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, 1997
                             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. EmployerIdentification Number)
  incorporation or organization)


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


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

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


                                                   Name of each exchange
          Title of Class                            on which registered:
          --------------                            --------------------

    Common Stock, .065 par value                   NASDAQ SmallCap Market


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


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

         The  Registrant's  revenues for the fiscal year ended October 31, 1997,
were $16,431,000.

         Based upon the closing price of $5.625 per share of Registrant's Common
Stock as reported on NASDAQ  SmallCap  Market at January 15, 1998, the aggregate
market value of the voting stock held by  non-affiliates  of the  Registrant was
then   approximately   $11,586,420.   (Determination   of  stock   ownership  by
non-affiliates was made solely for the purpose of responding to the requirements
of the Form and the Registrant is not bound by this  determination for any other
purpose).

         The number of shares of the Registrant's Common Stock outstanding as of
January 15, 1998 was  2,735,202  (excluding  treasury  shares) and the number of
shares of Class B Common Stock outstanding as of that date was 1,098,901.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Portions of Registrant's Proxy Statement for the 1998 Annual Meeting of
Stockholders  to be filed  with  the  Commission  within  120 days of the end of
Registrant's last fiscal year is incorporated by reference into Part III.

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



PART I

Item No. 1        Description of Business

Background.

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

         In  March  and  May of  1996,  a group  of  investors  made  an  equity
investment  of  $1,000,000  in the  Company  in return for  1,098,901  shares of
Preferred Stock,  $.91 par value.  Each share of Preferred Stock was entitled to
an annual cumulative  dividend of 13% of the purchase price, and was convertible
into one share of Common Stock. The shares of Preferred Stock, voting separately
as a class, were entitled to elect four of the Company's  directors.  Members of
such investment  group included Howard W. Schwan,  John H. Schwan and Stephen M.
Merrick, current members of management.

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


Business Overview

         The  Company is one of the leading  manufacturers  and sellers of mylar
balloons  in the world.  The  Company  also sells  latex  balloons,  novelty and
"message" items, such as mugs and banners, and toy products,  such as inflatable
masks, punch balls and water bombs, and produces laminated and

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specialty  films for food  packaging and other  commercial  uses.  The Company's
products  are sold  throughout  the United  States  and in 30 foreign  countries
through a wide variety of retail outlets including grocery,  general merchandise
and  drugstore  chains,  such as Eckerd  Drug  Stores and Safeway and Winn Dixie
grocery  chains,  card and gift shops,  such as Hallmark and Factory Card Outlet
stores, and party goods stores,  such as Party City, as well as through florists
and balloon decorators.

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

         The Company is a fully  integrated  designer  and  manufacturer  of its
mylar balloon product line. The Company is a party to a long term agreement with
a  Mexican  manufacturer  under  which  a  broad  line  of  latex  balloons  are
manufactured for the Company. The Company has recently entered into an agreement
with the  Mexican  supplier  whereby the Company has agreed to acquire an equity
interest in and has made loans to the Mexican  firm.  The Company  thereby has a
competitive  source of supply of quality latex balloon products which it markets
with its mylar  balloon line.  The Company has also  established a joint venture
with this  Mexican  manufacturer  for the  packaging  of  balloon  products  and
printing of latex balloons.

The Industry

         The mylar  balloon came into  existence  in the late 1970s.  During the
1980s,  the market for mylar balloons grew rapidly.  Initially,  the product was
sold  principally  to  individual  vendors,  small retail  outlets and at fairs,
amusement parks,  shopping  centers and other outdoor  facilities and functions.
Because of its  ability to remain  buoyant for a long period of time when filled
with helium and its  facility for the  printing of graphics  and  messages,  the
product has  significant  appeal as a novelty and message item.  Mylar  balloons
became part of the "social  expression"  industry,  carrying  graphics  designs,
characters and messages like greeting cards.  In the mid-1980s,  the Company and
other  participants in the market began  licensing  character and cartoon images
for printing on the  balloons  and directed  marketing of the balloons to retail
outlets including grocery,  general  merchandise and drug store chains, card and
gift shops, party goods stores as well as florists and balloon decorators.

         The  Company  estimates  that the  wholesale  world  market  for  mylar
balloons is  approximately  $120 million.  Mylar balloons are sold in the United
States and in Europe, several countries in the

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

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

         There are three separate latex balloon product lines:  (i) high quality
decorator  balloons,  (ii) standard novelty balloons and (iii) printed balloons.
The high quality  decorator  balloons are generally sold to and through  balloon
decorators  and are generally of higher quality and price than the standard line
of  balloons.  The  standard  line of balloons  is sold widely in retail  stores
including many of the same outlets as mylar balloons. Printed latex balloons are
sold both in retail outlets and for balloon decoration purposes including floral
designs.

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

Products

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

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

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

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

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


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

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

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

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

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

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


         In addition to size and shape,  a  principal  element of the  Company's
mylar  balloon  products  is the  printed  design or  message  contained  on the
balloon. These designs include figures and licensed characters many of which are
well-known licensed  characters.  The Company maintains licenses for Peanuts(R),
Garfield(R),  Precious Moments(R), Hallmark, Ziggy(R), Grimmy(R),  Elephantz(R),
Paddington(R),  Face-Offs(R),  Gibson  Greetings(R),  Postman Pat(R) and several
others. See "Patent, Trademarks and Copyrights" below.

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

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

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

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



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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
13 individuals and a customer  service  department of 16  individuals.  European
sales are conducted by CTI Balloons,  the Company's subsidiary located in Rugby,
England.  Sales in other foreign countries are made generally to distributors in
those countries and are managed at the Company's principal offices.

         The Company sells and  distributes its products  principally  through a
network of over 350 distributors and wholesalers  situated throughout the United
States and in a number of foreign countries.  These distributors and wholesalers
are engaged  principally in the sale of balloons and related products (including
such items as plush toys,  mugs,  containers,  floral supplies and other items).
These distributors and wholesalers,  in turn, sell balloons and related products
to retail outlets including grocery,  general merchandise and drug store chains,
card  and gift  shops,  party  goods  stores  as well as  florists  and  balloon
decorators. While the Company will continue to focus on the core U.S. market, it
will also seek to exploit other world markets such as Europe and South  America.
No  distributor  or other  customer  accounts for more than 10% of the Company's
sales revenues. Most sales are on an individual order basis.

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

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

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

         The  Company  engages  in a  variety  of  advertising  and  promotional
activities to promote the sale of its balloon  products.  Each year, the Company
produces a complete catalogue of its balloon products, and also prepares various
flyers and brochures for special or seasonal products, which are disseminated to
thousands of customers, potential customers and others. The Company participates
in numerous trade shows for the gift, novelty,  balloon and other industries and
advertises in a number of trade and other publications. The Company also attends
licensing shows for the purpose of seeking out additional design licenses.



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


Manufacturing

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

         The Company  owns and  operates  graphic  machinery  at its facility in
Barrington,  Illinois that is used for the printing of films for mylar  balloons
and for printed and laminated  films. The Company's use of water-based ink makes
its printed  films  attractive  to food  processors  for the  packaging of their
products.  At the  Barrington  facility,  the  Company  also  owns and  operates
laminating machines.

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

         The Barrington  facility also includes a computerized  customer service
department which receives and fulfills over 50,000 orders annually.

