3 reverse stock split. Thus, of the 3,734,732
combined shares of Common and Class B Common Stock eligible to vote with respect
to the proposed  reverse stock split,  3,434,740 total shares were voted, and of
these shares,  3,398,750 (or  approximately  91% of the shares eligible to vote)
voted in favor of the proposed 1-for-3 reverse stock split, 33,790 (or less than
1% of the shares  eligible to vote) voted  against the  proposed 1 for 3 reverse
stock split, and there were 2,200 abstentions.




                                       10

<PAGE>


         The reverse  stock split  became  effective at the close of business on
November 4, 1999.

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 the
period from November 1, 1997 to November 4, 1997.  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  eight  fiscal  quarters
(retroactively  adjusted to reflect post-reverse split share values),  according
to the NASDAQ Stock Market's Stock Price History Report, were:

                                                          High          Low
                                                          ----          ---

         November 5, 1997 to January 31, 1998            20.156       15.000
         February 1, 1998 to April 30, 1998              18.469       12.750
         May 1, 1998 to July 31, 1998                    16.875       11.250
         August 1, 1998 to October 31, 1998              12.750        6.563
         November 1, 1998 to January 31, 1999             9.000        5.250
         February 1, 1999 to April 30, 1999               6.750        2.625
         May 1, 1999 to July 31, 1999                     3.750        2.156
         August 1, 1999 to October 31, 1999               3.375        1.219


         As of January 20, 2000,  there were  approximately 46 holders of record
of the Company's Common Stock and two 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.






                                       11

<PAGE>



         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.  These
shares of Class B Common Stock were  reverse-split on a 1-for-3 basis along with
the Company's Common Stock on November 4, 1999,  resulting in a total of 366,300
shares of Class B Common Stock being presently outstanding.

         In  December,  1996,  Howard W.  Schwan,  John H. Schwan and Stephen M.
Merrick,  members of  management,  were each  issued  warrants to purchase up to
25,641  shares of the Company's  Common Stock at an exercise  price of $2.73 per
share in consideration of their facilitating and guaranteeing a bank loan to the
Company in the amount of $6.3 million. The 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 6,465 of their warrants to purchase  shares of the Company's  Common Stock at
an exercise price of $2.73 per share (5,000 and 1,465 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 92,415
shares of the  Company's  Common Stock at an exercise  price of $9.36 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.

         In June, 1999, Mr. Davis' June,  1997,  $150,000 note was cancelled and
reissued in the same  principal  amount with a new maturity date of February 28,
2001.  Mr.  Davis' June,  1997,  warrant to purchase up to 16,026  shares of the
Company's  Common Stock at an exercise price of $9.36 per share was cancelled in
September,  1999,  and a new  warrant  to  purchase  up to 16,026  shares of the
Company's  Common  Stock at an  exercise  price of  $1.688  per  share,  with an
expiration date of June 30, 2003, was issued in its place.






                                       12

<PAGE>

         In June, 1999, the June, 1997, $50,000,  $350,000 and $315,000 notes of
Messrs. H. Schwan, J. Schwan and Merrick, respectively, came due. On November 9,
1999, new notes in the same principal  amounts were issued to Messrs. H. Schwan,
J.  Schwan and  Merrick,  in payment  and  replacement  of the prior  notes with
maturity dates for each of November 9, 2001. In November,  1999, the June,  1997
warrants  of Messrs.  H.  Schwan,  J.  Schwan  and  Merrick  to  purchase  up to
(respectively)  5,342, 37,393 and 33,653 shares of the Company's Common Stock at
an exercise price of $9.36 per share were cancelled.  At that time, new warrants
to purchase up to 29,621,  207,346 and 186,612  shares of the  Company's  Common
Stock at an exercise price of $1.688 per share were issued to Messrs. H. Schwan,
J. Schwan and Merrick, respectively. These warrants expire on November 9, 2004.

         The new 1999 notes and new warrants issued to Messrs. Davis, H. Schwan,
J. Schwan and Merrick  were issued in a private  offering  which was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended,  as a
transaction   not  involving  a  public  offering  as  all   participants   were
sophisticated investors who had access to information about the Company.
























                                       13
<PAGE>

Item No. 6       Management's Discussion and Analysis of Financial Condition and
                 Results of Operations

General

         The following  table sets forth selected  financial data of the Company
for the three years ended October 31, 1999, 1998 and 1997 (in thousands,  except
per share data):

<TABLE>
<CAPTION>
                                                                  Year Ended October 31,
                                                          -----------------------------------
                                                              1997         1998         1999
<S>                                                        <C>          <C>          <C>
Consolidated Stmt. of Operations Data:
Net sales.......................................           $ 16,431     $ 19,953     $ 18,606
Cost of sales...................................             10,265       12,707       13,670
                                                           --------     --------     --------
Gross profit....................................              6,166        7,246        4,936
Operating Expenses:
 General and administrative.....................              1,864        2,353        2,350
 Selling........................................              2,375        2,587        2,448
 Advertising and marketing......................                983        1,805        1,504
                                                           --------     --------     --------
Total operating expenses........................              5,222        6,745        6,302
                                                           --------     --------     --------
Operating income (loss).........................                944          501       (1,366)
                                                           --------     --------     --------
Other income (expense)..........................               (354)        (319)        (796)
                                                           --------     --------     --------
Income (loss) before income taxes...............                590          182       (2,162)
Income tax benefit (expense)....................                550          (60)         380
                                                           --------     --------     --------
Net income (loss)...............................              1,140          122       (1,782)
Dividends applicable to Convertible
 Preferred Stock................................                (98)         ---          ---
                                                           --------     --------     --------
Net income (loss) applicable to
 common shares..................................           $  1,042     $    122     $ (1,782)
                                                           ========     ========     ========

Net income (loss) per share
 Basic   .......................................           $   3.13     $   0.10     $  (1.40)
                                                           ========     ========     ========
 Diluted........................................           $   1.54     $   0.09     $  (1.40)
                                                           ========     ========     ========

Weighted average number of common and
common equivalent shares outstanding
  Basic  .......................................            333,208    1,266,003    1,269,984
                                                          =========    =========    =========
  Diluted.......................................            741,778    1,373,789    1,269,984
                                                          =========    =========    =========
</TABLE>





                                       14

<PAGE>



Results of Operations
---------------------

         Net  Sales.  For the fiscal  year ended  October  31,  1999,  net sales
decreased  to  $18,606,000  from  $19,953,000  for fiscal  1998,  a decrease  of
approximately 7%. The decline in net sales is the net result of a decline in the
sales of  metallized  and latex  balloons,  partially  offset by an  increase in
laminated  and printed  film sales.  For fiscal 1999,  international  sales were
$2,436,000 or 13.1 % of sales, as compared to $2,498,000,  or 12.5% of net sales
for fiscal 1998.

         During fiscal 1999,  mylar  balloons  represented  67% of sales,  latex
balloons 12 % of sales and laminated and printed films 21% of sales.  For fiscal
1998, mylar balloons  represented 71% of sales, latex balloons 12% of sales, and
laminated  and  printed  films 17% of sales.  The Company  anticipates  that the
percentage  of sales  represented  by latex  balloons and  laminated and printed
films will again  increase  during  fiscal  2000.  For fiscal  1999,  the profit
margins on mylar balloons,  latex balloons,  and laminated and printed materials
were 33%, 18%, and 23%, respectively.

         Cost of Sales. For fiscal 1999, cost of sales increased to 73.5% of net
sales as compared to 63.9% of net sales in fiscal  1998.  The  increase  was the
result of a number of items including  decreased  units of production  absorbing
more overhead per unit, and costs  associated with the installation and start-up
of new extruding equipment.

         Administrative.   For  fiscal  1999,   administrative   expenses   were
$2,350,000  or 12.6% of net sales,  as  compared to  $2,353,000  or 11.8% of net
sales for fiscal 1998.  The dollar  level of  administrative  expenses  remained
constant from 1998 to 1999 due to most  administrative  costs being fixed rather
than variable based on sales.

         Selling.  For fiscal 1999, selling expenses were $2,448,000 or 13.2% of
net sales,  as compared to $2,587,000 or 13.0% of net sales for fiscal 1998. The
slight  decline in selling  expenses is related to the  decrease in sales in the
mylar  balloon  product line and the  variable  expenses  associated  with those
sales.

         Advertising and Marketing.  For fiscal 1999,  advertising and marketing
expenses were $1,504,000 or 8.1% of net sales, as compared to $1,806,000 or 9.1%
of sales for fiscal  1998.  The  decrease in these  expenses  came from  several
items, mainly reduced servicing costs on certain national account programs,  and
reduced expenditures related to trade show attendance.

