**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**










**FORM
      10-K**




**(Mark
      One)**


x
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934****For
                the fiscal year ended December 31, 2007****OR**o
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**


For
      the
      transition period from _________to_________




**Commission
      File Number**


**000-23115**





**CTI
      INDUSTRIES CORPORATION**


(Exact
      name of Registrant as specified in its charter)





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





22160
                N. Pepper RoadBarrington,
                Illinois
            60010(Address
                of principal executive offices)
            (Zip
                Code)





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





Securities
      Registered pursuant to sections 12(b) of the Act:


Title
                  of Each Class
              
              Name
                  of Each Exchange on Which RegisteredCommon
                  Stock, No Par
              
              NASDAQ
                  Capital Market


Securities
      registered pursuant to Section 12(g) of the Act: None





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. Yes o No þ





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Exchange Act. Yes o No þ








Indicate
      by check mark 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.  Yes þ No o





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of Registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K.  þ





Indicate
      by check mark whether the Registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
      (Check one):





Large
      accelerated filer o Accelerated
      filer o Non-accelerated
      filer o Smaller
      Reporting Company þ




Indicate
      by check mark whether the Registrant is a shell company (as defined in
      Rule 12b-2 of the Exchange Act).  Yes o No þ





Based
      upon the closing price of $4.10 per share of the Registrant’s Common Stock as
      reported on NASDAQ Capital Market tier of The NASDAQ Stock Market on June 30,
      2007, the aggregate market value of the voting common stock held by
      non-affiliates of the Registrant was then approximately $5,241,747. (The
      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 outstanding of the Registrant’s Common Stock as of April 9,
      2008 was 2,732,124 (excluding treasury shares).





DOCUMENTS
      INCORPORATED BY REFERENCE





Part
                of Form 10-K into WhichDocument
            
            Document
                Is IncorporatedSections
                of the registrant’s Proxy Statement To be filed on or before April 30,
                2008 for the Annual Meeting of Stockholders
            
            Part
                III





**TABLE
      OF CONTENTS**





**INDEX**





FORWARD
      LOOKING STATEMENTS





Part
                IItem
                No. 1
            Description
                of Business
            1Item
                No. 1A
            Risk
                Factors
            13Item
                No. 1B
            Unresolved
                Staff Comments
            20Item
                No. 2
            Properties
            20Item
                No. 3
            Legal
                Proceedings
            21Item
                No. 4
            Submission
                of Matters to a Vote of Security Holders
            21Part
                IIItem
                No. 5
            Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            21Item
                No. 6
            Selected
                Financial Data
            25Item
                No. 7
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            27Item
                No. 7A
            Quantitative
                and Qualitative Disclosures Regarding Market Risk
            41Item
                No. 8
            Financial
                Statements and Supplementary Data
            42Item
                No. 9
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            42Item
                No. 9A
            Controls
                and Procedures
            42Item
                No. 9B
            Other
                Information
            44Part
                IIIItem
                No. 10
            Directors
                and Executive Officers of the Registrant
            44Item
                No. 11
            Executive
                Compensation
            44Item
                No. 12
            Security
                Ownership of Certain Beneficial Owners and and Management and Related
                Stockholder Matters
            44Item
                No. 13
            Certain
                Relationships and Related Transactions
            44Item
                No. 14
            Principal
                Accounting Fees and Services
            44Part
                IVItem
                No. 15
            Exhibits
                and Financial Statement Schedules
            44








**FORWARD-LOOKING
      STATEMENTS**





This
      annual report includes both historical and “forward-looking statements” within
      the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
      We have based these forward-looking statements on our current expectations
      and
      projections about future results. Words such as “may,” “should,” “could,”
“would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,”
“potential,” “continue,” or similar words are intended to identify
      forward-looking statements, although not all forward-looking statements contain
      these words. Although we believe that our opinions and expectations reflected
      in
      the forward-looking statements are reasonable, we cannot guarantee future
      results, levels of activity, performance or achievements, and our actual results
      may differ substantially from the views and expectations set forth in this
      annual report. We disclaim any intent or obligation to update any
      forward-looking statements after the date of this annual report to conform
      such
      statements to actual results or to changes in our opinions or expectations.
      These forward-looking statements are affected by risks, uncertainties and
      assumptions that we make, including, among other things, the factors that are
      described in “Item No. 1A - Risk Factors.”





**PART
      I**





**Item
      No. 1 Description of Business**





**Business
      Overview**





We
      develop, produce, market and sell two principal lines of products:





·
            **Novelty
                products**,
                principally balloons, including metalized balloons, latex balloons,
                punch
                balls and other inflatable toy items, and





·
            **Specialty
                and printed films and flexible containers**,
                for food packaging, specialized consumer uses and various commercial
                applications.





We
      focus
      our business and efforts on the printing, processing and converting of plastic
      film, and of latex, into finished products. We:





·
            Coat
                and laminate plastic film. Generally, we adhere polyethylene film
                to
                another film such as nylon or
                polyester





·
            Print
                plastic film and latex balloons. We print films, both plastic and
                latex
                with a variety of graphics for use as packaging film or for
                balloons.





·
            Convert
                printed plastic film to
                balloons.


1


·
            Convert
                plastic film to flexible containers. These finished products are
                used to
                store and package food and for storage of a variety of personal
                items.





·
            Convert
                latex to balloons and other novelty
                items.





We
      market
      and sell metalized and latex balloons in the United States and in several other
      countries. We supply coated, laminated and printed films to a number of
      companies who generally convert these films into containers for the packaging
      of
      food and other items. We supply flexible containers to companies who (i) use
      them for packaging of food or other items or (ii) market them to consumers
      who
      use them for the storage of personal items. We also market containers to and
      through retail outlets for use by consumers that include a resealable closure
      system and a valve permitting the evacuation of air from the pouch by a small
      pump device, which we also supply.





In
      1978,
      we began manufacturing metalized balloons (sometimes referred to as "foil"
      balloons), which are balloons made of a base material (usually nylon or
      polyester) having vacuum deposited aluminum and polyethylene coatings. These
      balloons remain buoyant when filled with helium for much longer periods than
      latex balloons and permit the printing of graphic designs on the surface.





In
      1985,
      we began marketing latex balloons and, in 1988 we began manufacturing latex
      balloons. In 1994, we sold our latex balloon manufacturing equipment to a
      company in Mexico and entered into an arrangement for that company to
      manufacture latex balloons for us. Since 1997, we have manufactured latex
      balloons in Mexico through a majority-owned subsidiary.





In
      1999,
      we acquired an extrusion coating and laminating machine and began production
      of
      coated and laminated films, which we have produced since that time.





During
      the period from 1976 to 1986 and from 1996 to the present, we have produced
      flexible containers for the storage of liquids, food products, household goods
      and other items.





We
      market
      and sell our metalized and latex balloons and related novelty items directly
      to
      retail stores and chains and through distributors, who in turn sell to retail
      stores and chains. Our balloon and novelty products are sold to consumers
      through a wide variety of retail outlets including general merchandise, discount
      and drugstore chains, grocery chains, card and gift shops, and party goods
      stores, as well as through florists and balloon decorators.





Most
      of
      our metalized balloons contain printed characters, designs and social expression
      messages, such as “Happy Birthday”, “Get Well Soon” and similar items. In a
      number of cases, we obtain licenses for well-known characters and print those
      characters and messages on our balloons. Currently, we maintain licenses for
      Garfield ® ,
      Odie,
      Face Offs-Tudes ® ,
      Miss
      Spider and Sunny Patch Friends®, Andrea Mistretta and Wow Wow Wubsy®. In the
      United Kingdom, we maintain licenses on The Crazy Frog® and Tudes.


2


Balloons
      and novelty items accounted for 62.6% of our revenues in 2007. The remainder
      of
      our revenues is generated from the sale of laminated film products, generally
      intended for use in the packaging of foods, liquids and other materials. We
      provide laminated films, and printed films, to a number of customers who utilize
      the film to produce bags or pouches for the packaging of food, liquids and
      other
      items. We also produce finished products - pouches and bags - which are used
      for
      a variety of applications, including (i) as vacuumable consumer storage devices
      for clothing and other household items, (ii) as vacuumable pouches for household
      use in storage of food items, and (iii) as “dunnage” items which, when inflated,
      cushion products in a package or container. In 2007, our revenues from these
      products represented approximately 37.4% of our net revenues.





We
      are an
      Illinois corporation with our principal offices and plant at 22160 N. Pepper
      Road, Barrington, Illinois.





**Business
      Strategies**





Our
      essential business strategies are as follows:





·
            *Focus
                on our Core Assets and Expertise*.
                We have been engaged in the development, production and sale of film
                products for over 30 years and have developed assets, technology
                and
                expertise which, we believe, enable us to develop, manufacture, market
                and
                sell innovative products of high quality within our area of knowledge
                and
                expertise. We plan to focus our efforts in these areas which are
                our core
                assets and expertise - laminated films, printed films, pouches and
                film
                novelty products - to develop new products, to market and sell our
                products and to build our revenues.





·
            *Maintain
                a Focus on Margin Levels and Cost Controls in Order to Establish
                and
                Maintain Profitability*.
                We engage in constant review and effort to control our production,
                and our
                selling, general and administrative expenses, in order to establish
                and
                enhance profitability. Over the past three years, we have improved
                our
                gross margin levels from 22.1% in 2005 to 25.1% in 2006 and 23.8%
                in 2007.





·
            *Develop
                New Products, Product Improvements and Technologies*.
                We work constantly to develop new products, to improve existing products
                and to develop new technologies within our core product areas, in
                order to
                enhance our competitive position and our sales. In the novelty line,
                our
                development work includes new designs, new character licenses and
                new
                product developments. We also developed and introduced a device to
                amplify
                sound through a balloon so that voice and music can be played and
                amplified using our Balloon JamzTM balloons. In our commercial line, over
                the past several years we have developed new pouch closure systems
                and
                valves and new film methods for liquid packaging applications. We
                have
                received nine patents for these developments and have three patent
                applications pending.****During
                2007, we introduced a line of resealable pouches with a valve and
                pump
                system for household storage and vacuum sealing of food
                items.