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

         P&TF  has  experienced  financial  difficulties  and  in  1995,  sought
protection  from  creditors in a  "Suspension  of Payment"  proceeding in Mexico
similar,  but not identical to, a reorganization  under U.S. bankruptcy laws. In
the event of the loss of P&TF as a supplier,  there can be no assurance that the
Company  will be able to obtain  an  alternative  source of supply on  favorable
terms or at all. The Company  believes it has an  opportunity  to further secure
its source of supply by providing  necessary funding to P&TF. In July, 1997, the
Company entered into an Agreement with P&TF whereby it agreed to subscribe for a
note of P&TF in the principal amount of U.S.$1,200,000 and an option to purchase
a portion of P&TF's capital stock. On January 26, 1998, the Company and

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P&TF entered into an agreement which supersedes the July, 1997 agreement.  Under
the new agreement, (i) the Company subscribed for 45% of the outstanding capital
stock of P&TF for $800,000, (ii) the Company loaned to P&TF $850,000, which loan
is secured 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 equipment is now owned by
CTI and leased to P&TF.  The  purchase  of the capital  stock will be  effective
February 1, 1998,  and the purchase  price for the capital stock will be paid by
(i)  applying $400,000 of advances made to P&TF prior to closing and (ii) a cash
payment for the balance.  The  $400,000  debt owing to the Company from the 1995
acquisition was  extinguished as a result of the cancellation of the sale of the
two pieces of equipment to P&TF. The Company's  obligations  were subject to the
termination  of P&TF's  Suspension  of  Payment  proceeding  and the  payment or
settlement of P&TF's current bank debt. The Company  believes this  relationship
provides the Company with a competitive advantage over its competition.

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

         CTF  International.  In September,  1996,  the Company and P&TF entered
into a joint  venture  agreement  to organize and operate CTF  International,  a
Mexican corporation. The joint venture is owned equally by the Company and P&TF.
CTF leases a facility of 15,000 square feet in Guadalajara,  Mexico. CTF engages
in the  packaging  of balloons  for the Company and P&TF and in the  printing of
latex  balloons.  The Company  believes it can  achieve  significant  savings in
overhead,  labor and other  operating  costs  through the  operation  of CTF and
expects CTF to be an independent profit center.


Competition

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

         There are at least seven manufacturers of latex balloons whose products
are sold in the United States  including  Globus  Occidental,  Pioneer  Balloon,
National  Latex,  Maple City,  Tilco and P&TF. The market for film packaging and
custom  products is  fragmented,  and  competition  in this area is difficult to
gauge.  However,  there are numerous participants in this market and the Company
can expect to experience intense quality and price competition.

         Many of these  Companies offer products and services which are the same
or similar to those offered by the Company and the Company's  ability to compete
depends on many factors  within and outside its  control.  There are a number of
well-established  competitors in each of the Company's product lines, several of
which possess substantially greater financial, marketing and technical

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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. The Company has held a license on Peanuts(R) characters for over 11 years,
on Garfield(R) for more than 10 years and on Hallmark designs for  approximately
10 years.

         Trademarks.  The Company is the owner of over 23 registered  trademarks
in the United States  relating to its  products.  Many of these  trademarks  are
registered in foreign countries, principally in the European Community.

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


Research and Development

         The Company maintains a product  development and research department of
six  individuals  for the  development  or  identification  of new  balloons and
related  products,  product  components  and  sources  of supply.  Research  and
development includes (i) creative product development,  (ii) creative marketing,
and (iii)  engineering  development.  During  fiscal  years  1996 and 1997,  the
Company  estimates  that the total  amount  spent on  research  and  development
activities was approximately $201,000 and $238,000, respectively.


Employees

         As of October 31, 1997, the Company had 161 full-time  employees in the
United States, of whom 9 are executive or supervisory,  24 are in sales, 120 are
in  manufacturing  and 8 are clerical.  As of that same date, the Company had 11
full time employees in England, of whom 2 are executive or supervisory, 3 are in
sales, 5 are in warehousing and 1 are clerical. The Company is not a party


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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.

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

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


Item No. 3        Legal Proceedings

Not Applicable.


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

Not Applicable.


PART II

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

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


                                        9
<PAGE>



the Company's  Class B Common Stock which is convertible  into Common Stock on a
share per share basis.

         As of January 15, 1998, there was approximately 27 holders of record of
the Company's Common Stock and 2 holders of record of Class B Common Stock.

         The Company has never paid any  dividends  on its Common Stock and does
not  currently  intend to pay  dividends on its Common Stock in the  foreseeable
future.  The Company currently intends to retain all its earnings to finance the
development  and expansion of its business.  Under the terms of its current loan
agreement,  the Company  has  covenanted  not to declare  any  dividend or other
distribution  on its shares or redeem or purchase any of its shares in excess of
$250,000 in any year.  It is also  likely  that the Company  will be required to
agree to  restrictions  on the payment of  dividends in  connection  with future
financings, if any.

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

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

         In June,  1997, the Company issued in a private  placement notes in the
principal  amount of $865,000,  together with warrants to purchase up to 277,244
shares of the  Company's  Common Stock at an exercise  price of $3.12 per share.
Howard W. Schwan, John H. Schwan,  Stephen M. Merrick and John C. Davis, members
of management, purchased $50,000, $350,000, $315,000 and $150,000, respectively,
of the notes and  warrants.  The  offering  was exempt from  registration  under
Section  4(2) of the  Securities  Act as a  transaction  not  involving a public
offering as all participants  were members of management who were  sophisticated
and had access to information about the Company.


                                       10
<PAGE>


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

General

         In February,  1996, there was a change of control and management of the
Company. Since that time, new management has focused its efforts on (i) reducing
costs  of  operations,   (ii)  achieving   liquidity,   (iii)   formulating  and
implementing  plans  and  programs  to  increase  revenues  and  (iv)  achieving
profitability.  Operating  expenses  were  reduced  from 1995 to 1996 by over $5
million,  a reduction of approximately  50% and the Company was able to maintain
the lower  operating  cost  figures  in fiscal  1997.  Included  in the  expense
reduction in 1996, was a $200,000 decrease in depreciation  expense related to a
change in accounting  estimate of the useful life of certain equipment.  The net
loss of the Company was reduced  from the 1995 level of  $2,893,000  to $183,000
for fiscal 1996 and for fiscal 1997,  the Company had net income of  $1,140,000.
Included in income for fiscal 1997, was a tax benefit of $596,000 resulting from
the reversal of a tax valuation  allowance  created in prior years. The reversal
was based upon management's  determination  that the deferred tax benefits would
be utilized.  $1,672,000  of the loss in fiscal 1995 related to the shutdown and
sale of the Company's  latex balloon  manufacturing  operation.  While net sales
decreased 39% in fiscal 1996 to $13,910,000 from $22,784,000 in fiscal 1995, net
sales for  fiscal  1997  have  increased  18% to  $16,431,000.  Working  capital
increased  to $942,000 on October  31, 1997 from  $347,000 on October 31,  1996.
During the past 2 years,  the Company has introduced  over 180 new mylar balloon
designs,  has out-sourced the manufacture of and engaged in active  marketing of
latex balloons and introduced  several new products.  Approximately $1.9 million
of new financing has been  provided in private  financings,  a new bank loan and
line of credit in the aggregate  amount of $6.3 million has been obtained and an
initial public offering of Common Stock of over $6 million was completed.

         In November of 1997, the Company  completed an initial public  offering
of  1,725,000  shares of its Common  Stock,  for net  proceeds of  approximately
$5,500,000.  The Company  anticipates  investing $1.1 million of the proceeds in
capital  items and  operations  to improve the  products,  production  capacity,
marketing  efforts,  product  development  and  operations  of the Company.  The
Company plans to make capital  investments  of  approximately  $2.8  million,  a
portion of which will be financed  through  equipment  leases or  otherwise,  in
plant  improvements  and equipment which will increase  production  capacity and
which will allow the Company to print  eight-color  designs in the mylar product
line and the  laminated  and printed  films  business.  The Company has invested
$800,000 in its Mexican supplier of latex balloons.  The Company plans to invest
a portion  of the  proceeds  of the  offering  for the  hiring of  personnel  in
marketing,  product  design and  development  and sales to enhance the Company's
product design and development  efforts, its product line,  marketing,  customer
service and support and sales effort.