         Other  Income and Expense.  The Company had lease and rental  income in
fiscal 1999 of $131,000 as compared to $86,000 of lease  income in fiscal  1998.
The increase  resulted  from a full year's  ownership of a new facility  where a
portion of the  building  is leased  out.  Interest  income for fiscal  1999 was
$92,000,  compared to $161,000 in fiscal 1998. The decrease was due to a smaller
amount of funds held for investment purposes.  For fiscal 1999, interest expense
was $942,000,  as compared to $765,000 for fiscal 1998. The increase in interest
expense is the result of interest  paid on the new  extruding  equipment,  and a
higher outstanding balance on the revolving line of credit.






                                       15

<PAGE>


         Net Income or Loss.  For fiscal 1999, the Company had a net loss before
income taxes of  $2,162,000,  as compared to net income  before  income taxes of
$182,000 in fiscal 1998. The net loss for fiscal 1999 was $1,782,000 as compared
to net income of  $122,000  for  fiscal  1998.  Included  in the net loss is tax
benefit  of  $380,000,  which  reflects  the net  result of  establishing  a tax
valuation allowance of $400,000.

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

Liquidity and Capital Resources
-------------------------------

         Cash flow  provided by  operations  for the year ended October 31, 1999
was  $2,192,000.  This  resulted  primarily  from a  decrease  in  inventory  of
$2,199,000,  and non-cash  depreciation and amortization expenses of $1,382,000.
During fiscal 1998, the Company's cash flow used by operations was $2,384,000, a
result of increased accounts receivable and inventory of $3,170,000.

         During fiscal 1999,  the Company  invested  $2,053,000 in machinery and
equipment. The Company also completed the acquisition on CTF International,  and
now owns 100% of the  subsidiary.  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.

         Cash flow provided by financing  activities  for the year ended October
31,  1999  was  $94,000.  This  resulted  from the  issuance  of  long-term  and
short-term  debt.  During fiscal 1998,  the Company  generated  $9,082,000  from
financing  activities,  primarily  from the sale of 575,000 shares of its Common
Stock at $12.00 per share in an initial  public  offering,  and the  proceeds of
long-term  debt.  The  net  proceeds  from  the  offering  to the  Company  were
approximately $5,500,000.

         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  agreement  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 $926,000 was
unused at October 31, 1999. 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 .5%, was due on July 1, 1998,  and has been renewed
until June 1, 2000.  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







                                       16

<PAGE>



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.  In
June 1999, the bank provided  short-term  financing in the amount of $570,000 at
prime  plus 1% with  three  equal  installments  due in  October,  November  and
December  of 1999.  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.

         At October 31, 1999, the Company maintained a cash balance of $337,000.
The Company's current cash management strategy includes maintaining minimal cash
balances and utilizing the revolving  line of credit for  liquidity.  At October
31, 1998, the Company had cash and cash equivalents of $235,000. Working capital
at October 31, 1999 was $630,000,  compared to working  capital of $3,313,000 at
October 31, 1998.

         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.

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 Issue
---------------

         The Year 2000 issue (i.e. the ability of computer  systems to recognize
a date using "00" as the year 2000 rather than 1900)  affects all  companies and
organizations.  As a result of the Company's  Year 2000 efforts,  no significant
internal  problems have occurred to date.  The Company has not  experienced  any
problems with suppliers,  vendors,  customers, or financial institutions.  There
were no  significant  expenditures  related  to Year  2000  compliance,  and the
Company does not anticipate any further expenses associated with Year 2000.

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

         The Company operates in a dynamic and rapidly changing environment that
involves  numerous  risks  and  uncertainties.  The  market  for mylar and latex
balloon products is generally characterized by intense competition, frequent new
product  introductions  and changes in customer tastes which can render existing
products  unmarketable.  The  statements  contained  in Item 1  (Description  of
Business)  and  Item  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






                                       17

<PAGE>



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 2000 and beyond to differ  materially from those expressed in,
or implied by, any such  forward-looking  statements.  Wherever possible,  words
such as  "anticipate,"  "plan,"  "expect,"  "believe,"  "estimate,"  and similar
expressions have been used to identify these forward-looking statements, but are
not  the  exclusive  means  of  identifying   such   statements.   These  risks,
uncertainties and  contingencies  include,  but are not limited,  to competition
from,  among others,  national and regional  balloon,  packaging and custom film
product  manufacturers  and sellers that have greater  financial,  technical and
marketing  resources  and  distribution   capabilities  than  the  Company,  the
availability of sufficient capital,  the maturation and success of the Company's
strategy to develop, market and sell its products,  risks inherent in conducting
international business, risks associated with securing licenses,  changes in the
Company's product mix and pricing, the effectiveness of the Company's efforts to
control operating expenses,  general economic and business conditions  affecting
the Company and its customers in the United States and other  countries in which
the Company  sells and  anticipates  selling its  products  and services and the
Company's ability to (i) adjust to changes in technology,  customer preferences,
enhanced competition and new competitors; (ii) protect its intellectual property
rights from  infringement  or  misappropriation;  (iii)  maintain or enhance its
relationships with other businesses and vendors; and (iv) attract and retain key
employees.  There can be no assurance that the Company will be able to identify,
develop,  market, sell or support new products  successfully,  that any such new
products  will  gain  market  acceptance,  or that the  Company  will be able to
respond  effectively  to  changes  in  customer  preferences.  There  can  be no
assurance  that the Company will not encounter  technical or other  difficulties
that could delay  introduction of new or updated products in the future.  If the
Company is unable to introduce  new products and respond to industry  changes or
customer  preferences  on a timely  basis,  its  business  could  be  materially
adversely  affected.  The  Company is not  obligated  to update or revise  these
forward-looking statements to reflect new events or circumstances.







                                       18
<PAGE>

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

         Effective July 27, 1999, the Company  engaged Grant Thornton LLP as the
Company's principal  accountants to audit the Company's financial statements for
the   year   ending   October   31,   1999.    Grant   Thornton   LLP   replaced
PricewaterhouseCoopers  LLP ("PwC") who had previously been engaged for the same
purpose,  and whose  dismissal  was  effective  July 27, 1999.  The decisions to
change the Company's  principal  accountants was approved by the Company's Board
of Directors on July 23, 1999.

         The reports of PwC on the Company's  financial  statements for the past
two fiscal years ended October 31, 1997, and October 31, 1998 did not contain an
adverse opinion or disclaimer of opinion, nor were they qualified or modified as
to uncertainty, audit scope, or accounting principles.

         During the Company's  last two fiscal years ended October 31, 1997, and
October 31, 1998, and in the subsequent  interim  periods through July 27, 1999,
there were no disagreements  with PwC on any matter of accounting  principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements,  if not resolved to the satisfaction of PwC, would have caused it
to make reference to the subject matter of the  disagreements in connection with
its reports on the financial statements for such periods.

         PwC did not inform  the  Company of any  reportable  events  during the
Company's  last two fiscal years ended  October 31, 1997,  and October 31, 1998,
and in subsequent interim periods through July 27, 1999.

PART III

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

Directors and Executive Officers
--------------------------------

         The Company's current directors and executive  officers and their ages,
as of January 20, 2000, are as follows:







                                       19

<PAGE>



           Name             Age                 Position with Company
---------------------      -----        ---------------------------------------

John H. Schwan               55          Chairman and Director
Stephen M. Merrick           58          Executive Vice President, Secretary,
                                         Chief Financial Officer and Director
Howard W. Schwan             45          President and Director
Sharon Konny                 41          Manager of Finance and Administration
Brent Anderson               33          Vice President of Manufacturing
Stanley M. Brown             53          Director
Bret Tayne                   41          Director


         All directors hold office until the annual meeting of stockholders next
following  their  election  and/or  until  their   successors  are  elected  and
qualified.  Officers are elected annually by the Board of Directors and serve at
the discretion of the Board. Information with respect to the business experience
and  affiliation  of the directors and the executive  officers of the Company is
set forth below.

         John H. Schwan,  Chairman.  Mr. Schwan has been an officer and director
of the Company  since  January,  1996.  Mr.  Schwan has been the  President  and
principal executive officer of Packaging Systems,  Inc. and affiliated companies
for over the last 12 years. Mr. Schwan devotes  approximately 20% of his time to
his position as Chairman of the Company and the balance of his time to Packaging
Systems, Inc. and affiliates. Mr. Schwan has over 20 years of general management
experience,  including manufacturing,  marketing and sales. Mr. Schwan served in
the U.S. Army Infantry in Vietnam from 1966 to 1969,  where he attained the rank
of First Lieutenant.