3


·
            *Develop
                New Channels of Distribution and New Sales Relationships*.
                In order to increase sales, we endeavor to develop new channels of
                distribution and new sales relationships, both for existing and new
                products. In March 2006, we entered into a four-year agreement with
                Illinois Tool Works, Inc. (“ITW”) to manufacture certain pouches for them
                and to provide film to them for their pouch production. In April
                2006, we
                entered into a license agreement with Rapak L.L.C. (“Rapak”) granting
                Rapak a license under a patent related to textured film and pouches,
                and
                extending the term of an existing supply agreement with Rapak to
                October
                31, 2008. On February 1, 2008, we entered into a Supply and License
                Agreement with S.C. Johnson & Son, Inc. to manufacture and supply to
                SC Johnson certain home food management products to be sold under
                the SC
                Johnson ZipLoc® brand.





**Products**





*Metalized
      Balloons* .
      We have
      designed, produced and sold metalized balloons since 1979 and, we believe,
      are
      the second largest manufacturer of metalized balloons in the United States.
      Currently, we produce over 650 balloon designs, in different shapes and sizes,
      including the following:





·
            Superloons®-
                18" balloons in round or heart shape, generally made to be filled
                with
                helium and remain buoyant for long periods. This is the predominant
                metalized balloon size.





·
            Ultraloons®-
                31" balloons made to be filled with helium and remain buoyant.





·
            Miniloons®-
                9" balloons made to be air-filled and sold on holder-sticks or for
                use in
                decorations.





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





·
            Shape-A-Loons®-
                “18 to 48” shaped balloons made to be filled with helium.





·
            Minishapes
                - 11” to 16”small shaped balloons designed to be air filled and sold on
                sticks as toys or inflated
                characters.





·
            Balloon
                JamzTM-
                20” to 40” round and shaped balloons which emit and amplify sound through
                a speaker attached to the
                balloon.


4


In
      addition to size and shape, a principal element of the Company's metalized
      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. We maintain licenses for several characters, including
      Garfield ® ,
      Odie,
      Face Offs-Tudes, Miss Spider and Sunny Patch Friends®, Andrea Mistretta and Wow
      Wow Wubsy®, and in the United Kingdom, The Crazy Frog® and Tudes.





*Latex
      Balloons* .
      Through
      our majority-owned subsidiary in Guadalajara, Mexico, Flexo Universal, S.A.
      de
      C.V. (“Flexo Universal”), we manufacture latex balloons in 6 shapes and 42
      colors. These balloons are marketed under the name Partyloons® and Hitex. We
      also manufacture toy balloon products including punch balls, water bombs and
      "Animal Twisties."





*Packaging
      Films* .
      We
      produce and sell films that are utilized for the packaging of various products,
      principally food products. We laminate, extrusion coat and print films and
      sell
      them to customers who utilize the films for packaging applications. Our
      customers generally use these film products to convert them to bags or pouches
      for the packaging of food and other products.





*Pouches,
      Bags and Other Custom Film Products* .
      We
      produce a variety of completed film products, generally in the form of a bag
      or
      pouch. These products include (i) valved, resealable pouches for storage of
      household items, (ii) vacuum sealable bags for food storage, (iii) resealable,
      valved bags for storage and vacuum sealing of food items in the household,
      (v)
“dunnage” bags (inflatable pouches used to cushion products in packages. During
      2007, we introduced a line of resealable, valved bags for storage and vacuum
      sealing of food items in the household. These storage bags function with a
      small
      hand or powered pump to evacuate air when the bag is sealed. This product line
      is marketed under the brand ZipVacTM





**Markets**





*Metalized
      Balloons*





The
      metalized balloon came into existence in the late 1970s. During the 1980s,
      the
      market for metalized 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. Metalized
      balloons remain buoyant when filled with helium for extended periods of time
      and
      they permit the printing and display of graphics and messages. As a result,
      the
      product has significant appeal as a novelty and message item. Metalized balloons
      became part of the "social expression" industry, carrying graphics designs,
      characters and messages like greeting cards. In the mid-1980s, we 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, discount and drug store chains,
      card and gift shops, party goods stores as well as florists and balloon
      decorators. These outlets now represent the principal means for the sale of
      metalized balloons throughout the United States and in a number of other
      countries.


5


Metalized
      balloons are sold in the United States and in Europe, several countries in
      the
      Far East, Canada and to an increasing extent in Latin America. The United
      States, however, is by far the largest market for these products.





Metalized
      balloons are sold in the United States and foreign countries directly by
      producers to retail outlets and through distributors and wholesalers. Often
      the
      sale of metalized balloons by the wholesalers/distributors is accompanied by
      related products including latex balloons, floral supplies, candy containers,
      mugs, plush toys, baskets and a variety of party goods.





*Latex
      Balloons*





For
      a
      number of years, latex balloons and related novelty/toy latex items have been
      marketed and sold throughout the United States and in most other countries.
      Latex balloons are sold as novelty/toy items, for decorative purposes, as part
      of floral designs and as party goods and favors. In addition to standard size
      and shape balloons, inflatable latex items include punch balls, water bombs,
      balloons to be twisted into shapes, and other specialty designs. Often, latex
      balloons included printed messages or designs.





Latex
      balloons are sold principally in retail outlets, including party goods stores,
      general merchandise stores, discount chains, gift stores and drugstore chains.
      Balloons are also purchased by balloon decorators and floral outlets for use
      in
      decorative or floral designs.





Printed
      latex balloons are sold both in retail outlets and for balloon decoration
      purposes including floral designs. "Toy" balloons include novelty balloons
      sold
      in toy departments or stores, punch balls, water bombs and other specialty
      designs.





Latex
      balloons are sold both through distributors and directly to retail outlets
      by
      the producers.





*Printed
      and Specialty Films*





The
      industry and market for printed and specialty films is fragmented and includes
      many participants. There are hundreds of manufacturers of printed and specialty
      film products in the United States and in other markets. In many cases,
      companies who provide food and other products in film packages also produce
      or
      process the films used for their packages. The market for the Company's film
      products consists principally of companies who utilize the films for the
      packaging of their products, including food products and other items. In
      addition to the packaging of food products, flexible containers are used for
      medical purposes (such as colostomy bags, containers for saline solution and
      other items), "dunnage" (to cushion products being packaged), storage of
      personal and household items and other purposes.


6


*Flexible
      Containers/Pouches*





The
      market for flexible containers and pouches is large and diverse. Many companies
      engaged in the production of food items package their products in flexible
      containers or pouches, and, therefore, represent a market for these containers.
      Many of these companies purchase film - often printed film - and convert the
      film to pouches or packages at their own facilities while others purchase
      completed containers from suppliers.





Flexible
      containers and pouches are sold and utilized in the consumer market in numerous
      forms. They include simple open-top plastic bags, resealable bags and zippered
      bags. The market also includes containers and pouches of special design or
      purpose, including vacuumable bags for storage of food or household items,
      medical bags, or commercial uses.





**Marketing,
      Sales and Distribution**





*Balloon
      Products*





We
      market
      and sell our metalized balloon, latex balloon and related novelty products
      throughout the United States and in a number of other countries. We maintain
      a
      marketing staff, sales staff and support staff of 10 individuals and a customer
      service department of 3 individuals. European sales are conducted by CTI
      Balloons, the Company's subsidiary located in Rugby, England. Flexo Universal
      conducts sales and marketing activities for the sale of balloon products in
      Mexico, Latin America, and certain other markets. Sales in other foreign
      countries are made generally to distributors in those countries and are managed
      at the Company's principal offices.





We
      sell
      and distribute our balloon products (i) by our employed staffs of sales and
      customer service personnel in the United States, Mexico and the UK, (ii) through
      a network of distributors and wholesalers in the United States, Mexico and
      the
      UK, (iii) through several groups of independent sales representatives and (iv)
      to selected retail chains. The distributors and wholesalers are generally
      engaged principally in the sale of balloons and related products (including
      such
      items as plush toys, mugs, containers, floral supplies and other items) and
      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.





Our
      largest customer for balloons during 2007 was Dollar Tree Stores. Sales to
      this
      chain in 2007 represented $7,419,000 or approximately 20.3% of our net
      sales.





We
      engage
      in a variety of advertising and promotional activities to promote the sale
      of
      our balloon products. Each year, we produce a complete catalog of our balloon
      products, and also prepare various flyers and brochures for special or seasonal
      products, which we disseminate to thousands of customers, potential customers
      and others. We participate in several trade shows for the gift, novelty, balloon
      and other industries and advertise in several trade and other
      publications.


7





*Printed
      and Specialty Films*





We
      market
      and sell printed and laminated films directly and through independent sales
      representatives throughout the United States. We sell laminated and printed
      films to companies that utilize these films to produce packaging for a variety
      of products, including food products, in both liquid and solid form, such as
      cola syrup, coffee, juices and other items. We seek to identify and maintain
      customer relationships in which we provide value-added in the form of technology
      or systems. Our largest customer for film products is Rapak, L.L.C. (“Rapak”) to
      whom we provide a patented embossed film, as well as other film products. During
      2007, our sales to Rapak totaled $6,982,000, representing 19.1% of our net
      sales **.** Under
      our
      continuing agreement with Rapak, through October 31, 2008, Rapak is committed
      to
      purchase at least 65% of its requirements for embossed film from us. We
      anticipate that Rapak will continue to purchase film from us after this date
      but
      we have no contractual commitment from Rapak for such purchases.