                                       11
<PAGE>

         The following  table sets forth selected  financial data of the Company
for the three years ended October 31, 1997, 1996 and 1995 (in thousands,  except
per share data:
<TABLE>
<CAPTION>                                                                                    
                                                                 Year Ended October 31,       
                                                    -----------------------------------------------  
                                                        1995              1996             1997
                                                    -------------   ----------------   ------------
<S>                                                 <C>             <C>                <C>
Consolidated Statement of Operations Data:
Net sales .......................................    $   22,784      $   13,910        $  16,431
Cost of sales   .................................        15,078           8,558           10,265
                                                      ----------     -----------       ----------
Gross profit    .................................         7,706           5,352            6,166
Operating Expenses:
 General and administrative .....................         2,900           2,055            1,864
 Selling  .......................................         3,770           2,387            2,375
 Advertising and marketing  .....................         2,356             592              983
 Plant shut down expense ........................           850              --               --
 Loss on disposition of latex equipment .........           822              --               --
                                                      ----------     -----------       ----------
   Total operating expenses .....................        10,698           5,034            5,222
                                                      ----------     -----------       ----------
Operating income (loss)  ........................        (2,992)            318              944
                                                      ----------     -----------       ----------
Other income (expense)   ........................          (675)           (495)            (354)
                                                      ----------     -----------       ----------
Income (loss) before income taxes ...............        (3,667)           (177)             590
Income tax benefit (expense)   ..................           774              (6)             550 
                                                      ----------     -----------       ----------
Net income (loss)  ..............................        (2,893)           (183)           1,140
Dividends applicable to Convertible Preferred
 Stock ..........................................            --             (74)             (98)
                                                      ----------     -----------       ----------
Net income (loss) applicable to common shares         $  (2,893)     $     (257)       $   1,042
                                                      ==========     ===========       ==========
Net income (loss) per common and common
 equivalent share  ..............................     $   (2.18)     $     (.20)       $     .84
                                                      ==========     ===========       ==========
Weighted average number of common an
 common equivalent shares outstanding   .........      1,328,952       1,265,835        1,238,814
                                                      ==========     ===========       ==========
</TABLE>



Results of Operation

         Net  Sales.  For the fiscal  year ended  October  31,  1997,  net sales
increased  to  $16,431,000  from  $13,910,000  for fiscal  1996,  an increase of
approximately  18%. This increase in net sales was a reflection  principally  of
increases in the sales of latex  balloons and printed and laminated  films.  The
Company had no supply of latex balloons from October,  1995, to July, 1996, as a
result of the closing of the Company's latex balloon manufacturing operations in
September,  1995.  Sales also increased as a result of the Company's  efforts to
solidify and expand its  distribution  network.  For fiscal 1997,  international
sales were $2,622,000 or 16% of  net sales,  as compared to $1,777,000, or 12.8%
of net  sales  for  fiscal  1996.  Increases  in  England  sales  represented  a
significant part of the increase.

         During fiscal 1996,  mylar  balloons  represented  87% of sales,  latex
balloons 4% of sales and laminated and printed films 9% of sales.  During fiscal
1997, mylar balloons  represented 77% of sales,  latex balloons 10% of sales and
laminated  and  printed  films 13% of sales.  The Company  anticipates  that the
percentage  of sales  represented  by latex  balloons and  laminated and printed
films  will  continue  to  increase  during  fiscal  1998.  The  profit  margins
associated  with  latex  balloons  and  laminated  and  printed  films  are  not
materially different from the profit margin on mylar balloons.  For fiscal 1997,
the profit margins on mylar  balloons,  latex balloons and laminated and printed
materials were 28.6%, 30.4%, and 29.7%, respectively.



                                       12
<PAGE>

         Cost of Sales.  For  fiscal  1997,  cost of sales  remained  relatively
unchanged  at 62.5% of net  sales as  compared  to 61.5% of net  sales in fiscal
1996.

         Administrative.   For  fiscal  1997,   administrative   expenses   were
$1,864,000  or 11.3% of sales as compared to  $2,055,000,  or 14.8% of sales for
fiscal  1996.  The decrease  was the result of a number of items  including  the
reduction in accounting and financial staff, and reduction in certain  executive
salaries and expenses, and a reduction in overhead expenses.

         Selling.  For fiscal 1997, selling expenses were $2,375,000 or 14.5% of
net sales, as compared to $2,387,000, or 17.2% of net sales for fiscal 1996. The
percentage  decrease was due to the  Company's  ability to increase  sales while
maintaining selling expense levels.

         Advertising and Marketing.  For fiscal 1997,  advertising and marketing
expenses were  $983,000 as compared to $592,000 in fiscal 1996.  The increase in
these expenses in 1997 was a result of catalogue printing costs and service fees
paid on national account sales programs.

         Other  Expenses.  For fiscal  1997,  interest  expense was  $667,000 as
compared to  $553,000  for fiscal  1996.  The  increase in interest  expense for
fiscal 1997,  as compared to 1996,  is a result of interest  paid on $865,000 of
notes issued in June, 1997.

         Net Income or Loss.  For fiscal  1997,  the  Company  had net income of
$1,140,000  as compared to a net loss of  $183,000 in fiscal  1996.  Included in
income for 1997 was $596,000 of tax benefit  resulting  from a reversal of a tax
valuation  allowance  created  in prior  periods.  The  reversal  was based upon
management's determination that the deferred tax benefits would be utilized.

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


Liquidity and Capital Resources

         Cash flow used in operations during the year ended October 31, 1997 was
$837,000.  This resulted primarily from increased sales and resulting  increases
in accounts receivable and inventory of over $2,161,000. During fiscal 1996, the
Company had cash flows from  operations of $840,000.  During  fiscal 1996,  cash
raised from the issuance of Preferred Stock and the new revolving line of credit
was used in part to reduce accounts payable and accrued expenses.

         At October 31, 1997 the Company  maintained a cash balance of $237,000.
The Company's current cash management policy includes  maintaining  minimal cash
balances and utilizing the revolving line of credit for liquidity. As of October
31, 1996, the Company had cash and cash  equivalents of $131,000.  As of October
31, 1997, the Company had working capital of $942,000.
Working capital as of October 31, 1996 was $347,000.

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

         During the eighteen  months  preceding the  completion of the Company's
initial public  offering of Common Stock in November of 1997, the Company funded
its operations primarily through the cash provided by its operating  activities,
a private placement financing of Preferred Stock, funding provided by a new bank
loan and line of credit and a private placement of notes and warrants.  In early
1996, the Company completed a private placement of 1,098,901 shares of Preferred
Stock, par value $.91 per share, for gross proceeds of $1,000,000. The Preferred
Stock included a cumulative preferred dividend at the rate of 13%. The shares of
Preferred  Stock were converted  into  1,098,901  shares of Class B Common Stock
upon the closing of the public offering.


                                       13
<PAGE>

         In September,  1996,  the Company  entered into a Loan Agreement with a
bank under  which the bank  provided  loans and a line of credit to the  Company
aggregating  $6,300,000.  The  arrangement  included term loans in the amount of
$3,300,000  and a revolving  line of credit  providing  for maximum  advances of
$3,000,000  (increased  to $3,250,000  in October,  1997) of which  $232,000 was
unused at October 31, 1997.  The term loans are due on  September  1, 2001,  and
bear  interest at either 8.75% or prime plus 1%. The  revolving  loan was due on
September 1, 1997 and has been renewed until July 1, 1998. The revolving line of
credit  bears  interest  at prime  plus 1%.  During  July,  1997,  the same bank
provided  additional  term  loans to the  Company  in the  aggregate  amount  of
$475,000.  All these loans are  secured by all of the  Company's  assets.  Three
principal  shareholders  of the Company,  John H.  Schwan,  Howard W. Schwan and
Stephen M. Merrick have guaranteed these obligations.

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

         During  fiscal  1997  and  1996,  the  Company  invested  $838,000  and
$496,000, respectively, in plant and equipment.

         During  fiscal  1996,  the  Company  utilized   $336,000  in  financing
activities,  principally the reduction of bank  indebtedness.  During the fiscal
1997, the Company generated $1,857,000 in financing activities.

         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.  Thereafter the Company may require additional capital in order
to expand its business  and there can be no  assurance  that the Company will be
able to secure  additional debt or equity  financing or that such financing will
be available on favorable terms.


Seasonality

         In the mylar product line, sales have  historically  been seasonal with
approximately  20% to 27% 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.


Forward Looking Statements

         Forward looking  statements made in this filing involve  material risks
and  uncertainties  that  could  cause  actual  results  and  events  to  differ
materially from those set forth, or implied, including (i) the Company's ability
to enter into contracts with licensors,  suppliers,  distributors, and strategic
partners, (ii) the Company's growth strategy and (iii) anticipated trends in the
Company's  business,  as well as other risks and  uncertainties  reported in the
Company's other SEC filings.