         Stephen M. Merrick, Executive Vice President and Secretary. Mr. Merrick
was  President of the Company from  January,  1996 to June,  1997 when he became
Chief  Executive  Officer of the Company.  In October,  1999, Mr. Merrick became
Executive Vice President.  Mr. Merrick devotes  approximately 20% of his time to
his  position as Executive  Vice  President  of the  Company.  Mr.  Merrick is a
principal of the law firm of Merrick & Klimek, P.C. of Chicago, Illinois and has
been  engaged in the  practice of law for more than 30 years.  He is also Senior
Vice  President,  Director  and a member of the  Management  Committee  of Reliv
International,  Inc. (NASDAQ), a manufacturer and direct marketer of nutritional
supplements and food products.

         Howard W. Schwan,  President.  Mr. Schwan has been  associated with the
Company  for 19  years  principally  in the  management  of the  production  and
engineering  operations  of the  Company.  Mr.  Schwan  was  appointed  as  Vice
President of  Manufacturing  in November,  1990,  was appointed as a director in









                                       20

<PAGE>



January,  1996, and was appointed as President in June, 1997. Mr. Schwan manages
administration,  production  and  engineering  functions  as well  as the  sales
function for latex balloons and custom and created films.

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

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

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

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

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



Section 16(a) Beneficial Ownership Reporting Compliance
-------------------------------------------------------

         There were no late  filings  required by Section  16(a) during the most
recent fiscal year or prior years by any officer, director or 10% shareholder.


Item No. 10       Executive Compensation
-----------       ----------------------

Executive Compensation
----------------------

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








                                       21

<PAGE>


<TABLE>
<CAPTION>
                                               Summary Compensation Table
                                                                                Long Term
                                          Annual Compensation                 Compensation
                                      ---------------------------        --------------------------
                                                                         Securities      All Other
     Name and                            Salary     Other Annual         Underlying    Compensation
Principal Position            Year         ($)      Compensation           Options          ($)
------------------            ----      --------    -------------        ----------    ------------

<S>                           <C>       <C>                               <C>
Stephen M.                    1999      $ 53,750        ----                ----           ----
Merrick                       1998      $ 75,000        ----              13,333(3)        ----
Executive                     1997      $ 63,750        ----                ----           ----
Vice-President

Howard W.                     1999      $129,900      $ 13,675(1)           ----         $  1,650(5)
Schwan                        1998      $135,000      $  6,145(1)         13,333(4)      $  1,115(5)
President                     1997      $121,600      $  6,145(1)           ----         $  1,115(5)

John C. Davis                 1999      $120,000      $  5,500(2)           ----         $  1,529(5)
Executive Vice                1998      $132,115      $  6,562(2)           ----         $  1,800(5)
President-Sales               1997      $150,000      $  8,374(2)           ----         $  1,666(5)

----------------------
<FN>
(1)  Perquisites  include country club membership  ($5,000) in 1997 and 1998 and
     $7,360 in 1999.
(2)  Perquisites  include country club membership  ($5,000) in 1997 and 1998 and
     allocated  personal use of vehicles  ($5,500 in 1999,  $1,562 in 1998,  and
     $3,374 in 1997).
(3)  Stock options to purchase up to 13,333 shares of the Company's Common stock
     at $8.25 per share.
(4)  Stock options to purchase up to 13,333 shares of the Company's Common Stock
     at $7.50 per share.
(5)  Company contribution to the Company 401(k) Plan as pre-tax salary deferral.
</FN>
</TABLE>

         Certain Named  Executive  Officers  have received  warrants to purchase
Common Stock of the Company in connection  with their  guarantee of certain bank
loans secured by the Company and in  connection  with their  participation  in a
private offering of notes and warrants conducted by the Company. See Item 12. No
stock  option  grants were made to any of the  Company's  Executive  Officers in
connection with their employment in the fiscal year ending October 31, 1999.






                                       22

<PAGE>



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


<TABLE>
<CAPTION>

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

<S>                      <C>            <C>                <C>                             <C>
Stephen M. Merrick       0              0                  13,333/0                        $0/0(1)

Howard W. Schwan         0              0                  13,333/0                        $0/0(1)


-----------------------
<FN>

(1)      The  value  of  unexercised   in-the-money  options  is  based  on  the
         difference  between the exercise price and the fair market value of the
         Company's Common Stock on October 31, 1999.
</FN>
</TABLE>


Employment Agreements
---------------------

         In April,  1996, the Company entered into an employment  agreement with
John C. Davis as Executive  Vice  President-Sales,  which provided for an annual
salary of $150,000.  The term of the agreement was through  January 31, 1998. On
June 27, 1997, the agreement was amended to extend the term through  January 31,
2000,  and to provide for an annual  salary of $120,000 per year.  The agreement
contains  covenants  of  Mr.  Davis  not  to  use  the  Company's   confidential
information  while such  information  remains  confidential and establishing the
Company's  rights  to  inventions  created  by Mr.  Davis  during  the  term  of
employment.  Mr.  Davis'  agreement  does not contain a covenant not to compete.
Effective  February 1, 1999,  Mr.  Davis  retired from his position as Executive
Vice  President-Sales  with the Company,  and currently provides services to the
Company  as a special  project  consultant  under  the  terms of his  Employment
Agreement, as it was amended on June 27, 1997.

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

Director Compensation
---------------------

         Directors are not  compensated  for their  services as directors.  John
Schwan was  compensated in the amount of $34,400 in fiscal 1999 for his services
as Chairman of the Board of Directors.







                                       23

<PAGE>



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

Principal Stockholders
----------------------

         The following table sets forth certain  information with respect to the
beneficial  ownership of the Company's  capital stock, as of January 17, 2000 by
(i) each  stockholder who is known by the Company to be the beneficial  owner of
more than 5% of the Company's  Common Stock or Class B Common  Stock,  (ii) each
director  and  executive  officer of the  Company  who owns any shares of Common
Stock or Class B Common Stock, and (iii) all executive officers and directors as
a group. Except as otherwise indicated, the Company believes that the beneficial
owners of the shares  listed  below have sole  investment  and voting power with
respect  to such  shares.  All  shares  listed  in the  following  table and the
footnotes  thereto have been  adjusted to reflect the  Company's  recent 1 for 3
reverse split of its Common and Class B Common Stock.

<TABLE>
<CAPTION>
                                      Shares of Class B          Shares of Common
                                       Common Stock             Stock Beneficially         Percent of
 Name and Address(1)               Beneficially Owned(2)(3)           Owned(2)            Common Stock(4)
-----------------------------      ------------------------     ------------------       ----------------

<S>                                        <C>                        <C>                      <C>
Stephen M. Merrick                         73,260                     275,095(5)               23.71

John H. Schwan                            109,890                     260,188(6)               24.90

Howard W. Schwan                           54,945                      71,463(7)                9.69

John C. Davis                                 --                      148,505(8)               11.78

Sharon Konny                                  --                        4,000(9)                 *

Brent Anderson                                --                        4,400(9)                 *

Stanley M. Brown                              --                        3,952(10)                *
 747 Glenn Avenue
 Wheeling, Illinois

Frances Ann Rohlen                         91,575                       1,170                   7.45
 c/o Cheshire Partners
 1504 Wells
 Chicago, Illinois 60610

Philip W. Colburn                          36,630                      39,422(11)               6.11

Bret Tayne                                    --                        2,837(12)                *
 6834 N. Kostner Avenue
 Lincolnwood, Illinois 60646

All directors and executive               238,095                     621,935                  47.99
officers as a group (7 persons)

--------------
<FN>
*less than one percent
                       (footnotes continued on next page)






                                       23

<PAGE>



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

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

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

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

(5)      Includes  warrants to purchase up to 24,176  shares of Common  Stock at
         $2.73 per share,  warrants to  purchase up to 186,612  shares of Common
         Stock at $1.688 per share and options to  purchase up to 13,333  shares
         of Common stock at $8.25 per share  granted  under the  Company's  1997
         Stock Option Plan.

(6)      Includes  warrants to purchase up to 20,641  shares of Common  Stock at
         $2.73 per share,  warrants to  purchase up to 207,346  shares of Common
         Stock at $1.688 per share and options to  purchase up to 13,333  shares
         of Common stock at $8.25 per share  granted  under the  Company's  1997
         Stock Option Plan.

(7)      Includes  warrants to purchase up to 25,641  shares of Common  Stock at
         $2.73 per share,  warrants to  purchase  up to 29,621  shares of Common
         Stock at $1.688 per share,  and options to purchase up to 13,333 shares
         of Common Stock at $7.50 per share  granted  under the  Company's  1997
         Stock Option Plan.

(8)      Includes  warrants to purchase up to 16,026  shares of Common  Stock at
         $1.688  per  share,  and  70,667  shares of  Common  Stock  subject  to
         redemption by the Company. See "Certain Transactions."

(9)      Includes  options to  purchase  up to 4,000  shares of Common  Stock at
         $7.50 per share granted under the Company's 1997 Stock Option Plan.