*Flexible
      Containers/Pouches* .





We
      market
      flexible containers and pouches to various companies for commercial packaging
      purposes and we market lines of consumer storage packages both to a principal
      customer and to retail chains and outlets.





We
      produce consumer storage bags for ITW Space Bag, a division of Illinois Tool
      Works, Inc. (“ITW”). During 2007, ITW was our largest customer for pouches. Our
      sales of pouches to them in 2007 were $3,771,000, representing 10.3% of our
      net
      sales. In March 2006, we entered into a four-year agreement with ITW under
      which
      we will supply all of their requirements in North America for certain of their
      pouches which they market under the name Space Bag® and also are to supply their
      requirements of film for certain of the pouches which they produce.





During
      2005, we introduced a line of universal vacuumable bags for household storage
      of
      food products. These bags are designed to be used with existing vacuum and
      sealing devices. We market these bags through various retail channels. During
      2007, we introduced a line of re-sealable pouches incorporating a valve
      permitting the evacuation of air from the sealed pouch by use of a hand pump
      supplied with the pouches. This line of products is marketed under the brand
      name ZipVacTM. We market this line of products to various retail
      outlets.





We
      also
      produce "dunnage" bags (inflatable packaging pouches) which we sell to a
      commercial customer.





**Production
      and Operations** ***.***





We
      conduct our operations at four facilities: (i) our headquarters, offices and
      plant at Barrington, Illinois, consisting of a total of approximately 75,000
      square feet of office, production and warehouse space, (ii) a warehouse in
      Cary,
      Illinois, consisting of approximately 16,000 square feet of space, (iii) a
      plant, office and warehouse in Guadalajara, Mexico, consisting of approximately
      43,000 square feet of office, warehouse and production space and (iv) an office
      and warehouse facility at Rugby, England, consisting of approximately 16,000
      square feet of space.


8





We
      conduct production operations at our plants in Barrington, Illinois and
      Guadalajara, Mexico. At our plants, our production operations include (i)
      lamination and extrusion coating of films, (ii) slitting of film rolls, (iii)
      printing on film and on latex balloons, (iv) converting of film to completed
      products including balloons, flexible containers and pouches and (v) production
      of latex balloon products. We perform all of the lamination, extrusion coating
      and slitting activities in our Barrington, Illinois plant and produce all of
      our
      latex balloon products at our Guadalajara, Mexico plant. We print films in
      Barrington, Illinois and we print latex balloons in Guadalajara,
      Mexico.





We
      warehouse raw materials at our plants in Barrington, Illinois and Guadalajara,
      Mexico and we warehouse finished goods at our facilities in Barrington,
      Illinois, Cary, Illinois, Guadalajara, Mexico and Rugby, England. We maintain
      customer service and fulfillment operations at each of our warehouse locations.
      We conduct sales operations for the United States and for all other markets,
      except those handled by our Mexico and England facilities, in the Barrington,
      Illinois facility. Sales for Mexico and Latin America are handled in our
      Guadalajara, Mexico facility and sales for the United Kingdom and Europe are
      handled at our Rugby, United Kingdom facility.





We
      maintain a graphic arts and development department at our Barrington, Illinois
      facility which designs our balloon products and graphics. Our 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.





We
      conduct administrative and accounting functions at our headquarters in
      Barrington, Illinois and at our facilities in Guadalajara, Mexico and Rugby,
      England.





**Raw
      Materials**





The
      principal raw materials we use in manufacturing our products are (i) petroleum
      or natural gas-based films, (ii) petroleum or natural gas-based resin, (iii)
      latex and (iv) printing inks. The cost of these raw materials represented 41.2%
      of our net revenues in 2007. Because much of the raw materials we utilize are
      based on petroleum or natural gas, we have experienced fluctuation in pricing,
      in relation to the fluctuation of availability and pricing of these source
      commodities. We have also experienced significant fluctuation in the cost of
      raw
      latex which we use for our latex balloon products. While we currently purchase
      our raw materials from a relatively limited number of sources, films, resin,
      inks and latex are available from numerous sources and, in the past, we have
      generally been able to obtain a sufficient supply of raw materials. However,
      during August and September 2005, the petrochemical industry suffered facility
      damage, production disruptions and transportation shortages due to the impact
      of
      two Gulf Coast hurricanes. As a result, both the price and availability of
      petroleum and natural gas-based products were affected. While we were generally
      able to obtain a sufficient supply of raw materials to meet our needs during
      this time, prices of raw materials escalated rapidly and substantially; and,
      the
      risk of shortages of raw materials supply existed. Due to the increase in the
      price of oil over the past several years, the cost of petroleum-based raw
      materials has also risen, with the result that our cost for films and resins
      has
      increased during that time as well.


9





**Information
      Technology Systems**





Our
      corporate headquarters in Barrington, Illinois and our warehouse facility in
      Cary, Illinois are serviced by a PC-based local area network. We connect the
      facilities via a high speed T1 line that carries both voice and data
      communications. Access to the network is available to all appropriate employees
      but is secured through 4 Microsoft servers running Active Directory
      authentication. The network allows us to leverage printing resources, create
      shared file areas for cross-departmental functions and allows for a single
      source backup of critical business files. On the network we run Macola financial
      system software. Macola is a modular software system. We presently use the
      general ledger, order entry, inventory management, purchase order, electronic
      data exchange and custom report writing modules of that system and are engaged
      in a program to install and use additional modules including manufacturing
      costing and controls and inventory controls. Internal and external employee
      communications are handled by industry standard Microsoft Exchange email,
      allowing us to communicate with customers and vendors all over the world. We
      also provide a secure, firewall protected, load balanced and redundant T1 and
      cable internet connection allowing employees to use e-mail, research issues,
      support customers and securely move data.





At
      each
      of our Mexico and England facilities, we operate server computers and local
      area
      networks, accessible to employees at those facilities. At each of those
      facilities, we operate separate integrated financial, order entry and inventory
      management systems.





**Competition**





The
      balloon and novelty industry is highly competitive, with numerous competitors.
      We believe there are presently six principal manufacturers of metalized balloons
      whose products are sold in the United States including Anagram International,
      Inc., Pioneer Balloon Company, Convertidora International S.A. de C.V., Barton
      Enterprises Inc., and Betallic, LLC. Several companies market and sell metalized
      balloons designed by them and manufactured by others for them.





We
      believe there are approximately five manufacturers of latex balloons whose
      products are sold in the United States and numerous others whose products are
      sold in other countries.





The
      market for films, 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.


10





Many
      of
      these companies offer products and services that are the same or similar to
      those offered by us and our ability to compete depends on many factors within
      and outside our control. There are a number of well-established competitors
      in
      each of our product lines, several of which possess substantially greater
      financial, marketing and technical resources and have 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
      we
      can. Competitive pressures include, among other things, price competition,
      new
      designs and product development and copyright licensing.





**Patents,
      Trademarks and Copyrights**





We
      have
      developed or acquired a number of intellectual property rights which we believe
      are significant to our business.





*Copyright
      Licenses.* We
      maintain licenses on certain popular characters and designs for our balloon
      products. We presently maintain seven licenses and produce balloon designs
      utilizing the characters or designs covered by the licenses. Licenses are
      generally maintained for a one or two-year term, although the Company has
      maintained long term relationships with several of its licensors.





*Trademarks.* We own
      12 **** registered
      trademarks in the United States relating to our balloon products. Many of these
      trademarks are registered in foreign countries, principally in the European
      Union.





*Patent
      Rights.* We own,
      or have license rights under, or have applied for, patents related to our
      balloon products, certain film products and certain flexible container products.
      These include (i) ownership of two patents, and a license under a third,
      relating to self-sealing valves for metalized balloons and methods of making
      balloons with such valves, (ii) several metalized balloon design patents, (iii)
      patents and applications related to the design and structure of, and method
      of,
      inserting and affixing, zipper-closure systems in a bag, (iv) patents related
      to
      one-way valves for pouches, (v) a patent related to methods of embossing film
      and utilizing such film to produce pouches with fitments, and (vi) patent
      applications related to vacuumable storage bags with fitments.





**Research
      and Development**





We
      maintain a product development and research department of five individuals
      for
      the development or identification of new products, product components and
      sources of supply. Research and development includes (i) creative product
      development, (ii) creative marketing, and (iii) engineering development. During
      each of the fiscal years ended December 31, 2007, 2006, 2005, respectively,
      we
      estimate that the total amount spent on research and development activities
      was
      approximately $350,000, $230,000 and $224,000 and, respectively.


11


**Employees**





As
      of
      December 31, 2007, the Company had 84 full-time employees in the United States,
      of whom 17 are executive or supervisory, 5 are in sales, 44 are in manufacturing
      or warehouse functions and 18 are clerical. As of that same date, we had 9
      full-time employees in England, of whom 3 are executive or supervisory, 2 are
      in
      sales, 3 are in warehousing and one is clerical. At Flexo Universal, our Mexico
      subsidiary, as of December 31, 2007, we had 228 full-time employees, of whom
      5
      are executive or supervisory, 3 are in sales, 210 are in manufacturing and
      10
      are clerical. The Company is not a party to any collective bargaining agreement
      in the United States, has not experienced any work stoppages and believes that
      its relationship with its employees is satisfactory.





**Regulatory
      Matters**





Our
      manufacturing operations in the United States are subject to the U.S.
      Occupational Safety and Health Act ("OSHA"). We believe we are in material
      compliance with OSHA. The Company generates liquid, gaseous and solid waste
      materials in its operations in Barrington, Illinois and the generation, emission
      or disposal of such waste materials are, or may be, subject to various federal,
      state and local laws and regulations regarding the generation, emission or
      disposal of waste materials. We believe we are in material compliance with
      applicable environmental rules and regulations. Several states have enacted
      laws
      limiting or restricting the release of helium filled metalized balloons. We
      do
      not believe such legislation will have any material effect on our operations.