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

         Previously filed.


                                       14
<PAGE>



PART III

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

         Information  called  for by Item No. 9 of Part III is  incorporated  by
reference  to the  definitive  Proxy  Statement  for the 1998 Annual  Meeting of
Stockholders  to be filed with the Commission  within 120 days of the end of the
Company's last fiscal year.


Item No. 10       Executive Compensation

         Information  called for by Item No. 10 of Part III is  incorporated  by
reference  to the  definitive  Proxy  Statement  for the 1998 Annual  Meeting of
Stockholders  to be filed with the Commission  within 120 days of the end of the
Company's last fiscal year.


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

         Information  called for by Item No. 11 of Part III is  incorporated  by
reference  to the  definitive  Proxy  Statement  for the 1998 Annual  Meeting of
Stockholders  to be filed with the Commission  within 120 days of the end of the
Company's last fiscal year.


Item No. 12       Certain Relationships and Related Transactions

         Information  called for by Item No. 12 of Part III is  incorporated  by
reference  to the  definitive  Proxy  Statement  for the 1998 Annual  Meeting of
Stockholders  to be filed with the Commission  within 120 days of the end of the
Company's last fiscal year.


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


Exhibits

   Exhibit
   Number         Description

   *3.1           Second Restated Certificate of Incorporation of CTI Industries
                  Corporation 
   *3.2           By-laws of CTI Industries Corporation
   *4.1           Form  of  Certificate  for  Common  Stock  of  CTI  Industries
                  Corporation
   *10.1          CTI Industries Corporation Stock Option Plan
   *10.2          Employment   Agreement   dated  April  29,  1996  between  CTI
                  Industries Corporation and John C. Davis
   *10.3          Stock  Redemption  Agreement  dated March 1, 1996  between CTI
                  Industries Corporation and John C. Davis
   *10.4          Agreement   dated  June  27,  1997   between  CTI   Industries
                  Corporation and John C. Davis
   *10.5          Third  Amendment to Lease Agreement dated August 15, 1994, for
                  premises located at 675 Industrial Drive, Cary, Illinois




                                       15
<PAGE>


   Exhibit
   Number         Description

   *10.6          Form of Warrant dated  December 3, 1996 to purchase  shares of
                  Common Stock.
   *10.7          Form of Subscription Agreement dated March, 1996, for purchase
                  of Preferred Stock.
   *10.8          Form  of  Subscription  Agreement  dated  June  20,  1997  for
                  promissory  notes and  warrants to  purchase  shares of Common
                  Stock.
   *10.9          Employment   Agreement  dated  June  30,  1997,   between  CTI
                  Industries Corporation and Howard W. Schwan.
   *10.10         Joint Venture Agreement dated September 16, 1996,  between CTI
                  Industries  Corporation and Pulidos & Terminados Finos S.A. de
                  C.V.
   *10.11         Agreement  for  purchase of assets  dated  September  8, 1995,
                  between CTI  Industries  Corporation  and Pulidos & Terminados
                  Finos S.A. de C.V.
   *10.12         Amendment  dated May 24, 1996,  to  Agreement  for purchase of
                  assets  between  CTI  Industries  Corporation  and  Pulidos  &
                  Terminados Finos S.A. de C.V.
   *10.13         Form of Agreement  dated July 14, 1997 between CTI  Industries
                  Corporation and Pulidos & Terminados Finos S.A. de C.V.
   *10.14         Consulting  Agreement dated March, 1996 between CTI Industries
                  Corporation and Michael R. Miller.
   *10.15         Loan and Security  Agreement dated August 22, 1996 between the
                  Company and First American Bank.
   *10.16         Third  Amendment to Loan and Security  Agreement dated July 1,
                  1997, among CTI Industries  Corporation,  First American Bank,
                  Stephen M. Merrick, John H. Schwan and Howard W. Schwan.
   *10.17         First Term Note in the sum of $1,100,000 dated August 22, 1996
                  made by CTI Industries Corporation to First American Bank.
   *10.18         Second  Term Note in the sum of  $2,200,000  dated  August 22,
                  1996  made by CTI  Industries  Corporation  to First  American
                  Bank.
   *10.19         Revolving Note in the sum of $3,000,000  dated August 22, 1996
                  made by the Company to First American Bank.
   *10.20         Mortgage  dated August 22, 1996 for benefit of First  American
                  Bank.
   *10.21         Guaranty dated July 1, 1997, by Stephen M. Merrick,  Howard W.
                  Schwan and John H. Schwan for benefit of First American Bank.
   *10.22         Third Term Note in the sum of $275,000 dated July 1, 1997 made
                  by CTI Industries Corporation to First American Bank.
   *10.23         Fourth Term Note in  the sum of  $200,000  dated July 1, 1997,
                  made by CTI Industries Corporation to First American Bank.
   *10.24         First  Amendment to Revolving  Note dated July 1, 1997 made by
                  CTI Industries Corporation to First American Bank.
   *10.25         Form of Financial  Advisory and  Consulting  Agreement.  
  **10.26         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 
    21            Subsidiaries  (incorporate  description  in Form 10-KSB  under
                  Item No. 1)
    27            Financial Data Schedule


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

**    To be filed by Amendment.


                                       16
<PAGE>




Reports on Form 8-K

         There were no Reports on Form 8-K filed by the Company  during the last
quarter of fiscal 1997.






































                                       17
<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 January 29, 1998.


                                           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          January 29, 1998
-------------------------
Howard W. Schwan

 /s/ John H. Schwan             Chairman and Director           January 29, 1998
-------------------------
John H. Schwan

 /s/ Stephen M. Merrick         Chief Executive Officer,        January 29, 1998
-------------------------
Stephen M. Merrick              Secretary, Chief Financial
                                Officer and Director

 /s/ John C. Davis              Vice President and Director     January 29, 1998
-------------------------
John C. Davis

 /s/ Stanley M. Brown           Director                        January 29, 1998
-------------------------
Stanley M. Brown









                                       18

<PAGE>

                    

CTI Industries Corporation and Subsidiary

Table of Contents

                                                                       Page(s)

Report of Independent Accountants                                        F-2

Consolidated Financial Statements:

    Consolidated Balance Sheets as of October 31, 1996 and 1997       F-3 - F-4

    Consolidated Statements of Operations for the
       years ended October 31, 1996 and 1997                             F-5

    Consolidated Statements of Stockholders' Equity
       for the years ended October 31, 1996 and 1997                  F-6 - F-7

    Consolidated Statements of Cash Flows for the years
        ended October 31, 1996 and 1997                                  F-8

    Notes to Consolidated Financial Statements                        F-9 - F-23






















                                      F-1


<PAGE>







Report of Independent Accountants


To the Board of Directors of
CTI Industries Corporation

We have audited the  accompanying  consolidated  balance sheet of CTI Industries
Corporation  and  subsidiary  as of October  31,  1996 and 1997 and the  related
consolidated  statements of operations,  stockholders' equity and cash flows for
the  years  ended  October  31,  1996 and  1997.  These  consolidated  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the  financial  position of CTI  Industries
Corporation  and  subsidiary as of October 31, 1996 and 1997, and the results of
their operations,  stockholders' equity and their cash flows for the years ended
October 31,  1996 and 1997 in  conformity  with  generally  accepted  accounting
principles.