(10)     Includes  options to  purchase  up to 1,667  shares of Common  Stock at
         $7.50 per share and options to  purchase  up to 1,667  shares of Common
         Stock at $12.00 per share,  both granted under the Company's 1997 Stock
         Option Plan.


                       (footnotes continued on next page)





                                       25

<PAGE>



(11)     Includes shares held by immediate family members.

(12)     Includes  options to  purchase  up to 1,667  shares of Common  Stock at
         $7.50 per share granted under the Company's 1997 Stock Option Plan.
</FN>
</TABLE>




Item No. 12       Certain Relationships and Related Transactions
-----------       ----------------------------------------------

Certain Transactions
--------------------

         In March 1996, the Company  entered into a Stock  Redemption  Agreement
with John C. Davis  which was  subsequently  amended  June 27,  1997.  Under the
amended  Stock  Redemption  Agreement the Company was obligated to redeem 34,188
shares of Common Stock and has the right,  but not the obligation,  to redeem up
to an  additional  76,923 shares of Common Stock owned by Mr. Davis at the price
of $5.85 per share at any time  through  January 31, 1998.  Commencing  March 1,
1998 through  February 28, 2000,  the Company is obligated to pay to Mr.  Davis,
for the redemption of shares at $5.85 per share (i) an amount equal to 2% of the
Company's pretax profits each fiscal quarter  (beginning with the fiscal quarter
ended  February  28,  1998)  and (ii) an  amount  equal to 2% (but not to exceed
$8,000) of the amount by which  latex and mylar  balloon  revenues  exceed  $1.3
million  in any  month.  The  Company's  obligations  terminate  once a total of
111,111  shares of Common Stock have been  redeemed  under the Stock  Redemption
Agreement.  The Company also has the right to redeem additional shares of Common
Stock from Mr.  Davis during this period at $5.85 per share,  provided  that the
total  number of  shares  subject  to  redemption  under  the  Stock  Redemption
Agreement  does not exceed  111,111.  As of January  1, 2000,  40,444  shares of
Common Stock had been redeemed pursuant to the Stock Redemption Agreement.

         In  March  and  May of  1996,  a group  of  investors  made  an  equity
investment  of  $1,000,000  in the  Company  in  return  for  366,300  shares of
Preferred Stock,  $2.73 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.  CTI
Investors,  L.L.C., an Illinois limited liability company,  invested $900,000 in
the shares of Preferred Stock.  Members of CTI Investors,  L.L.C. include Howard
W. Schwan,  John H. Schwan and Stephen M. Merrick,  members of  management,  and
Frances Ann Rohlen.

         In  December,  1996,  Howard W.  Schwan,  John H. Schwan and Stephen M.
Merrick were each issued  warrants to purchase  25,641  shares of the  Company's
Common Stock at an exercise price of $2.73 per share in  consideration  of their
facilitating  and  guaranteeing a bank loan to the Company in the amount of $6.3
million.  The warrants have a term of six years.  In July,  1998, John H. Schwan
and  Stephen  M.  Merrick   exercised   5,000  and  1,465  of  these   warrants,
respectively.





                                       26

<PAGE>


         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 92,415
shares of the  Company's  Common Stock at an exercise  price of $9.36 per share.
The warrants had a term of five years. Howard W. Schwan, John H. Schwan, Stephen
M. Merrick and John C. Davis, members of management, purchased $50,000, $350,000
and $315,000 and $150,000,  respectively,  of the notes and  warrants.  Mr. John
Schwan and Mr. Merrick applied advances of $200,000 each, made to the Company in
January, 1997, toward the purchase of the notes and warrants.

         In June, 1999, Mr. Davis' June, 1997, $150,000 Note was cancelled,  and
reissued in the same  principal  amount with a new maturity date of February 28,
2001.  Mr.  Davis' June,  1997,  warrant to purchase up to 16,026  shares of the
Company's  Common Stock at an exercise price of $9.36 per share was cancelled in
September,  1999,  and a new  warrant  to  purchase  up to 16,026  shares of the
Company's  Common  Stock at an  exercise  price of  $1.688  per  share,  with an
expiration date of June 30, 2003 was issued in its place.

         In June, 1999, the June,  1997,  $50,000 $350,000 and $315,000 notes of
Messrs. H. Schwan, J. Schwan and Merrick,  respectively came due. On November 9,
1999, new notes in the same principal  amounts were issued to these persons,  in
payment and  replacement  of the prior notes,  with  maturity  dates for each of
November 9, 2001. In November,  1999,  the June,  1997,  warrants of Messrs.  H.
Schwan, J. Schwan and Merrick to purchase up to (respectively) 5,342, 37,393 and
33,653  shares of the Company's  Common Stock at an exercise  price of $9.36 per
share were  cancelled.  At that time,  new  warrants  to  purchase up to 29,621,
207,346,  and 186,612 shares of the Company's  Common Stock at an exercise price
of $1.688 per share were issued to Messrs.  H.  Schwan,  J. Schwan and  Merrick,
respectively. These warrants expire on November 9, 2004.

         Stephen M.  Merrick,  Executive  Vice  President of the  Company,  is a
principal  of the law firm of Merrick & Klimek,  P.C.,  which  serves as general
counsel of the Company.  Mr. Merrick was a principal in the law firm of Fishman,
Merrick,  Miller,  Genelly,  Springer,  Klimek & Anderson,  P.C., which formerly
served as general  counsel to the Company  until  December 1, 1998. In addition,
Mr. Merrick is a principal  stockholder of the Company. (See Item No. 11). Other
principals  of the firm of  Merrick  &  Klimek,  P.C.  own  less  than 1% of the
Company's  outstanding  Common  Stock.  Legal  fees  incurred  from  the firm of
Fishman,  Merrick,  Miller,  Genelly,  Springer,  Klimek & Anderson,  P.C.  were
$195,200 and $10,380 for the years ended  October 31, 1998 and October 31, 1999,
respectively.  No fees were paid to Merrick & Klimek, P.C. during the year ended
October 31, 1998.  Legal fees incurred  from the firm of Merrick & Klimek,  P.C.
for the fiscal year ended October 31, 1999 was $90,634.  Mr.  Merrick is also an
officer and director of Reliv International, Inc. (NASDAQ-RELV).








                                       27

<PAGE>


         John H. Schwan is President  and a  shareholder  of Packaging  Systems,
Inc. and affiliated companies. The Company made purchases of packaging materials
from these  entities in the amount of $458,347 and  $251,203  during each of the
years ended October 31, 1998, and October 31, 1999, respectively.

         The Company believes that each of the transactions set forth above were
entered into, and any future related party transactions will be entered into, on
terms as fair as those  obtainable from independent  third parties.  All related
party transactions, including loans and forgiveness of debt, must be approved by
a majority of disinterested directors.

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

Exhibits
--------

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

    * 3.1         Third Restated Certificate of Incorporation of CTI  Industries
                  Corporation
   ** 3.2         By-laws of CTI  Industries  Corporation
   ** 4.1         Form  of  Certificate  for  Common  Stock  of  CTI  Industries
                  Corporation
  ***10.1         CTI Industries Corporation Stock Option Plan
   **10.2         Employment   Agreement   dated  April  29,  1996  between  CTI
                  Industries Corporation and John C. Davis
   **10.3         Stock  Redemption  Agreement  dated March 1, 1996  between CTI
                  Industries Corporation and John C. Davis
   **10.4         Agreement   dated  June  27,  1997   between  CTI   Industries
                  Corporation and John C. Davis
   **10.6         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.










                                       28

<PAGE>



 ****10.14        Amended and Restated Loan and Security  Agreement dated May 1,
                  1998 between the Company and First American Bank
 ****10.15        First  Term  Note in the sum of  $1,788,328  dated May 1, 1998
                  made by CTI Industries Corporation to First American Bank.
 ****10.16        First  Amendment to Second Term Note dated May 1, 1998 made by
                  CTI Industries Corporation to First American Bank.
 ****10.17        Third  Term  Note in the sum of  $2,258,000  dated May 1, 1998
                  made by CTI Industries Corporation to First American Bank.
 ****10.18        Revolving Note in the sum of $4,000,000 dated May 1, 1998 made
                  by the Company to First American Bank.
 ****10.19        First  Amendment to Loan and Security  Agreement  dated August
                  24,  1998,  between  CTI  Industries   Corporation  and  First
                  American Bank.
 ****10.20        Fourth Term Note in the sum of $1,268,000 dated August 24,
                  1998 made by CTI  Industries  Corporation  and First  American
                  Bank.
 ****10.21        Mortgage  dated August 24, 1998 for benefit of First  American
                  Bank.
 ****10.22        Second  Amendment to Loan and Security  Agreement dated August
                  27, 1998 between CTI Industries Corporation and First American
                  Bank.
 ****10.23        Third Amendment to Loan and Security Agreement dated September
                  1, 1998 between CTI Industries  Corporation and First American
                  Bank.
 ****10.24        First  Amendment  to Third Term Note dated  September  1, 1998
                  made by CTI Industries Corporation to First American Bank.
 ****10.25        Revolving  Note in the sum of  $4,500,000  dated  September 1,
                  1998  made by CTI  Industries  Corporation  to First  American
                  Bank.
 ****10.26        Guaranty  dated  September  1, 1998,  by  Stephen M.  Merrick,
                  Howard W.  Schwan  and John H.  Schwan  for  benefit  of First
                  American Bank.
   **10.27        Form of Financial Advisory and Consulting Agreement.
*****10.28        Subscription  and  Loan  Agreement  dated  January  26,  1998,
                  between CTI  Industries  Corporation  and Pulidos & Terminados
                  Finos S.A. de C.V.
     11.1         Computation of Earnings Per Share - Annual
     21           Subsidiaries (incorporate  description  in  Form 10-KSB  under
                  Item No. 1)
     27           Financial Data Schedule