**International
      Operations**





We
      sell
      balloon products in a number of countries outside the United States. Sales
      of
      these products for the United Kingdom and Europe are handled by our facility
      and
      personnel in Rugby, England, and for Mexico and Latin America by our facility
      and personnel in Guadalajara, Mexico. In other countries, we sell balloon
      products through distributors located in those countries. We conduct production,
      packaging, warehousing and sales operations in Mexico and warehousing and sales
      operations in the United Kingdom. We rely and are dependent on our operations
      in
      Mexico for the supply of latex balloons in the United States, Mexico, Europe
      and
      other markets. Interruption of that supply would have a material adverse effect
      on the business of the Company.


12





Our
      domestic and international sales and assets by area over the period 2005-2007
      have been as follows:




**United
                States**
            
            **United
                Kingdom**
            
            **Mexico**
            
            **Eliminations**
            
            **Consolidated**Year
                ended 12/31/07Revenues
            
            $
            28,657,000
            
            $
            2,913,000
            
            $
            7,189,000
            
            $
            (2,249,000
            )
            $
            36,510,000Operating
                income
            
            $
            810,000
            
            $
            215,000
            
            $
            345,000
            
            $
            (125,000
            )
            $
            1,245,000Net
                (loss) income
            
            $
            (128,000
            )
            $
            167,000
            
            $
            168,000
            
            $
            (125,000
            )
            $
            82,000Total
                Assets
            
            $
            27,854,000
            
            $
            2,948,000
            
            $
            5,780,000
            
            $
            (7,258,000
            )
            $
            29,324,000Year
                ended 12/31/06Revenues
            
            $
            28,808,000
            
            $
            2,925,000
            
            $
            6,564,000
            
            $
            (2,869,000
            )
            $
            35,428,000Operating
                income
            
            $
            2,116,000
            
            $
            64,000
            
            $
            578,000
            
            $
            (25,000
            )
            $
            2,733,000Net
                income
            
            $
            1,544,000
            
            $
            93,000
            
            $
            284,000
            
            $
            (26,000
            )
            $
            1,895,000Total
                Assets
            
            $
            25,245,000
            
            $
            2,627,000
            
            $
            5,050,000
            
            $
            (6,288,000
            )
            $
            26,634,000Year
                ended 12/31/05Revenues
            
            $
            23,564,000
            
            $
            2,573,000
            
            $
            4,536,000
            
            $
            (1,483,000
            )
            $
            29,190,000Operating
                income (loss)
            
            $
            602,000
            
            $
            290,000
            
            $
            (240,000
            )
            $
            
            
            $
            652,000Net
                (loss) income
            
            $
            (342,000
            )
            $
            220,000
            
            $
            (211,000
            )
            $
            
            
            $
            (333,000
            )





**Item
      No. 1A – Risk Factors**





The
      following factors, as well as factors described elsewhere in this Annual Report,
      or in our other filings with the Securities and Exchange Commission, could
      adversely affect our consolidated financial position, results of operation
      or
      cash flows. Other factors not presently known to us, that we do not presently
      consider material, or that we have not predicted, may also harm our business
      operations or adversely affect us.





***Industry
      Risks***





*We
      engage in businesses which are intensely competitive, involve strong price
      competition and relatively low margins.*





The
      businesses in which we engage - supply of films for flexible packaging, supply
      of pouches for flexible packaging and supply of novelty balloon items - are
      highly competitive. We face intense competition from a number of competitors
      in
      each of these product categories, several of which have extensive production
      facilities, well-developed sales and marketing staffs and greater financial
      resources than we do. Some of these competitors maintain international
      production facilities enabling them to produce at low costs and to offer
      products at highly competitive prices. We compete on the basis of price,
      quality, service, delivery and differentiation of products. Most of our
      competitors seek to engage in product development and may develop products
      that
      have superior performance characteristics to our products. This intense
      competition can limit or reduce our sales or market share for the sale of our
      products as well as our margins. There can be no assurance that we will be
      able
      to compete successfully in the markets for our products or that we will be
      able
      to generate sufficient margins from the sale of our products to become or remain
      profitable.


13


*Our
      business is dependent on the price and availability of raw
      materials.*





The
      cost
      of the raw materials we purchase represents about 41.2% of our revenues. The
      principal raw materials we purchase are: nylon sheeting, polyester sheeting,
      polyethylene sheeting, polyethylene resin and latex. Much of these materials
      are
      derived from petroleum and natural gas. Prices for these materials fluctuate
      substantially as a result of the change in petroleum and natural gas prices,
      demand and the capacity of companies who produce these products to meet market
      needs. Instability in the world markets for petroleum and natural gas has,
      and
      may, adversely affect the prices of these raw materials and their general
      availability. The price of latex has also fluctuated significantly over the
      past
      three years. Our ability to achieve and maintain profitability is partially
      dependent upon our ability to pass through to our customers the amount of
      increases in raw materials cost. If prices of these materials increase and
      we
      are not able to fully pass on the increases to our customers, our results of
      operations and our financial condition will be adversely affected.





*Changes
      or limitations in the price and availability of helium to our customers may
      adversely affect our sales of novelty products.*





Many
      of
      our novelty products, including many styles of foil balloons and latex balloons,
      are intended to be, and are, when sold to or used by customers filled with
      helium for buoyancy. During recent months, the price of helium has increased.
      It
      has been reported that the supply of helium is decreasing, that demand for
      helium for industrial and scientific uses has been increasing and that exports
      of helium from the United States, which is the principal producer of helium,
      have increased. As a result, the increased price of helium and possible lack
      of
      availability may adversely affect sales of novelty balloon products, including
      sales by the Company.





*The
      loss of a key supplier or suppliers could lead to increased costs and lower
      margins as well as other adverse results.*





We
      rely
      on eight principal suppliers for our petroleum, natural gas and latex-based
      raw
      material suppliers. We do not maintain supply agreements with any of our
      suppliers for these materials. The loss of any of these suppliers would force
      us
      to purchase these materials from other suppliers or on the open market, which
      may require us to pay higher prices for raw materials than we do now, with
      the
      result that our margins on the sale of our products would be adversely affected.
      In addition, the loss of the supply of an important raw material from one of
      our
      present suppliers may not be replaceable through open market purchases or
      through a supply arrangement with another supplier. In the event that we were
      unable to obtain a raw material from another supplier, we would be unable to
      continue to manufacture certain of our products.





14


***Company
        Risks***
 
 *We
        have a history of both income and losses and have experienced fluctuations
        of
        operating income, which may cause our stock to fluctuate.*


We
      have
      had a history of losses and of fluctuating income from operations over the
      past
      five years. We have reported net income from operations in three of the past
      five years and losses in two of those years Our income or loss from operations
      during that time has ranged from a profit of $2,622,000 to a loss of $223,000
      and has been subject to significant quarterly and annual fluctuations. These
      fluctuations can be caused by:





·
            Economic
                conditions


·
            Competition


·
            Production
                efficiencies


·
            Variability
                in raw materials prices


·
            Seasonality





These
      fluctuations make it more difficult for investors to compare our operating
      results to corresponding prior year periods. These fluctuations also cause
      our
      stock price to fluctuate. You should not rely on our results of operations
      for
      any particular quarter or year as being indicative of our results for a full
      year or any other period.





*We
      have limited financial resources that may adversely affect our ability to invest
      in productive assets, marketing, new products and new
      developments.*





Our
      working capital is limited. As of December 31, 2007, our current assets exceeded
      our current liabilities by approximately $1,318,000. As a result of this limited
      amount of working capital, we may be unable to fund capital investments, working
      capital needs, marketing and sales programs, research and development, patent
      or
      copyright licenses or other items which we would like to acquire or pursue
      in
      accordance with our business strategies. The inability to pursue any of these
      items may adversely affect our competitive position, our business, financial
      condition or prospects.





*A
      high percentage of our sales are to a limited number of customers and the loss
      of any one or more of those customers could adversely affect our results of
      operation, cash flow and financial condition.*





For
      the
      year ended December 31, 2007, our sales to our top 10 customers represented
      65.3% of our net sales and our sales to our top three customers represented
      49.8% of our net sales. We do not have long term contracts with several of
      our
      principal customers. The loss of any of our principal customers, or a
      significant reduction in the amount of our sales to any of them, would have
      a
      material adverse effect on our business and financial condition.





In
      March
      2006, we entered into a four-year agreement with ITW, one of our top three
      customers, to provide (i) all of their requirements for a certain kind of pouch
      and (ii) all of their requirements, subject to competitive pricing, for film
      for
      their use in the production of certain pouches. In April 2006, we entered into
      a
      license agreement with Rapak, one of our top three customers, granting Rapak
      a
      license under a patent related to textured film and pouches, and extending
      the
      term of an existing supply agreement with Rapak to October 31, 2008. On February
      1, 2008, we entered into a Supply and License Agreement with S.C. Johnson &
Son, Inc. to manufacture and sell to SC Johnson certain home food management
      products to be sold under the SC Johnson ZipLoc® brand. The agreement is for a
      term expiring on June 30, 2011 and provides for two renewal terms of two years
      each at the option of SC Johnson.


15





*We
      rely on intellectual property in our business and the failure to develop,
      acquire or protect our intellectual property could adversely affect our
      business.*





We
      consider patents, copyright licenses and to some degree trademarks, as being
      significant to our competitive position, our ability to obtain and retain
      customers and to achieve acceptable margin levels on the sale of our products.
      With respect to our film and flexible packaging/pouch business, we believe
      that
      developing, acquiring and maintaining patent rights are of significance to
      us
      for those reasons. Over the past 12 years, we have obtained nine patents related
      to films, pouches, zippers for pouches, the method of inserting zippers in
      pouches and certain valves for pouches. We have three patents pending with
      regard to such products With respect to our novelty balloon products, we believe
      that patent rights and trade secrets for product developments and copyright
      licenses for characters and designs are of significance to our ability to
      compete in the market and to obtain acceptable margins on the sale of our
      products. Our limited financial resources have made it more difficult for us
      to
      invest in product and patent developments and to obtain copyright licenses.
      If
      we are unable to develop, acquire, maintain or enforce some or all of our
      intellectual property rights, our business, financial conditions and prospects
      will be adversely affected.