Chicago, Illinois

January 27, 1998









                                      F-2
<PAGE>

 
CTI Industries Corporation and Subsidiary

Consolidated Balance Sheet
as of October 31, 1996 and 1997



               ASSETS                                   1996            1997

Current assets:
     Cash                                         $    130,818    $    237,230
     Accounts receivable (less allowance for
         doubtful accounts of $129,998 and
         $136,050 at October 31, 1996 and 1997)      1,665,097       3,045,696
     Inventories                                     4,582,593       5,073,861
     Deferred tax assets                                 --            327,035
     Other                                             218,879         483,652
                                                  ------------    ------------

              Total current assets                   6,597,387       9,167,474
                                                  ------------    ------------

Property and equipment:
     Machinery and equipment                         6,237,128       6,711,978
     Building                                        2,168,563       2,175,713
     Office furniture and equipment                  1,082,665       1,058,150
     Land                                              250,000         250,000
     Leasehold improvements                            147,128         147,128
     Projects under construction                       114,926         402,714
                                                  ------------    ------------

                                                    10,000,410      10,745,683
     Less:  accumulated depreciation                (6,418,486)     (6,851,148)
                                                  ------------    ------------

              Total property and equipment, net      3,581,924       3,894,535
                                                  ------------    ------------

Other assets:
     Deferred IPO costs                                  --            445,067
     Deferred financing costs, net                     106,224          56,671
     Investment in joint venture                         --             81,816
     Note receivable                                     --            300,000
     Deferred tax assets                                 --            272,063
                                                  ------------    ------------

                                                       106,224       1,155,617
                                                  ------------    ------------

              Total assets                        $ 10,285,535    $ 14,217,626
                                                  ============    ============
                                                   











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





                                      F-3
<PAGE>


CTI Industries Corporation and Subsidiary

Consolidated Balance Sheet, Continued
as of October 31, 1996 and 1997

<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY                            1996           1997


<S>                                                        <C>            <C>            <C>
Current liabilities:      
     Accounts payable                                      $ 2,755,700    $ 3,725,500
     Line of credit                                          2,058,816      3,017,940
     Stock redemption contract payable - current portion       100,000         30,533
     Advances from related parties                                --            3,750
     Notes payable - current portion                           402,798        580,097
     Accrued liabilities                                       932,575        867,432
                                                           -----------    ----------- 

              Total current liabilities                      6,249,889      8,225,252
                                                           -----------    ----------- 


     Stock redemption contract payable                          47,908           --
     Notes payable                                           3,056,923      2,885,151
     Subordinated debt                                            --          865,000
                                                           -----------    ----------- 

              Total long-term liabilities                    3,104,831      3,750,151
                                                           -----------    ----------- 

Redeemable common stock                                        450,000        450,000

Stockholders' equity:
     Convertible Preferred stock - $.91 par value,
       2,000,000 shares shares authorized,
         1,098,901 shares issued and outstanding,                                          Pro Forma
         including accumulated dividends of                                               (unaudited)
          $27,625 (October 31, 1996) and $63,917
         (October 31, 1997)                                  1,027,625      1,063,917    $      --


     Common stock - $.065 par value,
         11,000,000 shares authorized, 
         1,131,507 (October 31, 1996), 
         1,154,584 (October 31, 1997) and
         2,879,584 (pro forma) shares issued,
         987,125 (October 31, 1996), 
         1,010,202 (October 31, 1997) and
         2,735,202 (pro forma) shares outstanding               73,548         75,048        187,173
     Class  B  Common  stock - $.91  par  value,
          1,100,000 shares authorized,
          1,098,901 shares outstanding                            --             --        1,000,000
     Paid-in-capital                                           230,348        248,348      5,605,713
     Retained earnings                                         137,194      1,179,274      1,179,274
     Foreign currency translation adjustment                      --           51,036         51,036
       Less:
         Treasury stock - 144,382 shares at cost              (370,700)      (370,700)      (370,700)
         Redeemable common stock                              (450,000)      (450,000)      (450,000)
         Stock subscription receivable                        (167,200)        (4,700)        (4,700)
                                                           -----------    -----------    -----------
              Total stockholders' equity                       480,815      1,792,223    $ 7,197,796
                                                           -----------    -----------    ===========
                                                                


              Total liabilities and stockholders' equity   $10,285,535    $14,217,626
                                                           ===========    ===========
                                                                           
</TABLE>


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








                                       F-4
<PAGE>


CTI Industries Corporation and Subsidiary

Consolidated Statements of Operations
for the years ended October 31, 1996 and 1997


                                                        1996            1997

Net sales                                          $ 13,910,104    $ 16,431,418

Cost of sales                                         8,558,053      10,265,117
                                                   ------------    ------------

              Gross profit on sales                   5,352,051       6,166,301
                                                   ------------    ------------

Operating expenses:
     Administrative                                   2,054,780       1,864,304
     Selling                                          2,387,027       2,375,293
     Advertising and marketing                          592,309         983,161
                                                   ------------    ------------

              Total operating expenses                5,034,116       5,222,758
                                                   ------------    ------------

Income from operations                                  317,935         943,543
                                                   ------------    ------------

Other income (expense):
     Interest expense                                  (553,027)       (667,060)
     Other                                               57,986         312,911
                                                   ------------    ------------

              Total other expense                      (495,041)       (354,149)
                                                   ------------    ------------

Income (loss) before income taxes                      (177,106)        589,394

Income tax expense (benefit)                              5,934        (550,184)
                                                   ------------    ------------

              Net income (loss)                        (183,040)      1,139,578

Dividends applicable to 
     convertible preferred stock                        (74,211)        (97,500)
                                                   ------------    ------------

Income (loss) applicable to common shares          $   (257,251)   $  1,042,078
                                                   ============    ============


Primary income (loss) per common and
       common equivalent shares                    $      (0.20)   $       0.84
                                                   ============    ============

Fully diluted income (loss) per common
       and common equivalent shares                $       --      $       0.84
                                                   ============    ============

Weighted average number of shares 
  and equivalent shares           
  of common stock outstanding                         1,265,835       1,238,814
                                                   ============    ============



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




                                      F-5
<PAGE>


CTI Industries Corporation and Subsidiary

Consolidated Statements of Stockholders' Equity
for the years ended October 31, 1996 and 1997


<TABLE>
<CAPTION>

                                                                                                   
                                                                                                   Less
                                                                                  ---------------------------------------           
                        Common Stock            Preferred Stock                    Treasury Stock  Redeemable   Stock   
                     ----------------- Paid-In  -----------------      Retained   ----------------   Common  Subscription      
                      Shares    Amount Capital   Shares    Amount      Earnings    Shares   Amount    Stock    Receivable    Total
<S>                  <C>       <C>     <C>      <C>        <C>        <C>          <C>     <C>       <C>      <C>        <C>        
                                              
Balance, 
 October 31, 1995    1,131,507 $73,548 $230,348                         $394,445   41,818  $170,700           $126,450   $  401,191

  Payment on stock
    subscription 
    receivable                                                                                                (119,250)     119,250

  Preferred stock 
    subscription
    receivable                                                                                                 160,000     (160,000)

  Issuance of
    preferred stock                              1,098,901 $1,000,000                                                     1,000,000

  Accumulated 
    preferred stock
    dividends                                                  27,625                                                        27,625

  Redeemable 
   common stock                                                                                      $450,000              (450,000)

  Acquisition of
    treasury stock                                                                102,564   200,000                        (200,000)

  Net loss                                                              (183,040)                                          (183,040)

  Preferred 
   dividends                                                             (74,211)                                           (74,211)
                     ---------  ------ --------  --------- ----------  ---------  -------  --------  -------- --------     -------- 
Balance, 
 October 31, 1996    1,131,507 $73,548 $230,348  1,098,901 $1,027,625  $ 137,194  144,382  $370,700  $450,000 $167,200     $480,815 
                     ---------  ------ --------  --------- ----------  ---------  -------  --------  -------- --------     -------- 
 
</TABLE>



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



                                      F-6
                                      
<PAGE>


CTI Industries Corporation and Subsidiary

Consolidated Statements of Stockholders' Equity, Continued
for the years ended October 31, 1996 and 1997

<TABLE>              
<CAPTION>
                   
                                                                                                
                                                                                                 Less
                                                                                    --------------------------------------- 
                   Common Stock           Preferred Stock                            Treasury Stock Redeemable   Stock   
                 --------------- Paid-In  ----------------    Retained Translation    -------------    Common  Subscription      
                 Shares   Amount Capital  Shares    Amount    Earnings Adjustment   Shares   Amount    Stock    Receivable  Total
<S>            <C>       <C>     <C>      <C>       <C>        <C>         <C>      <C>      <C>      <C>      <C>       <C>    
                                            