*        Incorporated  by  reference  to  Exhibit A  contained  in  Registrant's
         Schedule 14A Definitive  Proxy  Statement for  solicitation  of written
         consent of  shareholders,  as filed with the  Commission on October 25,
         1999.
**       Incorporated  by  reference  to  Exhibits,  contained  in  Registrant's
         Form   SB-2  Registration  Statement  (File  No.  333-31969)  effective
         November 5, 1997.
***      Incorporated by reference to Exhibit contained in Registrant's Schedule
         14A Definitive Proxy  Statement,  as filed with the Commission on March
         26, 1999.
****     Incorporated by reference to Exhibits  contained in  Registrant's  Form
         10KSB Annual Report, for the fiscal year ended October 31, 1998.
*****    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
-------------------

         The  following  report on Form 8-K was filed by the Company  during the
last quarter of fiscal 1999:

         (1)      On  August 8,  1999,  the  Company  filed a Report on Form 8-K
                  disclosing a change in the  Company's  certifying  accountant,
                  effective July 27, 1999.




                                       29
<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 14, 2000.


                                          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 14, 2000
--------------------------
Howard W. Schwan

 /s/ John H. Schwan              Chairman and Director         February 14, 2000
--------------------------
John H. Schwan

 /s/ Stephen M. Merrick          Chief Executive Officer,      February 14, 2000
--------------------------       Secretary, Chief Financial
Stephen M. Merrick               Officer and Director

 /s/ Stanley M. Brown            Director                      February 14, 2000
--------------------------
Stanley M. Brown

 /s/ Bret Tayne                  Director                      February 14, 2000
--------------------------
Bret Tayne
















                                       30
<PAGE>

CTI Industries Corporation and Subsidiaries

Table of Contents


                                                                     Page(s)

Report of Independent Accountants                                       F-1

Consolidated Financial Statements:

  Consolidated Balance Sheets as of
    October 31, 1998 and 1999                                        F-2 - F-3

  Consolidated Statements of Operations for
    years ended October 31, 1998 and 1999                               F-4

  Consolidated Statements of Stockholders'
    Equity for the years ended October 31,
    1998 and 1999                                                    F-5 - F-6

  Consolidated Statements of Cash Flows for
    the years ended October 31, 1998
    and 1999                                                            F-7

Notes to Consolidated Financial Statements                           F-8 - F-21




<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


Shareholders and   Board of Directors
CTI Industries Corporation

We have audited the accompanying balance sheet of CTI Industries Corporation and
Subsidiaries  as of October 31, 1999, and the related  statements of operations,
stockholders'  equity,  and cash flows for the year then ended.  These financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our  audit.  The  financial   statements  of  CTI  Industries   Corporation  and
Subsidiaries  as of and for the year ended  October 31,  1998,  were  audited by
other auditors  whose report dated  February 16, 1999,  expressed an unqualified
opinion on those statements.

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

In our opinion,  the 1999 financial statements referred to above present fairly,
in all material respects,  the financial position of CTI Industries  Corporation
and Subsidiaries as of October 31, 1999, and the results of their operations and
their cash flows for the year then ended, in conformity with generally  accepted
accounting principles.



GRANT THORNTON LLP
January 6, 2000







Report of Independent Accountants

To the Board of Directors and
Shareholders of CTI Industries Corporation

In our opinion,  the  accompanying  consolidated  balance  sheet and the related
consolidated  statement 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 the results
of their  operations  and their cash flows for the year then ended in conformity
with  accounting  principles  generally  accepted  in the United  States.  These
financial  statements are the  responsibility of the Company's  management,  our
responsibility  is to express an opinion on these financial  statements based on
our  audit.  We  conducted  our audit on 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 audit  provides a reasonable  basis for the opinion  expressed
above.

Pricewaterhouse Coopers LLP


Chicago,  Illinois  February 16, 1999, except for share and per share data which
is as of November 4, 1999







                                      F-1
<PAGE>


CTI Industries Corporation and Subsidiaries
Consolidated Balance Sheet
as of October 31, 1998 and October 31, 1999

                                                        1998            1999
                                                   ------------    ------------

                            ASSETS
Current assets:
  Cash                                             $    235,333    $    336,832
  Accounts receivable (less allowance for
    doubtful accounts of $132,211 and
    $186,251 at October 31, 1998 and 1999)            3,276,894       3,225,802
  Inventories                                         7,641,381       5,425,769
  Deferred tax assets                                   176,549         208,926
  Other                                               1,089,058         754,303
                                                   ------------    ------------

      Total current assets                           12,419,215       9,951,632

Property and equipment:
  Machinery and equipment                             6,812,069       9,752,302
  Building                                            3,503,801       3,643,675
  Office furniture and equipment                      1,556,742       1,588,382
  Land                                                  535,000         535,000
  Leasehold improvements                                161,885         161,885
  Fixtures and equipment at customer locations        1,907,358       2,031,919
  Projects under construction                         1,522,893         391,719
                                                   ------------    ------------
                                                     15,999,748      18,104,882
    Less :  accumulated depreciation                 (7,674,299)     (9,048,413)
                                                   ------------    ------------

      Total property and equipment, net               8,325,449       9,056,469

Other assets:
  Deferred financing costs, net                          44,383          29,165
  Investment in joint venture                            77,975            --
  Invesment in subsidiary                               879,800         809,773
  Note receivable                                       715,422         715,422
  Deferred tax assets                                   391,377         766,000
  Other assets                                             --           110,526
                                                   ------------    ------------

      Total other assets                              2,108,957       2,430,886
                                                   ------------    ------------

TOTAL ASSETS                                       $ 22,853,621    $ 21,438,987
                                                   ============    ============



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




                                      F-2
<PAGE>
CTI Industries  Corporation and  Subsidiaries
Consolidated  Balance Sheet
as of October 31, 1998 and October 31, 1999


                                                         1998          1999
                                                    ------------  ------------

             LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable                                  $  3,070,545  $  2,980,500
  Line of credit                                       4,178,246     3,574,023
  Notes payable - current portion                        817,569     1,367,070
  Accrued liabilities                                  1,039,742     1,399,689
                                                    ------------  ------------

      Total current liabiliites                        9,106,102     9,321,282

Long-term liabilities:
  Other liabilities                                         --          15,928
  Notes payable                                        5,280,692     5,534,876
  Subordinated debt                                      865,000       865,000
                                                    ------------  ------------

      Total long-term liabilities                      6,145,692     6,415,804

Redeemable common stock                                  413,406       413,406

Stockholders' equity:
  Common stock - $.195 par value,
    5,000,000 shares  authorized,
    966,327 shares issued, 911,944
    (October 31, 1998) and
    870,944 (October 31, 1999)
    shares outstanding                                   188,434       188,434
  Class B Common stock  - $2.73 par value,
    500,000 shares authorized,
    366,300 shares issued and outstanding              1,000,000     1,000,000
  Paid-in-capital                                      5,554,332     5,554,332
  Retained earnings (deficit)                          1,301,134      (481,136)
  Accumulated other comprehensive earnings                26,377        14,548
    Less:
      Treasury stock - 54,383
        (October 31, 1998) and 95,383
        (October 31, 1999) shares                       (407,294)     (513,121)
      Redeemable common stock                           (413,406)     (413,406)
      Stock subscription receivable                       (4,700)       (4,700)
      Notes receivable from stockholders                 (56,456)      (56,456)
                                                    ------------  ------------

      Total stockholders' equity                       7,188,421     5,288,495
                                                    ------------  ------------

TOTAL LIABILITIES & STOCKHOLDERS' EQUITY            $ 22,853,621  $ 21,438,987
                                                    ============  ============



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




                                       F-3
<PAGE>

CTI Industries Corporation and Subsidiaries
Consolidated Statements of Operations
for the years ended October 31, 1998 and 1999


                                                      1998            1999
                                                 ------------    ------------