*We
      produce all of our products at two plants and damage to or destruction of one
      or
      both of the plants would have a serious adverse affect on our
      business.*





We
      produce all of our film products and pouches at our plant in Barrington,
      Illinois and all of our latex balloon products at our plant in Guadalajara,
      Mexico. In the event of a fire, flood, or other natural disaster, or the
      termination of our lease in Mexico, we could lose access to one or both of
      our
      plants. Loss of, significant damage to, or destruction of, one or both of these
      plants would render us unable to produce our products presently produced in
      such
      plants, possibly for an extended period of time and our business, financial
      condition and prospects would be materially adversely affected. While we
      maintain business interruption insurance, the proceeds of such insurance may
      not
      be adequate to compensate us for all of our losses in such an
      event.





*We
      are dependent on the management experience of our key
      personnel.*





We
      are
      dependent on the management experience and continued services of our executive
      officers, including Howard W. Schwan, our President, John H. Schwan, our
      Chairman and Stephen M. Merrick, our Chief Financial Officer, as well as each
      of
      these other executive officers of the Company: Brent Anderson, Sam Komar, Steve
      Frank and Timothy Patterson. We have an existing employment agreement with
      Howard Schwan, dated January 1, 1997, which is automatically renewed each July
      1
      for another year unless terminated by either party. The agreement includes
      confidentiality, inventions, non-compete and other customary provisions. The
      loss of any of these executive officers would have an adverse effect on our
      business.


16


In
      addition, our continued growth depends on our ability to attract and retain
      experienced key employees. Competition for qualified employees is intense,
      and
      the loss of such persons, or an inability to attract, retain and motivate such
      skilled employees, could have a material adverse effect on our results of
      operations, financial condition and prospects. There can be no assurance that
      we
      will be able to retain our existing personnel or attract and retain additional
      qualified employees.





*Our
      principal executive officers own a majority of our outstanding common stock,
      have warrants to purchase additional shares, and have significant influence
      and
      control over our business.*





Howard
      W.
      Schwan (our President), John H. Schwan (our Chairman) and Stephen M. Merrick
      (our Chief Financial Officer) or persons affiliated to them, in combination,
      owned approximately 45.2% of the outstanding shares of common stock of the
      Company as of April 9, 2008 and then had options and warrants to purchase
      additional shares which, if exercised, together with the shares owned, would
      aggregate 48.2% of the shares then outstanding. As a result of such ownership,
      these executives have the ability to exert significant influence and control
      on
      the outcome of corporate transactions and other matters submitted to the Board
      of Directors or stockholders for approval, including mergers, consolidations
      and
      the sale of all or substantially all of our assets, and also the power to
      prevent or cause a change in control of the Company. **





***Financial
      Risks***





*We
      have a high level of debt relative to our equity, which reduces cash available
      for our business and which may adversely affect our ability to obtain additional
      funds, and increases our vulnerability to economic or business
      turndowns.*





We
      have a
      substantial amount of debt in relation to our shareholders’ equity. As of
      December 31, 2007, we had $22,720,000 of debt outstanding and $6,591,000 in
      shareholders equity. These circumstances could have important adverse
      consequences for our Company. For example they could:





·
            Increase
                our vulnerability to general adverse economic and industry
                conditions


·
            Require
                us to dedicate a substantial portion of our cash flow from operations
                to
                payments on our debt, thereby limiting our ability to fund working
                capital, capital expenditures and other general corporate
                purposes;


·
            Limit
                our flexibility in planning for, or reacting to, changes in our business
                and the industry in which we
                operate;


·
            Place
                us at a competitive disadvantage compared to our competitors who
                may have
                less debt and greater financial resources;
                and


·
            Limit,
                among other things, our ability to borrow additional
                funds.


17




On
      February 1, 2006, we entered into a loan agreement with RBS Citizens, N.A.,
      previously referred to as Charter One Bank, in which, as amended, RBS Citizens,
      N.A. provides to us a line of credit totaling $15,300,000, including a five
      year
      mortgage loan on our principal plant and offices in Barrington, Illinois for
      $2,800,000, a five year term loan secured by our physical assets in Barrington,
      Illinois for $3,500,000 and a three year revolving line of credit secured by
      inventory and receivables in the maximum amount of $9,000,000. In November,
      2007
      RBS Citizens, N.A. also provided to us a capital lease line of credit in the
      aggregate amount of $1,500,000 for the acquisition of production equipment.
      Also, on February 1, 2006, Messrs. John Schwan and Stephen Merrick, each loaned
      to the Company the sum of $500,000 in exchange for five year subordinated notes
      and warrants to purchase up to 151,515 shares of common stock of the Company,
      each.





*We
      will require a significant amount of cash to service our debt, to develop new
      business and to make capital investments and our ability to generate cash
      depends on many factors beyond our control.*





Our
      ability to service our debt and to fund our operations and planned capital
      expenditures will depend on our financial and operating performance and our
      ability to borrow money or raise capital. These matters are, in part, subject
      to
      prevailing economic conditions and to financial, business and other factors
      beyond our control. If our cash flow from operations is insufficient to fund
      our
      debt service obligations, we may be forced to reduce or delay funding capital
      or
      working capital, marketing or other commitments or to sell assets, obtain
      additional equity capital or indebtedness or refinance or restructure our debt.
      These alternative measures may not be successful and may not permit us to meet
      our scheduled debt service obligations, or to fund operations, initiatives
      or
      capital requirements. In the absence of cash flow from operations, or the
      generation of cash from such other sources sufficient to meet our debt service
      obligations and our other cash requirements, we could face substantial cash
      problems.





In
      July
      2006, we entered into a Standby Equity Distribution Agreement (SEDA) with
      Cornell Capital Partners, LP (“Cornell Capital”) pursuant to which we may, at
      our discretion, periodically sell to Cornell Capital shares of common stock
      at a
      price equal to the volume weighted average price of our common stock on the
      NASDAQ Capital Market for the five days immediately following the date we notify
      Cornell Capital of our request. See pages 35-37 for a description of the
      agreement. On December 28, 2006, we filed a Registration Statement with the
      SEC
      for the registration of 403,500 shares to be sold by Cornell Capital and
      Newbridge Securities (our placement agent). On January 28, 2007, the
      Registration Statement was declared effective. Through December 31, 2007, in
      connection with the SEDA, we have requested and received aggregate advances
      from
      Cornell Capital under this agreement for $1,580,000 and Cornell Capital has
      purchased from us an aggregate of 323,625 shares of our common stock.


18


*We
      are subject to a number of restrictive debt covenants that may restrict our
      business and financing activities.*





Our
      credit facility contains restrictive debt covenants that, among other things,
      restrict our ability to:





·
            Borrow
                money;


·
            Pay
                dividends and make distributions;


·
            Issue
                stock


·
            Make
                certain investments;


·
            Use
                assets as security in other
                transactions;


·
            Create
                liens;


·
            Enter
                into affiliate transactions;


·
            Merge
                or consolidate; or


·
            Transfer
                and sell assets.





In
      addition, our credit facility also requires us to meet certain financial tests,
      including (i) maintaining tangible net worth in excess of $3,500,000, (ii)
      maintaining specified ratios of senior debt to EBITDA and (iii) maintaining
      a
      ratio of EBITDA to fixed charges. These restrictive covenants may limit our
      ability to expand or pursue our business strategies.





Our
      ability to comply with the restrictions contained in our credit facility may
      be
      affected by changes in our business condition or results of operation, adverse
      regulatory developments, or other events beyond our control. A failure to comply
      with these restrictions could result in a default under our credit facility
      which, in turn, could cause our debt to become immediately due and payable.
      If
      our debt were to be accelerated, we cannot assure that we would be able to
      repay
      it. In addition, a default would give our lender the right to terminate any
      commitment to provide us with additional funds.





**Market
      Risks and Risks Related to the Offering Described in Our Registration
      Statement**





*Our
      common stock may be affected by limited trading volume and may fluctuate
      significantly, which may affect shareholders’ ability to sell shares of our
      common stock.*





There
      has
      been a limited public market for our common stock and a more active trading
      market for our common stock may not develop. An absence of an active trading
      market could adversely affect our shareholders’ ability to sell our common stock
      in short time periods, or possibly at all. Our common stock has experienced,
      and
      is likely to experience in the future, significant price and volume
      fluctuations, which could adversely affect the market price of our common stock
      without regard to our operating performance. In addition, we believe that
      factors such as quarterly fluctuations in our financial results and changes
      in
      the overall economy or the condition of the financial markets could cause the
      price of our common stock to fluctuate substantially. These factors may
      negatively affect shareholders’ ability to sell shares of our common
      stock.


19


*Our
      common stock may be affected by sales of short sellers, which may affect
      shareholders’ ability to sell shares of our common stock.*





As
      stated, our common stock has experienced, and is likely to experience in the
      future, significant price and volume fluctuations. These fluctuations could
      cause short sellers to enter the market from time to time in the belief that
      we
      may have poor operating results in the future. The market for our common stock
      may not be stable or appreciate over time and the sale of our common stock
      may
      negatively impact shareholders’ ability to sell shares of our common
      stock.