Balance, 
 October 31,  
  1996        1,131,507 $73,548 $230,348 1,098,901 $1,027,625 $ 137,194            144,382  $370,700 $450,000 $167,200  $  480,815
 Payment on 
  stock
  subscription 
  receivable                                                                                                   (162,500)    162,500
 
 Common stock 
  warrants   
  exercised      23,078   1,500   18,000                                                                                    19,500 

 Accumulated 
  preferred
  stock
  dividends                                             36,292                                                               36,292

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

 Foreign 
  currency
  translation 
  adjustment                                                              $51,036                                            51,036

 Dividends 
  paid                                                           (97,500)                                                   (97,500)
              ---------  ------ -------- --------- ---------- ----------  -------   -------  -------- --------  ------- ----------
Balance, 
 October 31,
  1997        1,154,585 $75,048 $248,348 1,098,901 $1,063,917 $1,179,274  $51,036   144,382  $370,700 $450,000  $ 4,700  $1,792,223 
              =========  ====== ======== ========= ========== ==========  =======   =======  ======== ========  =======  ========== 
                 

 
</TABLE>


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



                                      F-7
<PAGE>

CTI Industries Corporation and Subsidiary

Consolidated Statements of Cash Flows
for the years ended October 31, 1997 and 1996


                                                          1996          1997

Cash flows from operating activities:
     Net income (loss)                               $  (183,040)   $ 1,139,580
     Adjustments to reconcile 
         net income (loss) to cash  provided
         by (used in) operating activities:
       Depreciation and amortization                     371,893        575,434
       Gain on sale of property and equipment            (20,712)       (42,942)
       Gain on settlement of legal claim                    --         (188,768)
       Provision for losses on 
         accounts receivable and inventory               255,738        289,537
       Deferred income taxes                                --         (599,098)
       Change in assets and liabilities:
         Accounts receivable                           1,006,439     (1,458,699)
         Inventories                                     486,483       (702,706)
         Other assets                                    (12,526)    (1,009,841)
         Accounts payable and accrued expenses        (1,064,584)     1,160,540
                                                     -----------    -----------
           Net cash provided by (used in) 
             operating activities                        839,691       (836,963)
                                                     -----------    -----------

Cash flows from investing activities:
     Proceeds from sale of 
       property and equipment                             45,415          2,942
     Purchases of property and equipment                (495,880)      (838,491)
     Cash surrender value - 
       officers' life insurance                           10,700           --
     Investment in joint venture                            --          (81,816)
                                                     -----------    -----------

           Net cash used in investing activities        (439,765)      (917,365)
                                                     -----------    -----------

Cash flows from financing activities:
     Stock redemption contract payments                  (52,092)       (77,375)
     Advances on line of credit                        3,270,970      8,408,078
     Repayments on line of credit                     (4,843,239)    (7,448,954)
     Proceeds from issuance of long-term debt          3,300,000        440,465
     Repayment of long-term debt                      (2,694,358)      (431,188)
     Proceeds from debt issued to related parties           --          865,000
     Proceeds from issuance of preferred stock           840,000        160,000
     Payment of debt issue costs                        (110,400)
     Payment on stock subscription receivable               --            2,500
     Dividends paid                                      (46,586)       (61,208)
                                                     -----------    -----------
           Net cash provided by 
             (used in)  financing activities            (335,705)     1,857,318
                                                     -----------    -----------

Effect of exchange rate changes on cash                     --           3,422 
                                                     -----------    -----------

Net increase in cash                                      64,221        106,412

Cash at beginning of period                               66,597        130,818
                                                     -----------    -----------

Cash at end of period                                $   130,818    $   237,230
                                                     ===========    ===========
                                                      
Supplemental disclosures:
     Cash paid for interest                          $   617,952    $   606,040
     Cash paid for income taxes                            5,776           --

Noncash financing activities:
     Purchase of treasury stock
       through issuance of
       stock redemption contract payable             $   200,000    $      --
     Assets exchanged for settlement of debt                        $    40,000
     Common stock warrants exercised 
       in exchange for contractual
       services received                                            $    19,500


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

                                      F-8
<PAGE>

CTI Industries Corporation and Subsidiary

Notes to Consolidated Financial Statements


  1    Nature of Operations

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



  2.   Summary of Significant Accounting Policies

       Principles of Consolidation 

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

       Foreign Currency Translation

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

       Inventories

       Inventories are stated at the lower of cost or market. Cost is determined
       using standard costs which approximates costing determined on a first-in,
       first-out basis.

       Property and Equipment

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

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


       Depreciation  expense  was  $525,880  and  $367,717  for the years  ended
       October  31,  1997 and 1996,  respectively.  Effective  November 1, 1995,
       management  determined  that the  useful  life of certain  equipment  was
       longer than  originally  estimated.  A change in accounting  estimate was
       recognized  to  reflect  this  decision,  resulting  in  a  reduction  in
       depreciation expense of $196,318 in 1996.





                                      F-9
<PAGE>

CTI Industries Corporation and Subsidiary

Notes to Consolidated Financial Statements, Continued

                                                 
                                                                   
  2.   Summary of Significant Accounting Policies, continued   
                                                                         
       Deferred Financing Costs

       Deferred financing costs consist of unamortized  financing costs incurred
       in connection  with the refinancing of long-term debt during fiscal 1996.
       These costs are being amortized on a straight-line basis over the term of
       the loans.  Amortization  expense  was $4,176 and  $49,554  for the years
       ended October 31, 1996 and 1997, respectively.

       Income Taxes

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

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

       Concentration of Credit Risk

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

       Use of Estimates

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





                                      F-10
<PAGE>

CTI Industries Corporation and Subsidiary

Notes to Consolidated Financial Statements, Continued



  2.   Summary of Significant Accounting Policies, continued

       Unaudited Pro Forma Stockholders' Equity

       The pro forma  stockholders'  equity  as  reflected  on the  Consolidated
       balance sheet presents  estimated effects of the Company's initial public
       offering.   (Note  18)  The  proforma   information   also  reflects  the
       anticipated  conversion of all outstanding shares of Preferred Stock into
       shares of Class B Common Stock on a one-to-one  ratio in conjunction with
       the initial public offering.

       Fair Value of Financial Instruments

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

       Impairment of Long-Lived Assets

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

       The   computation  of  income  (loss)  per  share  as  reflected  on  the
       consolidated  statement of  operations  is based on the weighted  average
       number of common  and common  equivalent  shares  outstanding  during the
       period.  Common stock  equivalents  consist of outstanding stock options,
       which pursuant to Staff Accounting  Bulletin No. 83 of the Securities and
       Exchange  Commission,  are included in the weighted  average shares as if
       they were  outstanding for the entire period to the extent granted within
       the twelve months preceding the contemplated  public offering date, using
       the  treasury  stock  method  until such time as shares are  issued.  The
       primary  weighted   average  number  of  common  and  equivalent   shares
       outstanding  was  1,265,835 and 1,238,814 for the years ended October 31,
       1996 and 1997.





                                      F-11
<PAGE>

CTI Industries Corporation and Subsidiary

Notes to Consolidated Financial Statements, Continued



  2.   Summary of Significant Accounting Policies, continued
    
       Computation of Income (Loss) Per Share, continued

       Information  regarding  income  (loss) per share has been  computed  on a
       historical  basis under the  provisions  of Accounting  Principles  Board
       Opinion No. 15.

                                                      Years ended October 31,
                                                   ----------------------------
                                                        1996            1997
         Primary earnings per share:
           Net income (loss) per share             $     (0.25)     $      1.04
                                                   ===========      ===========
                                                    
           Weighted average shares outstanding       1,026,572          999,551
                                                   ===========      ===========
                                                    
         Fully diluted earnings per share:
           Net income per share                                     $      0.57
                                                                    ===========
           Weighted average shares outstanding                        2,002,298
                                                                    ===========

       For the year ended October 31, 1996, fully diluted earnings per share has
       not been presented as the result would be  anti-dilutive  to the net loss
       per share.