Net Sales                                        $ 19,952,823    $ 18,606,414

Cost of Sales                                      12,706,460      13,670,402
                                                 ------------    ------------

      Gross profit on sales                         7,246,363       4,936,012

Operating expenses:
  Administrative                                    2,352,959       2,349,531
  Selling                                           2,586,798       2,448,276
  Advertising and marketing                         1,805,603       1,503,819
                                                 ------------    ------------

      Total operating expenses                      6,745,360       6,301,626
                                                 ------------    ------------

Income (loss) from operations                         501,003      (1,365,614)

Other income (expense):
  Interest expense                                   (765,425)       (942,301)
  Interest income                                     161,201          91,899
  Other                                               285,094          54,495
                                                 ------------    ------------

      Total other expense                            (319,130)       (795,907)
                                                 ------------    ------------

Income (loss) before income taxes                     181,873      (2,161,521)

Income tax expense (benefit)                           60,013        (379,251)
                                                 ------------    ------------

      Net income  (loss)                         $    121,860    $ (1,782,270)
                                                 ============    ============

Income (loss) applicable to common shares        $    121,860    $ (1,782,270)
                                                 ============    ============

Basic income (loss) per common
      and common equivalent shares               $       0.10    $      (1.40)
                                                 ============    ============

Diluted income (loss) per common
      and common equivalent shares               $       0.09    $      (1.40)
                                                 ============    ============

Weighted average number of shares
      and equivalent shares of
       common stock outstanding:
          Basic                                     1,266,003       1,269,984
                                                 ============    ============

          Diluted                                   1,373,789       1,269,984
                                                 ============    ============



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




                                      F-4
<PAGE>

CTI Industries Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
for the years ended October 31, 1998 and 1999

<TABLE>
<CAPTION>

                                          Common Stock         Class B Common Stock      Paid-in          Preferred Stock
                                          ------------         --------------------      -------          ---------------
                                      Shares       Amount       Shares      Amount       Capital        Shares       Amount
                                      ------       ------       ------      ------       -------        ------       ------
<S>                                   <C>           <C>                     <C>         <C>            <C>         <C>
Balance, November 1, 1997             384,861       $ 75,048       -        $   -       $ 248,348      1,098,901   $1,063,917

Conversion of preferred
  stock into Class B common                                     366,300   $1,000,000                  (1,098,901)  (1,063,917)

Issuance of common stock              575,000        112,125                            5,289,594

Common stock warrants
  exercised                             6,466          1,261                               16,390

Acquisition of
  treasury stock

Notes receivable from
  stockholders

Net income

Other comprehensive income
  Foreign currency transalation

    Total comprehensive income


                                      -------       --------    -------   ----------    -----------   --------     --------
Balance, October 31, 1998             966,327       $188,434    366,300   $1,000,000    $ 5,554,332         -     $     -

</TABLE>


<PAGE>

CTI Industries Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity, Continued
for the years ended October 31, 1998 and 1999



<TABLE>
<CAPTION>

                                             Accumulated
                                               Other                             Less
                                 Retained   Comprehensive   Treasury Stock     Redeemable     Stock    Notes Recvble
                                 Earnings     Earnings      Shares   Amount   Common Stock Sub Recvble  Shareholders    TOTAL
                                 --------     --------      ------   ------   ------------ -----------  ------------    -----
<S>                             <C>           <C>           <C>    <C>        <C>         <C>            <C>         <C>
Balance, November 1, 1997       $1,179,274    $  51,036     48,127 ($370,700) ($ 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 warrants
  exercised                                                                                                           $    17,651

Acquisition of
  treasury stock                                             6,256   (36,594)      36,594                             $       -

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

Net income                         121,860                                                                            $   121,860

Other comprehensive income
  Foreign currency transalation                 (24,659)                                                              $   (24,659)
                                                                                                                      ------------
    Total comprehensive income                                                                                             97,201
                                                                                                                      ------------


                                ----------    ---------     ------  --------   ----------   ---------    ----------   ------------
Balance, October 31, 1998       $1,301,134    $  26,377     54,383 ($407,294) ($  413,406) ($   4,700)  ($   56,456)  $ 7,188,421


</TABLE>




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


                                       F-5




<PAGE>

CTI Industries Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity, Continued
for the years ended October 31, 1998 and 1999

<TABLE>
<CAPTION>

                                             Common Stock          Class B Common Stock       Paid-in          Preferred Stock
                                             ------------          --------------------       -------          ---------------
                                          Shares       Amount      Shares       Amount        Capital       Shares        Amount
                                          ------       ------      ------       ------        -------       ------        ------
<S>                                      <C>         <C>           <C>        <C>           <C>                        <C>
Balance, November 1, 1998                966,327     $ 188,434     366,300     $1,000,000   $5,554,332         -       $     -


Acquisition of treasury
  stock on open market

Net income

 Other comprehensive income
  Foreign currenty translation


    Total comprehensive income

                                         -------     ---------     -------     ----------   ----------      ------     ---------
Balance, October 31, 1999                966,327     $ 188,434     366,300     $1,000,000   $5,554,332         -       $     -
                                         =======     =========     =======     ==========   ==========      ======     =========
</TABLE>


<PAGE>

CTI Industries Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity, Continued
for the years ended October 31, 1998 and 1999


<TABLE>
<CAPTION>
                                             Accumulated
                                                Other         Treasury Stock     Less
                                  Retained  Comprehensive     --------------   Redeemable     Stock    Notes Recvble
                                  Earnings     Earnings    Shares    Amount   Common Stock Sub Recvble Shareholders      TOTAL
                                  --------     --------    ------    ------   ------------ ----------- ------------      -----
<S>                              <C>          <C>          <C>     <C>        <C>          <C>          <C>          <C>
Balance, November 1, 1998        $1,301,134   $  26,377    54,383  ($407,294) ($  413,406) ($  4,700)   ($  56,456)  $ 7,188,421


Acquisition of treasury                                    41,000   (105,827)                                        $  (105,827)
  stock on open market

Net (loss)                       (1,782,270)                                                                         $(1,782,270)

 Other comprehensive income
  Foreign currenty translation                  (11,829)                                                             $   (11,829)
                                                                                                                     -----------
    Total comprehensive income                                                                                       $(1,794,099)
                                                                                                                     -----------

                                 ----------   ---------    ------  ---------  -----------  ---------    ----------   ------------
Balance, October 31, 1999        $ (481,136)  $  14,548    95,383  ($513,121) ($  413,406) ($  4,700)   ($  56,456)  $ 5,288,495
                                 ==========   =========    ======  =========  ===========  =========    ==========   ============

</TABLE>




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



                                       F-6
<PAGE>

CTI Industries Corporation and Subsidiaries
Consolidated Statements of Cash Flows
for the years ended October 31, 1998 and 1999

<TABLE>
<CAPTION>
                                                                     1998            1999
                                                                ------------    ------------
<S>                                                             <C>             <C>
Cash flows from operating activities:
  Net income (loss)                                             $    121,860    $ (1,782,270)
  Adjustment to reconcile net income (loss) to cash
      provided by (used in) operating activities:
    Depreciation and amortization                                    835,439       1,381,663
    Equity in loss of subsidiary and joint venture                     9,466         115,360
    Provision for losses on accounts receivable & inventory          371,569         332,988
    Deferred income taxes                                             27,963        (407,000)
    Change in assets and liabilities:
      Accounts receivable                                           (305,645)       (114,240)
      Inventory                                                   (2,864,641)      2,199,461
      Other assets                                                   (96,795)        403,418
      Accounts payable and accrued expenses                         (483,351)         62,630
                                                                ------------    ------------

          Net cash provided by (used in) operating activities     (2,384,135)      2,192,010

Cash flows from investing activities:
  Purchases of property and equipment                             (5,254,065)     (2,052,777)
  Investment in and advances to P&TF                              (1,419,318)        (45,515)
  Investment in joint venture                                         (1,529)           --
  Acquisition of CTF International                                      --           (74,024)
                                                                ------------    ------------

          Net cash used in investing acitivites                   (6,674,912)     (2,172,316)

Cash flows from financing activities:
  Stock redemption contract payments                                 (30,533)           --
  Advances on line of credit                                      19,235,217      17,299,183
  Repayments on line of credit                                   (18,074,747)    (17,903,406)
  Proceeds from issuance of long-term debt                         4,158,959       1,202,281
  Proceeds from issuance of short-term debt                          850,000         570,000
  Repayment of long-term debt                                     (1,525,946)       (778,597)
  Repayment of short-term debt                                      (850,000)       (190,000)
  Proceeds from issuance of common stock                           5,401,719            --
  Proceeds from warrants exercised                                    17,650            --
  Purchase of treasury stock                                         (36,594)       (105,827)
  Dividends paid                                                     (63,917)           --
                                                                ------------    ------------