*Future
      Sales of Stock By Our Shareholders May Negatively Affect Our Stock Price
      And Our Ability To Raise Funds In New Stock Offerings*





Sales
      of
      our common stock in the public market by our existing substantial shareholders,
      could lower the market price of our common stock. Sales may also make it more
      difficult for us to sell equity securities or equity-related securities in
      the
      future at a time and price that our management deems acceptable or at all.
      Of
      the 2,732,124 shares of common stock outstanding as of April 9, 2008, 811,182
      shares of common stock are, or will be, held by our “affiliates” and 1,296,066
      shares of common stock, held by existing shareholders, including the officers
      and directors, are “restricted securities” and may be resold in the public
      market only if registered or pursuant to an exemption from registration. Some
      of
      these shares may be resold under Rule 144.




**Item
      No. 1B – Unresolved Staff Comments**




As
      of the
      filing of this Annual report on Form 10-K, we had no unresolved comments from
      the staff of the Securities and Exchange Commission that were received not
      less
      than 180 days before the end of our 2007 fiscal year.




**Item
      No. 2 Properties**





We
      own
      our 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. This facility
      is subject to a mortgage loan in the principal amount of $2,800,000, having
      a
      term of 5 years, with payments amortized over 25 years.





In
      September 2005, the Company entered into a lease to rent 16,306 square feet
      of
      space in Cary, Illinois. This lease has a 2-year term. In September 2006, the
      Company signed an extension to this lease to run through September 2009. The
      facility includes warehouse and office space, which is utilized principally
      for
      the warehousing of balloon inventory. In addition, as of December 2007, we
      entered into a month-to-month agreement to rent additional warehouse space
      as
      required.


20


The
      Company also leases approximately 15,000 square feet of office and warehouse
      space in Rugby, England at an annual lease cost of $51,700, expiring in 2019.
      This facility is utilized to warehouse balloon products and to manage and
      service the Company's operations in England and Europe.





In
      February 2008, Flexo Universal entered into a 3-year lease agreement for the
      lease of approximately 43,000 square feet of manufacturing, warehouse and office
      space in Guadalajara, Mexico at the cost of $19,200 per month.





We
      believe that our properties have been adequately maintained, are in generally
      good condition and are suitable for our business as presently conducted. We
      believe our existing facilities provide sufficient production capacity for
      our
      present needs and for our presently anticipated needs in the foreseeable future.
      We also believe that, with respect to leased properties, upon the expiration
      of
      our current leases, we will be able to either secure renewal terms or to enter
      into leases for alternative locations at market terms.




**Item
      No. 3 Legal Proceedings**





On
      December 20, 2006, Pliant Corporation filed an action against the Company in
      the
      Circuit Court of Cook County, Illinois. In the action, Pliant claims that there
      is due from the Company to Pliant the sum of $245,000 for goods sold and
      delivered by Pliant to the Company as well as interest on such amount. On
      February 21, 2007, the Company filed an answer to the complaint and counterclaim
      denying liability and asserting certain claims against Pliant for damages for
      the sale by Pliant to the Company of defective products. Management intends
      to
      defend the claims of Pliant in this action and to pursue its counterclaims
      and
      believes that the Company has established adequate reserves regarding the claim.





In
      addition, the Company is also party to certain lawsuits or claims arising in
      the
      normal course of business. The ultimate outcome of these matters is unknown,
      but
      in the opinion of management, we do not believe any of these proceedings will
      have, individually or in the aggregate, a material adverse effect upon our
      financial condition, cash flows or future results of operation.




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





No
      matters were submitted to the shareholders of the Company during the Fourth
      Quarter 2007.





**PART
      II**





**Item
      No. 5 Market for Registrant's Common Equity, Related Stockholder Matters and
      Issuer Purchases of Equity Securities**





Market
      Information. The Company's Common Stock was admitted to trading on the NASDAQ
      SmallCap Market (now the NASDAQ Capital Market) under the symbol CTIB on
      November 5, 1997.


21


The
      high
      and low sales prices for the last nine fiscal quarters (retroactively
      adjusted to reflect post-reverse split share and stock dividend values),
      according to the NASDAQ Stock Market's Stock Price History Report, were:




**High**
            
            **Low**January
                1, 2006 to March 31, 2006
            
            
            3.56
            
            
            2.77April
                1, 2006 to June 30, 2006
            
            
            3.90
            
            
            2.60July
                1, 2006 to September 30, 2006
            
            
            4.68
            
            
            2.20October
                1, 2006 to December 31, 2006
            
            
            8.23
            
            
            3.50January
                1, 2007 to March 31, 2007
            
            
            10.39
            
            
            4.39April
                1, 2007 to June 30, 2007
            
            
            8.10
            
            
            3.68July
                1, 2007 to September 30, 2007
            
            
            5.59
            
            
            2.88October
                1, 2007 to December 31, 2007
            
            
            5.44
            
            
            2.76January
                1, 2008 to March 31, 2008
            
            
            6.43
            
            
            3.25





As
      of
      March 4, 2008 there were approximately 32 holders of record of the Company’s
      Common Stock. The Company believes that its total number of actual shareholders
      is substantially greater than the number of record shareholders.





The
      Company has never paid any cash dividends on its Common Stock and does not
      currently intend to pay cash 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 is restricted from declaring any cash dividends or other
      distributions on its shares.





**Issuer
      Purchases of Equity Shares**





The
      Company made no purchases of its shares during 2007.





**Recent
      Sales of Unregistered Securities**





During
      February 2003, John H. Schwan loaned $930,000 to the Company and Stephen M.
      Merrick loaned $700,000 to the Company, each in exchange for (i) two year
      promissory notes bearing interest at 9% per annum and (ii) five year warrants
      to
      purchase up to 163,000 shares of Common Stock of the Company at $4.87 per share,
      the market price of the Common Stock on the date of the Warrants. The proceeds
      of these loans were to (i) re-finance the bank loan of CTI Mexico in the amount
      of $880,000 and (ii) to provide financing for CTI Mexico and Flexo Universal.
      On
      February 8, 2008, Mr. Schwan and Mr. Merrick exercised these warrants utilizing
      $793,810 in principal amount of such promissory notes as payment of the exercise
      price for the shares purchased. The payment date of the remaining amount of
      the
      notes have been extended to December 31, 2008.


22





On
      September 23, 2005, the Company issued 50,229 shares of its common stock to
      three service providers as payment for services.





On
      February 1, 2006, John H. Schwan and Stephen M. Merrick each loaned the sum
      of
      $500,000 to the Company, each in exchange for (i) five year promissory notes
      bearing interest at 2% in excess of the prime rate and (ii) five year warrants
      to purchase up to 151,515 shares each of common stock of the Company at the
      price of $3.30 per share, an amount equal to 110% of the market price of the
      common stock on the day immediately preceding the date of the
      transaction.





On
      June
      6, 2006, the Company entered into a Standby Equity Distribution Agreement with
      Cornell Capital pursuant to which Cornell Capital agreed, subject to certain
      conditions, to purchase up to $5,000,000 of the Company’s common stock for its
      own account, for investment, during a commitment period of 24 months commencing
      on the date of an effective registration statement covering the shares to be
      sold. Under the agreement, shares are to be purchased at the lowest volume
      weighted average price of the shares as traded during the five trading days
      after an advanced request by the Company. The number of shares to be sold under
      the agreement is limited to 400,000 shares unless shareholder approval shall
      have been obtained for the sale of a greater amount of shares. The sale of
      the
      shares is subject to certain conditions including the filing by the Company,
      and
      the declaration of effectiveness by the SEC, of a Registration Statement
      covering the shares to be sold under the agreement. On December 28, 2006, the
      Company filed a Registration Statement with respect to 403,500 shares and on
      January 26, 2007, the Registration Statement was declared effective. Since
      the
      effective date to March 19, 2008, the Company has sold to Cornell Capital an
      aggregate of 323,625 shares of common stock at an average price of $4.88 per
      share.





Also
      on
      July 6, 2006, the Company entered into a Placement Agent Agreement with
      Newbridge Securities Corp. under which Newbridge agreed to act as the Company’s
      exclusive placement agent in connection with the Standby Equity Distribution
      Agreement. Under this agreement, the Company agreed to issue 3,500 shares of
      its
      common stock to Newbridge.





On
      June
      12, 2006, John Schwan exercised a warrant issued on July 1, 2001 to purchase
      79,367 shares of common stock of the Company at the warrant exercise price
      of
      $1.50 per share. In payment for such shares, Mr. Schwan surrendered to the
      Company 38,404 shares of common stock at the then market price per share of
      $3.09. On June 12, 2006, Stephen M. Merrick exercised a warrant issued on July
      1, 2001 to purchase 39,683 shares of common stock of the Company at the warrant
      exercise price of $1.50 per share.





On
      February 1, 2007, the Company issued to Capstone Advisory Group, L.L.C. 17,000
      shares of common stock for consulting services to be performed over an 18-month
      period.





Each
      of
      the foregoing transactions involved the sale of securities of the Company to
      a
      limited number of sophisticated investors on a restricted basis, for investment,
      and an exemption from registration with respect to such sales is claimed
      pursuant to Section 4(2) of the Securities Act of 1933.


23


**Stock
      Performance Graph**





The
      following graph compares for the period December, 2002 to December, 2007, the
      cumulative total return (assuming reinvestment of dividends) on our common
      stock
      with (i) NASDAQ Composite Index (U.S.), (ii) S&P 500 Specialty Stores Index
      (U.S.) and (iii) a Peer Group. The Peer Group was created based on ten companies
      with similar Market-Capitalization (5 above and 5 below). The graph assumes
      an
      investment of $100 on December 31, 2002, in our common stock and each of the
      other investment categories.





The
      historical stock prices of our common stock shown on the graph below are not
      necessarily indicative of future stock performance. Per share value as of
      December 31, 2002 through December 31, 2007 is based on the common stock’s
      closing price as of such date. All prices reflect any stock splits or dividends
      during the period.