       Reverse  Stock Split  

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


  3.   Inventory

       Inventory is comprised of the following:

                                            October 31,   October 31,
                                                 1996         1997

               Raw materials                 $  278,976   $  243,858
               Work in process                  745,091    1,008,296
               Finished goods                 3,558,526    3,821,707
                                             ----------   ----------

                       Total inventory       $4,582,593   $5,073,861
                                             ==========   ==========







                                      F-12
<PAGE>

CTI Industries Corporation and Subsidiary

Notes to Consolidated Financial Statements, Continued



  4.   Line of Credit

       The Company has a bank line of credit,  due July 1, 1998,  which provides
       for a  maximum  borrowing  limit  of  $3,250,000  of which  $230,061  and
       $941,184  was  available  at  October  31,  1997 and 1996,  respectively.
       Advances  under the line of credit are  subject to a borrowing  base,  as
       defined in the line of credit  agreement.  Interest is payable monthly at
       prime  plus 1% (prime was 8.5% and 8.25% at  October  31,  1997 and 1996,
       respectively).  The line of credit is collateralized by all assets of the
       Company.  The line of credit agreement contains,  among other provisions,
       certain covenants relating to the maintenance of tangible net worth.



  5.   Stock Redemption

       In March 1996, the Company entered into a Stock Redemption Agreement with
       a shareholder  which was  subsequently  amended June 27, 1997.  Under the
       amended Stock Redemption  Agreement the Company has the right but not the
       obligation  to redeem up to 333,333  shares of Common  Stock owned by the
       shareholder  at the price of $1.95 per share at any time through  January
       31, 1998. Commencing March 1, 1998 through February 28, 2000, the Company
       is obligated to pay to the  shareholder,  for the redemption of shares at
       $1.95 per share (i) an amount equal to 2% of the Company's pretax profits
       each fiscal quarter  (beginning with the quarter ended February 28, 1998)
       and (ii) an amount  equal to 2% (but not to exceed  $3,000) of the amount
       the latex and mylar  balloon  revenues  exceed $1.3 million in any month.
       The  Company  also has the  right to redeem  additional  shares of Common
       Stock  from the  shareholder  during  this  period  at $1.95  per  share,
       provided  total number of shares  subject to  redemption  under the Stock
       Redemption Agreement does not exceed 333,333. Redeemable common stock has
       been reflected as a liability with a contra equity account on the balance
       sheet. As of the date of this report, 102,564 shares of Common Stock have
       been redeemed under the Stock Redemption Agreement.












                                      F-13
<PAGE>

CTI Industries Corporation and Subsidiary

Notes to Consolidated Financial Statements, Continued



  6.   Notes Payable

       Long-term debt at October 31, 1997 consists of:
<TABLE>
<CAPTION>

<S>                                                                                            <C>     
         First Term Loan,  payable in monthly  installments of $18,333 
              including interest at prime plus 1% due September 1,
              2001.  Collateralized by all assets of the Company.                              $ 2,151,264

         Second Term Loan, payable in monthly installments of
              $19,617 including interest at 8.75% due at various
              times through September 1, 2001.  Collateralized
              by all assets of the Company.                                                        861,667

         Third Term Loan,  payable in monthly installments of $7,739
              plus interest at prime plus 1% due October 1, 2000.
              Collateralized by all assets of the Company.                                         222,465

         Fourth Term Loan, payable  in monthly  installments of $16,667 
              plus interest at prime plus 1% due July 1, 1998.
              Collateralized by all assets of the Company.                                         149,999

         Installment Loan, payable in monthly installments of $9,583 
              plus interest at 10.5% due May 1, 1998.
              Collateralized by equipment purchased.                                                57,500

         Installment Loans, payable in monthly installments of $1,674 
              including interest at 7.99% and 8.5% due at various  
              times  through  March, 2000.
              Collateralized by vehicles purchased.                                                 22,362
                                                                                               ----------- 
              Total                                                                              3,465,257

         Less current portion                                                                     (580,097)
                                                                                               -----------

              Total long-term debt                                                             $ 2,885,160
                                                                                               ===========
   </TABLE>
                                                                          

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

                    1998                           $     580,097
                    1999                                 369,727
                    2000                                 315,024
                    2001                               2,200,409
                    2002                                    --
                                                   -------------

                                                   $   3,465,257
                                                   -------------


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






                                      F-14
<PAGE>

CTI Industries Corporation and Subsidiary

Notes to Consolidated Financial Statements, Continued



  7.   Convertible Preferred Stock

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

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



  8.   Income Taxes

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

                                                          1996          1997

          Current:
               Federal                                 $     (34)   $   3,209
               State                                         192         --
               Foreign                                     5,776       45,705
                                                       ---------    ---------

                                                           5,934       48,914
                                                       ---------    ---------

          Deferred:
               Federal                                      --       (551,630)
               State                                        --        (47,468)
                                                       ---------    ---------

                                                            --       (599,098)
                                                       ---------    ---------

                Total income tax provision (benefit)   $   5,934    $(550,184)
                                                       =========    =========








                                      F-15
<PAGE>

CTI Industries Corporation and Subsidiary

Notes to Consolidated Financial Statements, Continued



  8.   Income Taxes, continued

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

                                                            1996         1997

     Deferred tax assets:
       Accounts receivable allowance                   $   43,331   $   51,369
       Inventory valuation                                 54,826       78,519
       Accrued liabilities                                220,964      150,294
       Net operating loss carryforwards                   636,190      570,542
       Alternative minimum tax credit carry forwards      338,612      341,979
                                                       ----------   ----------

               Total deferred tax assets                1,293,923    1,192,703

     Deferred tax liabilities:
       Book over tax basis of capital assets              458,706      593,605

     Less:  Valuation allowance                           835,217         --
                                                       ----------   ----------

               Net deferred tax asset                  $     --     $  599,098
                                                       ==========   ==========
                                                        


       As of October 31, 1996, the Company maintained a valuation allowance with
       respect to deferred tax assets as a result of the uncertainty of ultimate
       realization.  At October  31,  1997,  management  determined  it was more
       likely than not that the net operating loss and  alternative  minimum tax
       credit  carryforwards  would  be  realized,   accordingly  the  valuation
       allowance  was removed.  At October 31, 1996 and 1997 the Company has net
       operating loss carryforwards for tax purposes of approximately $1,600,000
       and $1,500,000. These carryforwards expire in the years 2010 and 2011. In
       addition,  the  Company has  approximately  $339,000  and  $342,000 as of
       October 31, 1996 and 1997 of  alternative  minimum tax credits which have
       no expiration date.

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

                                                              Years ended
                                                        ----------------------- 
                                                               October 31,
                                                            1996         1997

          Taxes at statutory rate                       $ (60,216)   $ 200,395
          State income taxes                                  127      (31,455)
          Foreign taxes paid                                5,776       45,705
          Foreign income                                     --        (68,078)
          Increase (decrease) 
             in valuation allowance                        59,164     (564,276)
          Correction of prior estimates                     1,083     (141,592)
          Other                                              --          9,117
                                                        ---------    ---------

                   Income tax provision (benefit)       $   5,934    $(550,184)
                                                        =========    =========



    



                                  F-16

<PAGE>

CTI Industries Corporation and Subsidiary

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  day  of  the  plan  year.  Profit  sharing
       contributions  may  also  be  made  at the  discretion  of the  Board  of
       Directors. Employer contributions to the plan totaled $52,903 and $52,369
       for the years ended October 31, 1997 and 1996, respectively.



 10.   Related Party Transactions

       The  Company  obtains  legal  services  from a law firm in which  several
       shareholders of the law firm are also shareholders of the Company, and in
       which  one  shareholder  of  the  law  firm  is  both  a  director  and a
       shareholder  of the  Company.  Legal  fees  incurred  with this firm were
       $236,071 and $123,872 for the years ended October 31, 1997 and 1996.

       The  Company  purchases   packaging  materials  from  entities  in  which
       shareholders  of the Company  maintain an ownership  interest.  Purchases
       from these  affiliates  were $233,842 and  $1,106,649 for the years ended
       October 31, 1997 and 1996.