          Net cash provided by financing activities                9,081,808          93,634

Effect of exchange rate changes on cash                              (24,658)        (11,829)
                                                                ------------    ------------

Net increase (decrease) in cash                                       (1,897)        101,499

Cash and Equivalents at Beginning of Period                          237,230         235,333
                                                                ------------    ------------

Cash and Equivalents at End of Period                           $    235,333    $    336,832
                                                                ============    ============

Supplemental disclosures:
    Cash paid for interest                                      $    750,565    $    905,218

    Cash paid for income taxes                                  $    215,000    $       --

Noncash financing activities:
    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-7


<PAGE>

CTI Industries Corporation and Subsidiaries

Notes to Consolidated Financial Statements



1.       Nature of Operations

CTI Industries  Corporation (the "Company"),  its United Kingdom subsidiary (CTI
Balloons  Limited),  and Mexican  subsidiary  (CTF  International  S.A. de C.V.)
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  subsidiaries  CTI  Balloons  Limited and CTF
International   S.A.  de  C.V.  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 separate 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 - 30 years
         Machinery and equipment                      3 - 15 years
         Office furniture and equipment               5 - 8  years
         Leasehold improvements                       5 - 8  years
         Fixtures and equipment at
             customer locations                       1 - 3  years

Depreciation expense was $823,151 and $1,366,446 for the years ended October 31,
1998 and 1999, respectively.

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  $12,288  and $15,217 for the years ended  October 31,
1998 and 1999 respectively.




                                      F-8
<PAGE>

CTI Industries Corporation and Subsidiaries

Notes to Consolidated Financial Statements, Continued



2.  Summary of Significant Accounting Policies, continued

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,  1999,  the
Company had two  customers  that  accounted for  approximately  16.2% and 14.3%,
respectively,   of  consolidated   net  sales.   Corresponding   percentages  of
consolidated  net sales  generated by these customers for the year ended October
31, 1998, were approximately 15.2% and 11.1%, respectively. At October 31, 1999,
the outstanding  accounts  receivable balances due from these two customers were
$447,944 and $916,665, 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.

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.





                                      F-9
<PAGE>

CTI Industries Corporation and Subsidiaries

Notes to Consolidated Financial Statements, Continued


2. Summary of Significant Accounting Policies, continued

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, 1998     October 31, 1999
     Raw materials                      $  223,530           $  384,880
     Work in process                       874,994              810,803
     Finished goods                      6,542,857            4,230,086
                                        ----------           ----------
       Total inventory                  $7,641,381           $5,425,769
                                        ==========           ==========

4.       Line of Credit

The Company has a bank line of credit,  due June 1, 2000,  which  provides for a
maximum  borrowing  limit of  $4,500,000,  of which  $321,754  and  $925,977 was
available at October 31, 1998 and 1999, 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 8.0% and
8.25% at  October  31,  1998 and  1999,  respectively).  The line of  credit  is
collateralized  by all  assets  of the  Company.  The line of  credit  agreement
contains,  among other provisions,  certain financial convenants relating to the
maintenance of tangible net worth and the ratio of debt to equity.







                                      F-10
<PAGE>

CTI Industries Corporation and Subsidiaries

Notes to Consolidated Financial Statements, Continued



5.       Notes Payable


<TABLE>
<CAPTION>

Long-term debt at October 31, 1999 consists of:
<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.                                                                        $  1,222,072

   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.                                                                           2,038,218

   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.                                                                           1,958,559

   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.                                                                           1,241,912

   Fifth Term  Loan,  payable in monthly  installments  of  $190,000  plus
   interest at prime plus 1%, due December,  1999.  Collateralized  by all
   assets of the Company.                                                                   380,000

   Installment  Loan,  payable in monthly  installments  of $565 including
   interest at 7.99% due March, 2000. Collateralized by company vehicle.                      2,754

   Installment Loan,  payable in monthly  installments of $3,633 including
   interest at 8.25% due May, 2001. Collateralized by equipment.                             58,431
                                                                                       ------------

       Total                                                                              6,901,946

   Less current portion                                                                  (1,367,070)
                                                                                       ------------

       Total long-term debt                                                            $  5,534,876
                                                                                       ============
</TABLE>

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

                 2000                                 $   1,367,070
                 2001                                     2,937,155
                 2002                                       811,627
                 2003                                     1,670,057
                 2004                                       116,037
                                                      -------------

                                                      $   6,901,946
                                                      =============




                                      F-11
<PAGE>

CTI Industries Corporation and Subsidiaries

Notes to Consolidated Financial Statements, Continued


5. Notes Payable, continued

The  loan  agreements  contain,   among  other  provisions,   certain  financial
convenants  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 contain a clause allowing for the subjective  accumulation of
amounts  due under the loan  agreements.  The  Company  received a waiver of the
tangible net worth and the ratio of debt to equity  covenants  which enabled the
Company  to  comply  with the loan  agreement  covenant  at  October  31,  1999.
Borrowings  under the line of credit (Note 4) and the above 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 111,111  shares of Common  Stock  owned by the  shareholder  at the
price of $5.85 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
$5.85 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 that 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 $5.85 per  share,  provided  total  number of shares  subject to
redemption  under  the  Stock  Redemption  Agreement  does not  exceed  111,111.
Redeemable  Common Stock has been  reflected as a liability with a contra equity
account on the balance  sheet.  As of October 31, 1999,  40,444 shares of Common
Stock have been redeemed under the Stock Redemption Agreement.

7.       Income Taxes

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

                                              1998         1999

Current:
  Federal                                  $    --      $    --
  State                                       32,208         --
  Foreign                                       --         27,749
                                           ---------    ---------
                                              32,208       27,749

Deferred:
  Federal                                     22,672     (354,800)
  State                                        5,133      (52,200)
                                           ---------    ---------

                                              27,805     (407,700)
                                           ---------    ---------

    Total income tax provision (benefit)   $  60,013    $(379,251)
                                           =========    =========





                                      F-12
<PAGE>

CTI Industries Corporation and Subsidiaries

Notes to Consolidated Financial Statements, Continued


7. Income Taxes, continued

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

                                                      1998          1999

Deferred tax assets:
  Accounts receivable allowance                  $    50,349   $    84,000
  Inventory valuation                                 56,784        74,300
  Accrued liabilities                                 49,979        50,873
  Net operating loss carryforwards                   695,062     1,465,600
  Alternative minimum tax credit carryforwards       338,612       338,612
                                                 -----------   -----------

   Total deferred tax assets                       1,190,786     2,013,385

Deferred tax liabilities:
  Book over tax basis of capital assets              622,859       638,459
                                                 -----------   -----------

                                                     567,927     1,374,926

Less:  Valuation allowance                              --        (400,000)
                                                 -----------   -----------

    Net deferred tax asset                       $   567,927   $   974,926
                                                 ===========   ===========

At October 31, 1999, the Company  maintained a valuation  allowance with respect
to deferred tax assets as a result of the  uncertainty of ultimate  realization.
At October 31, 1998 and 1999 the Company has net  operating  loss  carryforwards
for tax purposes of approximately  $1,800,000 and $3,718,000.  The carryforwards
expire in the years 2011 and 2014.  In addition,  the Company has  approximately
$339,000  of  alternative  minimum  tax  credits as of October 31, 1998 and 1999
which have no expiration date.  Unremitted earnings of foreign subsidiaries have
been indefinitely reinvested.

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

                                        1998         1999

Taxes at statutory rate              $  61,838    $(735,000)
State income taxes                       3,388     (104,000)
Foreign taxes paid                      32,208       27,749
Foreign income                         (51,194)        --
Changes in deferred
  valuation allowance                     --        400,000
Other                                   13,773       32,000
                                     ---------    ---------

    Income tax provision (benefit)   $  60,013    $(379,251)
                                     =========    =========

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,  1998 and 1999,  the Company
estimates that the total amount spent on research and development activities was
approximately $252,000 and $257,000, respectively.




                                      F-13
<PAGE>

CTI Industries Corporation and Subsidiaries

Notes to Consolidated Financial Statements, Continued


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 date 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
$58,188 and $62,506 for the years ended October 31, 1998 and 1999, respectively.
The total other expense charged to operations  relating to this plan amounted to
$9,995 and $5,138 for the years ended October 31, 1998 and 1999, respectively.

10.      Related Party Transactions

The Company obtains legal services from law firms in which several  shareholders
of the law  firms  are  also  shareholders  of the  Company,  and in  which  one
shareholder  of the  law  firms  is both a  director  and a  shareholder  of the
Company. Legal fees incurred with these firms were $195,200 and $101,014 for the
years ended October 31, 1998 and 1999.

The Company purchases packaging materials from entities in which shareholders of
the Company maintain an ownership interest. Purchases from these affiliates were
$458,347 and $251,203 for the years ended October 31, 1998 and 1999.