Graph




The information under this heading shall not be deemed
      incorporated by reference by any general statement incorporating by reference
      information from this Annual Report into any filing under the Securities Act
      of
      1933 or under the Securities Exchange Act of 1934 and shall not otherwise be
      deemed filed under such Acts.




24




**Item
      No. 6 Selected Financial Data**





The
      following selected financial data are derived from the consolidated financial
      statements of the Company. The data should be read in conjunction with the
      consolidated financial statements, related notes, and other financial
      information included herein.




**Year
                ended December 31, (000 omitted)**2007
            
            2006
            
            2005
            
            2004
            
            2003**Statement
                of Operations Data:**Net
                Sales
            
            $
            36,510
            
            $
            35,428
            
            $
            29,190
            
            $
            37,193
            
            $
            36,260Costs
                of Sales
            
            $
            27,826
            
            $
            26,531
            
            $
            22,726
            
            $
            30,841
            
            $
            29,627Gross
                Profit
            
            $
            8,684
            
            $
            8,897
            
            $
            6,464
            
            $
            6,352
            
            $
            6,633Operating
                expenses
            
            $
            7,439
            
            $
            6,275
            
            $
            5,812
            
            $
            6,402
            
            $
            6,856Income
                (loss) from operations
            
            $
            1,245
            
            $
            2,622
            
            $
            652
            
            $
            (50
            )
            $
            (223
            )Interest
                expense
            
            $
            1,286
            
            $
            1,691
            
            $
            1,231
            
            $
            1,350
            
            $
            1,103Other
                (income) expense
            
            $
            (174
            )
            $
            (191
            )
            $
            (45
            )
            $
            (208
            )
            $
            23Income
                (loss) before taxes and minority interest
            
            $
            133
            
            $
            1,122
            
            $
            (534
            )
            $
            (1,192
            )
            $
            (1,349
            )Income
                tax (benefit) expense
            
            $
            51
            
            $
            (774
            )
            $
            (200
            )
            $
            1,286
            
            $
            (782
            )Minority
                interest
            
            $
            -
            
            $
            1
            
            $
            -
            
            $
            1
            
            $
            -Net
                Income (loss)
            
            $
            82
            
            $
            1,895
            
            $
            (333
            )
            $
            (2,479
            )
            $
            (566
            )Earnings
                (loss) per common shareBasic
            
            $
            0.03
            
            $
            0.91
            
            $
            (0.17
            )
            $
            (1.28
            )
            $
            (0.30
            )Diluted
            
            $
            0.03
            
            $
            0.85
            
            $
            (0.17
            )
            $
            (1.28
            )
            $
            (0.30
            )**Other
                Financial Data:**Gross
                margin percentage
            
            
            23.79
            %
            
            25.11
            %
            
            22.14
            %
            
            17.08
            %
            
            18.29
            %Capital
                Expenses
            
            $
            2,848
            
            $
            553
            
            $
            550
            
            $
            306
            
            $
            2,007Depreciation
                & Amortization
            
            $
            1,299
            
            $
            1,205
            
            $
            1,463
            
            $
            1,651
            
            $
            1,619**Balance
                Sheet Data:**Working
                capital (Deficit)
            
            $
            1,318
            
            $
            1,848
            
            $
            (2,426
            )
            $
            (2,790
            )
            $
            (706
            )Total
                assets
            
            $
            29,256
            
            $
            26,645
            
            $
            23,536
            
            $
            27,888
            
            $
            30,270Short-term
                obligations(1)
            
            $
            9,767
            
            $
            9,422
            
            $
            8,618
            
            $
            9,962
            
            $
            6,692Long-term
                obligations
            
            $
            6,237
            
            $
            6,887
            
            $
            6,039
            
            $
            6,491
            
            $
            8,909Stockholders’
                Equity
            
            $
            6,523
            
            $
            5,102
            
            $
            2,726
            
            $
            2,951
            
            $
            5,212





(1)
            Short
                term obligations consist of primarily of borrowings under bank line
                of
                credit and current portion of long-term
                debt.


25




The
      following table sets forth selected unaudited statements of operations for
      each
      quarter of fiscal 2007 and 2006:





For
                the Year Ended December 31, 2007 (1)1st
            
            2nd
            
            3rd
            
            4thQuarter
            
            Quarter
            
            Quarter
            
            QuarterNet
                sales
            
            $
            8,279,000
            
            $
            9,259,000
            
            $
            8,673,000
            
            $
            10,299,000Gross
                profit
            
            $
            1,903,000
            
            $
            2,744,000
            
            $
            1,617,000
            
            $
            2,420,000Net
                (loss) income
            
            $
            (52,000
            )
            $
            423,000
            
            $
            (414,000
            )
            $
            125,000Earnings
                per common shareBasic
            
            $
            (0.02
            )
            $
            0.18
            
            $
            (0.18
            )
            $
            0.05Diluted
            
            $
            (0.02
            )
            $
            0.17
            
            $
            (0.18
            )
            $
            0.05




(1)
      Earnings per common share are computed independently for each of the quarters
      presented. Therefore, the sum of the quarterly per common share information
      may
      not equal the annual earnings per common share





For
                the Year Ended December 31, 2006 (1)1st
            
            2nd
            
            3rd
            
            4thQuarter
            
            Quarter
            
            Quarter
            
            Quarter
                (2)Net
                sales
            
            $
            8,156,000
            
            $
            8,997,000
            
            $
            8,603,000
            
            $
            9,672,000Gross
                profit
            
            $
            1,953,000
            
            $
            2,197,000
            
            $
            2,253,000
            
            $
            2,494,000Net
                income
            
            $
            220,000
            
            $
            206,000
            
            $
            315,000
            
            $
            1,154,000Earnings
                per common shareBasic
            
            $
            0.11
            
            $
            0.10
            
            $
            0.15
            
            $
            0.54Diluted
            
            $
            0.10
            
            $
            0.10
            
            $
            0.15
            
            $
            0.49





(1)
            Earnings
                per common share are computed independently for each of the quarters
                presented. Therefore, the sum of the quarterly per common share
                information may not equal the annual earnings per common
                share





(2)
            During
                the fourth quarter 2006, management of the Company conducted an analysis
                of the recoverability of the deferred tax asset based on results
                of
                operations during the fourth quarter of 2005 and for the full year
                of
                2006, expected continued achievement of and continuing improvement
                in
                operating results for the forseeable future and anticipated repatriations
                of profits and services income to be generated from the Company's
                foreign
                subsidiaries. As a result of such analysis, management determined
                that the
                net recorded deferred tax asset in the amount of $1,127,000 is more
                likely
                than not to be realized.


26





**Item
      No. 7 Management's Discussion and Analysis of Financial Condition and Results
      of
      Operations**





**Overview**





The
      Company produces film products for novelty, packaging and container
      applications. These products include metalized balloons, latex balloons and
      related latex toy products, films for packaging applications, and flexible
      containers for packaging and storage applications. We produce all of our film
      products for packaging and container applications at the facilities in
      Barrington, Illinois. We produce all of our latex balloons and latex products
      at
      our facility in Guadalajara, Mexico. Substantially all of our film products
      for
      packaging applications and flexible containers for packaging and storage are
      sold to customers in the United States. We market and sell our novelty items
      -
      principally metalized balloons and latex balloons - in the United States,
      Mexico, the United Kingdom and a number of additional countries.





Our
      revenues from each of our product categories in each of the past three years
      have been as follows:




**(000
                Omitted)****$**
            ****
            **%
                of**
            
            **$**
            
            **%
                of**
            
            **$**
            
            **%
                of****Product
                Category**
            
            
            **2007**
            
            
            **Net
                Sales**
            
            
            **2006**
            
            
            **Net
                Sales**
            
            
            **2005**
            
            
            **Net
                Sales**Metalized
                Balloons
            
            
            15,998
            
            
            43.8%
            
            
            17,050
            
            
            48.1%
            
            
            11,737
            
            
            40.2%Films
            
            
            7,846
            
            
            21.5%
            
            
            8,412
            
            
            23.7%
            
            
            7,616
            
            
            26.1%Pouches
            
            
            4,938
            
            
            13.5%
            
            
            3,081
            
            
            8.7%
            
            
            4,079
            
            
            14.0%Latex
                Balloons
            
            
            6,853
            
            
            18.8%
            
            
            6,083
            
            
            17.2%
            
            
            4,855
            
            
            16.6%Helium/Other
            
            
            875
            
            
            2.4%
            
            
            802
            
            
            2.3%
            
            
            903
            
            
            3.1%**Total**
            
            
            **36,510**
            
            
            **100.0%**
            
            
            **35,428**
            
            
            **100.0%**
            
            
            **29,190**
            
            
            **100.0%**





Our
      primary expenses include the cost of products sold and selling, general and
      administrative expenses.





Cost
      of
      products sold primarily consists of expenses related to raw materials, labor,
      quality control and overhead directly associated with production of our
      products, as well as shipping costs relating to the shipment of products to
      customers. Cost of products sold is impacted by the cost of the raw materials
      used in our products, the cost of shipping, along with our efficiency in
      managing the production of our products.





Selling,
      general and administrative expenses include the compensation and benefits paid
      to our employees, all other selling expenses, marketing, promotional expenses,
      travel and other corporate administrative expenses. These other corporate
      administrative expenses include professional fees, depreciation and
      amortization, occupancy costs, communication costs and other similar operating
      expenses. Selling, general and administrative expenses can be affected by a
      number of factors, including staffing levels and the cost of providing
      competitive salaries and benefits, the cost of regulatory compliance and other
      administrative costs.