11.    Joint Venture

       Effective  September 16, 1996,  the Company  entered into a joint venture
       agreement with a manufacturer in Mexico. The joint venture will engage in
       the  production  and  packaging of balloons.  Under the  agreement,  both
       entities will hold a 50% interest in the joint venture. As of October 31,
       1997,  the Company has made capital  investment  in the joint  venture of
       $81,816.


12.    Commitments and Contingencies

       Operating Leases

       The Company leases certain  production  facilities  under a noncancelable
       lease with monthly  payments of $21,432  expiring  December 31, 1999. The
       Company  subleases  approximately  70% of this facility  through  August,
       1998. The Company's United Kingdom  subsidiary also maintains a lease for
       office and warehouse space which expires in 2019.

       The Company leases a office  equipment and  automobiles  under  operating
       leases which expire on various dates between  November 1997 and September
       2002.




                                      F-17
<PAGE>


CTI Industries Corporation and Subsidiary

Notes to Consolidated Financial Statements, Continued



12.    Commitments and Contingencies, continued

       Operating Leases, continued

       The net rent  expense of all leases was  $401,242 in 1997 and $528,654 in
       1996.

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

                                  Lease        Sublease
                                 Payments       Income         Net

          1998                  $ 351,410     $ 139,280     $ 212,130
          1999                    344,905                     344,905
          2000                     11,608                     116,608
          2001                     71,044                      71,044
          2002                     71,044                      71,044
          Thereafter              930,600                     930,600


       Litigation

       The Company is a defendant  in  business-related  litigation.  Management
       does not  believe  the  outcome of such  litigation  will have a material
       adverse  effect  on the  Company's  financial  position  and  results  of
       operations.   Other  income  includes  $188,000  resulting  a  negotiated
       settlement at an amount less than previously estimated loss accruals.

       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:

                    1998                       $  438,103
                    1999                            9,464
                    2000                            3,016








                                      F-18
<PAGE>


CTI Industries Corporation and Subsidiary

Notes to Consolidated Financial Statements, Continued



 13.   Recapitalization

       In  July  1997,   the  Company   authorized   a   recapitalization   (the
       "Recapitalization")  without  a  formal  reorganization.  As  part of the
       Recapitalization, the Board of Directors approved the creation of Class B
       Common Stock and negotiated a conversion of all then  outstanding  shares
       of the  Company's  Convertible  Preferred  Stock  into  an  aggregate  of
       1,098,901  shares of Class B Common  Stock  effective  with the  proposed
       initial public  offering.  The shares of the Class B Common Stock contain
       rights identical to shares of Common Stock, except that shares of Class B
       Common Stock,  voting separately as a class, have the right to elect four
       of the Company's seven directors.  Shares of the Common Stock and Class B
       Common  Stock,  voting  together as a class,  vote on all other  matters,
       including the election of the remaining directors. The Board of Directors
       also  approved a 1 for 2.6 reverse  stock split on both the Common  Stock
       and Class B Common Stock. The  recapitalization  and related transactions
       were approved by written consent of the shareholders.



 14.   Stock Options

       Under the Company's  1997 Stock Option Plan  (effective  July 1, 1997), a
       total of 300,000  shares of Common Stock are reserved for issuance  under
       the Stock  Option  Plan.  As of  October  31,  1997,  121,000  options to
       purchase  shares of Common  Stock  have been  granted.  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.





                                      F-19
<PAGE>


CTI Industries Corporation and Subsidiary

Notes to Consolidated Financial Statements, Continued



 14.   Stock Options, continued

       In December,  1996,  certain  members of company  management  were issued
       warrants to purchase  230,769 shares of the Company's  Common Stock at an
       exercise price of $.91 per share in consideration  of their  facilitating
       and  guaranteeing  a bank  loan  to the  Company  in the  amount  of $6.3
       million. The warrants have a term of six years.

       In June,  1997,  the Company issued in a private  placement  notes in the
       principal  amount of $865,000,  together  with warrants to purchase up to
       277,244  shares of the  Company's  Common  Stock at an exercise  price of
       $3.12 per share. The warrants have a term of five years.

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

          Outstanding, beginning of period                     --
          Granted                                           629,013
          Exercised                                            --
          Canceled                                             --
                                                            -------
          Outstanding at the end of period                  629,013
                                                            =======
          Weighted average exercise price per share         $  2.57
                                                            =======
          Exercisable at end of period                      629,013
                                                            =======
          Available for grant at end of period              179,000
                                                            =======





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






                                      F-20
<PAGE>

CTI Industries Corporation and Subsidiary

Notes to Consolidated Financial Statements, Continued



 14.   Stock Options, continued

       Accounting for Stock Options, continued

       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.

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

                                                                      1997

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

                 EPS                            As reported       $    0.84
                                                Pro Forma             (0.25)


       The fair value of each option was  estimated  as of the date of the grant
       using the  Black-Scholes  option  pricing  model  based on the  following
       assumptions:  volatility of 20.0%;  expected  life of 5 years;  risk-free
       interest rate of 6.5%;  and no payment of dividends  expected  during the
       life of the options.  The weighted  average fair value of options granted
       during the year ending October 31, 1997 is $2.21 per share.



 15.   Private Placement

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






                                      F-21
<PAGE>

CTI Industries Corporation and Subsidiary

Notes to Consolidated Financial Statements, Continued



16.    Future Adoption of Recently Issued Accounting Standards

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

       SFAS No. 128 establishes standards for the computation, presentation, and
       disclosure  requirements for earnings per share and is effective for both
       interim and annual periods  ending after  December 15, 1997.  FASB 128 is
       not expected to have a material impact upon reported  earnings per share.
       SFAS  No.  129  consolidates  the  existing   requirements   relating  to
       disclosure of certain  information  about an entity's capital  structure.
       SFAS No. 130 establishes standards for reporting  comprehensive income to
       present a measure of all changes in equity that result from  renegotiated
       transactions   and  other  economic  events  of  the  period  other  than
       transactions  with  owners in their  capacity  as  owners.  Comprehensive
       income is defined as the change in equity of a business enterprise during
       a period  from  transactions  and other  events  and  circumstances  from
       nonowner sources and includes net income.  SFAS No. 131 specifies revised
       guidelines for  determining an entity's  operating  segments and the type
       and  level  of  financial  information  to be  disclosed.  This  standard
       requires that  management  identify  operating  segments based on the way
       that management  disaggregates  the entity for making internal  operating
       decisions.

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


       








                                      F-22
<PAGE>

CTI Industries Corporation and Subsidiary

Notes to Consolidated Financial Statements, Continued


 17.   Geographic Segment Data (Unaudited)

       The  Company's  operations  consist of a single  business  segment  which
       designs,   manufactures,  and  distributes  balloon  products.  Transfers
       between geographic areas were primarily at cost. The Company's subsidiary
       has  assets  consisting   primarily  of  trade  accounts  receivable  and
       inventory.  Sales and selected  financial  information by geographic area
       for the years ended October 31, 1996 and 1997 are as follows:

<TABLE>
<CAPTION>

                                                      United
                                    United            Kingdom          Eliminations     Consolidated
         1996                       States
<S>                                <C>               <C>              <C>              <C>          
         Revenues                  $ 13,055,900      $  1,408,683     $    (554,479)   $  13,910,104
         Operating income (loss)        289,521            28,414                            317,935
         Net income (loss)             (208,784)           25,744                           (183,040)
         Total assets                  9,613,062          672,473                         10,285,535


         1997

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

</TABLE>



 18.   Subsequent Events

       On November 5, 1997, the Company issued  1,500,000 shares of common stock
       to the  public  at  $4.00  per  share.  The  underwriting  discounts  and
       commissions  against the sale were $868,443 and the direct costs incurred
       by the Company were $445,067.

       On November 21,  1997,  in  connection  with the  underwriting  option to
       purchase additional shares to cover  over-allotments,  the Company issued
       225,000  additional  shares  of common  stock to the  public at $4.00 per
       share.  The underwriting  discount and commissions  against the sale were
       $117,000 with the net proceeds to the Company amounting to $783,000.

       On January 26, 1998, the Company  entered into an agreement to purchase a
       45% common stock interest in a Mexican  manufacturer for consideration of
       $800,000. The purchase will be effective February 1, 1998.



                                      F-23