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, 1999.

11.      Joint Venture

Effective September 16, 1996, the Company entered into a joint venture agreement
with a manufacturer in Mexico. The joint venture, CTF International,  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  accounted  for its  proportionate  share of income or loss using the equity
method.   In  July  1999,  the  Company   acquired  the  remaining  50%  of  CTF
International for $40,000.

12.      Investment in Subsidiary

On January 26,  1998,  the Company and Pulidos Y  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-14
<PAGE>

CTI Industries Corporation and Subsidiaries

Notes to Consolidated Financial Statements, Continued


13.      Commitments and Contingencies

Operating Leases

The Company leases certain  production  facilities under a noncancellable  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  office  equipment  under  operating  leases which expire on
various dates between November 1999 and April 2004.

The net rent expense of all lease  payments was $115,519 in 1998 and $109,056 in
1999.

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

                                Lease payments    Sublease Income        Net

         2000                   $   151,666        $    42,696      $   108,970
         2001                       106,102               --            106,102
         2002                        93,408               --             93,408
         2003                        69,833               --             69,833
         2004                        60,767               --             60,767
         Thereafter                 775,500               --            775,500

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:

                               2000                                $   735,155
                               2001                                    783,676
                               2002                                    132,085













                                      F-15
<PAGE>

CTI Industries Corporation and Subsidiaries

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  366,300  shares  of  Class B  Common  Stock.  The
conversion  was  effective  upon the  closing of an initial  public  offering of
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.      Public Offering of Securities

In November of 1997,  the Company  issued  500,000 shares of Common Stock to the
public at $12.00 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 75,000 additional
shares of Common  Stock to the  public at $12.00  per  share.  The  underwriting
discount and commissions against the sale were $117,000 with the net proceeds to
the Company amounting to $783,000.

16.      Stock Options

On March 19, 1999, the Board of Directors  approved for adoption,  effective May
6, 1999, the 1999 Stock Option Plan ("Plan").  The Plan  authorizes the grant of
options to purchase up to an aggregate of 133,333 shares of the Company's Common
Stock.  As of October 31, 1999, no options had been granted under the 1999 Stock
Option Plan.














                                      F-16
<PAGE>

CTI Industries Corporation and Subsidiaries

Notes to Consolidated Financial Statements, Continued


16. Stock Options, continued

Under the Company's 1997 Stock Option Plan  (effective July 1, 1997), a total of
100,000  shares of Common Stock are reserved for issuance under the Stock Option
Plan.  Options to purchase 99,667 shares of Common Stock have been granted as of
October 31, 1998 and 1999. 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 10,000 shares of the
Company's  Common  Stock at an  exercise  price of $7.50 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  76,923  shares of the Company's  Common Stock at an exercise  price of
$2.73 per share in consideration  of their  facilitating and guaranteeing a bank
loan to the Company in the amount of $6.3  million.  The warrants 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 92,415 shares of
the Company's Common Stock at an exercise price of $9.36 per share. The warrants
have a term of five years.

In September,  1999,  warrants to purchase 16,026 shares of the Company's Common
Stock at an exercise  price of $9.36 per share were cancelled and reissued at an
exercise price of $1.69 per share.





                                      F-17
<PAGE>

CTI Industries Corporation and Subsidiaries

Notes to Consolidated Financial Statements, Continued


16. 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,  1998,  and 1999,
respectively.

                                                 1998        1999

Outstanding, beginning of period               209,671     272,539
Granted                                         70,667      16,026
Exercised                                       (6,466)       --
Cancelled                                       (1,333)    (17,360)
                                              --------    --------

Outstanding at the end of period               272,539     271,205
                                              ========    ========

Weighted average exercise price per share     $   7.00    $   6.54
                                              ========    ========

Exercisable at end of period                   272,539     271,205
                                              ========    ========

Available for grant at end of period               333     133,666
                                              ========    ========

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-18
<PAGE>

CTI Industries Corporation and Subsidiaries

Notes to Consolidated Financial Statements, Continued


16. 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:

                                       1998

     Net income (loss)             $    122
                                        (89)

     EPS                           $   0.03
                                      (0.02)

The pro forma effect of compensation  cost based on the fair value method of the
warrants issued in 1999 was not significant.

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:

                                             1998         1999

          Expected life (years)                 5         3.75
          Volatility                           20%          20%
          Risk-free interest rate             5.0%         6.0%
          Dividend yield                       -            -


The  weighted  average  fair value of options  granted  during the years  ending
October 31, 1998 and 1999 was $1,00 and $0.44 per share, respectively.

Significant  option and  warrant  groups  outstanding  at October  31,  1999 and
related weighted average price and remaining life information are as follows:

                                                                  Remaining Life
  Grant Date        Outstanding   Exercisable    Exercise Price      (Years)

September 1998         70,667        70,667          $ 7.78             8
September 1997         37,666        37,666          $ 7.70             7
June 1997              76,389        76,389          $ 9.36             3
September 1999         16,026        16,026          $ 1.69             3
December 1996          70,457        70,457          $ 2.73             2


17.      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.






                                      F-19
<PAGE>

CTI Industries Corporation and Subsidiaries

Notes to Consolidated Financial Statements, Continued


17. Earnings Per Share, continued

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

Earnings per share for each of the two fiscal years in the period ended  October
31, 1999 was computed as follows:

<TABLE>
<CAPTION>
                                              Year Ended                  Year Ended
                                           October 31, 1998            October 31, 1999
                                      -------------------------   --------------------------
                                          Basic        Diluted        Basic        Diluted
<S>                                     <C>           <C>           <C>            <C>
Average shares outstanding:
  Weighted average shares
    outstanding                         1,266,003     1,266,003     1,269,984      1,269,984
  Common stock equivalents
    (options/warrants)                       --         107,786          --             --
                                      -----------   -----------   -----------    -----------

                                        1,266,003     1,373,789     1,269,984      1,269,984

Earnings:
  Net income (loss)                   $   121,860   $   121,860   $(1,782,270)   $(1,782,270)
  Dividends applicable to
    Redeemable Preferred stock               --            --            --             --
                                      -----------   -----------   -----------    -----------

Income (loss) available to
    common stockholders               $   121,860   $   121,860   $(1,782,270)   $(1,782,270)
                                      ===========   ===========   ===========    ===========

Net earnings (loss)applicable
    to common shares                  $      0.10   $      0.09   $     (1.40)   $     (1.40)
                                      ===========   ===========   ===========    ===========
</TABLE>


18.      Future Adoption of Recently Issued Accounting Standards

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,  as amended by
SFAS No. 137, is  effective  for fiscal  years  beginning  after June 15,  2000.
Management has not determined what impact this standard, when adopted, will have
on the Company's financial statements.








                                      F-20
<PAGE>

CTI Industries Corporation and Subsidiaries

Notes to Consolidated Financial Statements, Continued



19.      Geographic Segment Data

The  Company's   operations   consist  of  a  business  segment  which  designs,
manufactures,  and distributes  balloon products.  Transfers between  geographic
areas were primarily at cost. The Company's  subsidiaries have assets consisting
primarily  of trade  accounts  receivable  and  inventory.  Sales  and  selected
financial  information  by geographic  area for the years ended October 31, 1998
and 1999 are as follows:
<TABLE>
<CAPTION>

                                             United States   United Kingdom       Mexico    Eliminations    Consolidated
1998
<S>                                           <C>             <C>            <C>             <C>             <C>
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

1999
Revenues                                      $ 17,388,540    $  1,826,874   $    437,410    $ (1,046,410)   $ 18,606,414
Operating income                                (1,481,723)        130,829        (14,720)           --        (1,365,614)
Net income                                      (1,874,456)        108,622        (16,436)           --        (1,782,270)
Total Assets                                    20,677,206         839,891        412,262    $   (490,372)   $ 21,438,987
</TABLE>


20.      Fourth Quarter Adjustments

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.


21.      Subsequent Events

On November 4, 1999, a one-for-three  reverse stock split became effective.  The
information presented in these financial statements has been restated to reflect
the effect of the reverse split.

On  November  12,  1999,  the  Company  entered  into an  agreement  to  acquire
additional shares of PTF Industrias S.A. de C.V.,  bringing the Company's common
stock  ownership to 72%. The Company  contributed  to the capital of PTF certain
outstanding  indebtedness  of PTF to the company in the amount of  approximately
$975,000,  and certain equipment valued in total at approximately  $745,000,  in
exchange for capital stock of PTF.

In November  1999,  1997 warrants  issued to purchase up to 76,388 shares of the
Company's common stock for $9.36 were cancelled.  New warrants to purchase up to
423,579  shares of the  Company's  common stock at $1.688 per share were issued.
The new warrants have a term of five years.








                                      F-21