27





Purchases
      by a limited number of customers represent a significant portion of our total
      revenues. In 2007, sales to our top 10 customers represented 65.3% of net
      revenues. During 2007, there were three customers to whom our sales represented
      more than 10% of net revenues. Our principle customers and 2007 sales to them
      were:





**Customer**
            
            **Product**
            
            **2007 Sales**
            
            **% of 2007**
              **Revenues**
            
            **2006 Sales**
            
            **% of 2006**
              **Revenues**Dollar
                Tree Stores
            
            
            Balloons
            
            $
            7,419,000
            
            
            20.3%
            
            $
            8,596,000
            
            
            24.3%Rapak
                L.L.C
            
            
            Films
            
            $
            6,982,000
            
            
            19.1%
            
            $
            7,110,000
            
            
            20.1%ITW
                Spacebag
            
            
            Pouches
            
            $
            3,771,000
            
            
            10.3%
            
            $
            2,526,000
            
            
            7.1%





The
      loss
      of one or more of these principal customers, or a significant reduction in
      purchases by one or more of them, could have a material adverse effect on our
      business.





**Results
      of Operations**





The
      following table sets forth selected results of our operations expressed as
      a
      percentage of net sales for the years ended December 31, 2007, 2006 and 2005.
      Our results of operations for the periods described below are not necessarily
      indicative of results of operations for future periods.




**Year
                ended December 31,****2007**
            
            **2006**
            
            **2005*****Net
                sales***
            
            
            100.0%
            
            
            100.0%
            
            
            100.0%Costs
                and expenses:Cost
                of products sold
            
            
            76.2
            
            
            74.9
            
            
            77.9Operating
                Expenses
            
            
            20.4
            
            
            17.7
            
            
            19.9Income
                from operations
            
            
            3.4
            
            
            7.4
            
            
            2.2Interest
                expense
            
            
            (3.5)
            
            
            (4.8)
            
            
            (4.2)Other
                income
            
            
            0.5
            
            
            0.5
            
            
            0.2Income
                (loss) before income taxes
            
            
            0.4
            
            
            3.1
            
            
            (1.8)Provision
                for income taxes
            
            
            0.2
            
            
            (2.2)
            
            
            (0.7)Net
                profit (loss)
            
            
            0.2%
            
            
            5.3%
            
            
            (1.1)%


28





**Year
      Ended December 31, 2007 Compared to Year Ended December 31,
      2006**





*Net
      Sales*





For
      the
      fiscal year ended December 31, 2007, consolidated net sales from the sale of
      all
      products were $36,510,000 compared to consolidated net sales of $35,428,000
      for
      the year ended December 31, 2006, an increase of 3.1%.





In
      2007,
      sales of metalized balloons declined by 6.2% from $17,050,000 in 2006 to
      $15,998,000 in 2007. This decline is attributable to a decline in sales of
      metalized balloons to Dollar Tree Stores from $8,596,000 in 2006 to $7,419,000
      in 2007. Sales of metalized balloons to customers other than Dollar Tree Stores
      increased from $8,454,000 in 2006 to $8,579,000 in 2007.





Sales
      of
      film products declined from $8,412,000 in 2006 to $7,846,000 in 2007. This
      decline is due principally to our decision to withdraw from the production
      and
      sale of certain product items we deemed not profitable. Sales to our principal
      films customer, Rapak LLC, decreased from $7,110,000 in 2006 to $6,982,000
      in
      2007.





Sales
      of
      pouch products increased by 60.3% from $3,081,000 in 2006 to $4,938,000 in
      2007.
      This increase was due to (i) an increase in pouch sales to our principal pouch
      customer ITW Space Bag from $2,526,000 in 2006 to $3,771,000 in 2007 and (ii)
      the introduction of our ZipVacTM line of products. Total sales of the ZipVacTM
line in 2007 were $465,000.





Sales
      of
      latex balloons increased by 12.7% from $6,083,000 in 2006 to $6,853,000 in
      2007.
      Most of this increase is represented by increased sales of latex balloons in
      Mexico by Flexo Universal, our Mexican subsidiary.





*Cost
      of Sales*





Cost
      of
      sales increased from 74.9% of sales in 2006 to 76.2% of sales in 2007. This
      increase is the result of (i) changes in product mix (ii) increase in raw
      materials, (iii) increase labor rates and (iv) production cost related to the
      set-up, testing and initial production of pouch production lines.





*General
      and Administrative Expenses*





General
      and administrative expenses increased from $4,554,000 in 2006 or 12.9% of net
      sales to $5,211,000 or 14.3% of net sales. This increase is attributable
      principally to (i) increases in personnel and compensation, (ii) increases
      in
      accounting fees, (iii) increases in legal fees, (iii) increases in consulting
      fees relating to operational strategies and internal controls documentation
      and
      (iv) increases in travel related to vendor development in Southeast
      Asia.


29





*Selling*





Selling
      expenses decreased from $847,000 or 2.4% of sales in 2006 to $754,000 or 2.1%
      of
      sales in 2007. We anticipate that selling expenses will increase during 2008,
      due to new personnel and related sales expenses.





*Advertising
      and Marketing*





Advertising
      and Marketing expenses increased from $1,201,000 or 3.4% of sales in 2006 to
      $1,474,000 or 4% of sales in 2007. This increase is due to (i) an increase
      in
      marketing and promotion relating to the Company’s new Zip-Vac product, (ii)
      artwork and films and (iii) an increase in the cost of in store servicing for
      new retail customers.





We
      anticipate further increases in marketing and advertising expenses during 2008
      as we invest in the marketing and sale of our ZipVacTM line of zippered vacuum
      pouches.





*Other
      Income or Expense*





During
      2007, we incurred net interest expense of $1,286,000 compared to net interest
      expense of $1,691,000 during 2006. The reduction in interest expense incurred
      in
      2007 is the result of both lower applicable interest rates and reduced levels
      of
      borrowing.





During
      2007, we realized foreign currency gain in the amount of $174,000 compared
      to
      foreign currency gain in 2006 of $191,000.





During
      2007, we had no other items of operating income or expense. During 2006, we
      incurred a loss on the sale of certain assets in the amount of $145,000 and
      we
      realized income from the settlement of certain vendor claims in the amount
      of
      $472,000.





*Net
      Income or Loss*





During
      2007, we had net income of $82,000 compared to net income of $1,895,000 in
      2006.
      Net income for 2007 was affected by cost related to the set-up, testing and
      initial production of pouch production lines. During 2007, we incurred such
      costs in the total amount of approximately $2,330,000 of which $2,082,000 was
      capitalized. Our 2006 net income included a tax benefit of $774,000 and, absent
      that tax benefit, our net income for that year was $1,121,000.





*Income
      Taxes*





For
      2007,
      the Company recognized an income tax expense, on a consolidated basis, of
      $51,000. This income tax expense is composed of income tax expense realized
      by
      CTI Balloons, our United Kingdom subsidiary, and Flexo Universal, our Mexico
      subsidiary, in the amounts of $90,000 and $98,000, respectively, and an income
      tax benefit of $137,000 recognized by the Company in the United States. In
      2006,
      the Company recognized an income tax benefit of $774,000 by reason of the
      determination of management to reduce the amount of the valuation allowance
      previously taken with respect to the deferred tax asset.


30





**Year
      Ended December 31, 2006 Compared to Year Ended December 31,
      2005**





*Net
      Sales*





For
      the
      fiscal year ended December 31, 2006, consolidated net sales from the sale of
      all
      products were $35,428,000 compared to consolidated net sales of $29,190,000
      for
      the year ended December 31, 2005, an increase of 21.4%. The increase in net
      sales is attributable principally to an increase in (i) metalized balloon sales
      from $11,737,000 in 2005 to $17,050,000 in 2006 and (ii) latex balloon sales
      from $4,855,000 in 2005 to $6,083,000 in 2006.





The
      increase in metalized balloon sales reflects, principally, an increase in sales
      of these products to a principal customer, Dollar Tree Stores. Sales to this
      chain increased from $3,987,000 in 2005 to $8,596,000 in 2006.





Sales
      of
      commercial films increased by 10% from $7,616,000 in 2005 to $8,412,000 in
      2006.
      Most of this increase is reflected in increased sales to Rapak,
      LLC.





Sales
      of
      pouches declined from $4,079,000 to $3,081,000. The decline is accounted for
      by
      reduced sales to ITW Spacebag. Sales of our vacuumable pouch line in 2006 were
      $319,000.





The
      increase in latex balloon sales occurred as the result of increased levels
      of
      production achieved by our Guadalajara facility and increases in sales to
      several customers in the United States and Mexico.





*Cost
      of Sales*





Cost
      of
      sales declined from 77.9% of net sales in 2005 to 74.9% of net sales in 2006.
      This improvement in gross margin has resulted from production efficiencies
      which
      include (i) the allocation of production overhead among a larger number of
      units
      produced and (ii) stabilization in the cost of raw materials.





*General
      and Administrative Expenses*





For
      2006,
      general and administrative expenses were $4,554,000, or 12.9% of net sales
      compared to $3,847,000 or 13.2% of net sales in 2005. The increases in general
      and administrative expenses consisted principally of (i) salary increases to
      existing personnel, (ii) new personnel and (iii) increases in audit
      expenses.


31





*Selling*





Selling
      expenses declined from $928,000 or 3.2% of net sales in 2005 to $847,000 or
      2.4%
      of net sales in 2006. This decline is attributable principally to (i) the change
      in position of one executive from sales to marketing during 2006 and the
      associated change in recording of salary and related expense from sales to
      marketing and (ii) the reclassification of customer service expenses to
      marketing expense.





*Advertising
      and Marketing*





Advertising
      and marketing expenses increased from $913,000 or 3.1% of net sales in 2005
      to
      $1,201,000 or 3.4% of net sales in 2006. This increase is attributable
      principally to the change in position described with respect to selling expense
      and the reclassification of customer service expense to marketing.





*Other
      Operating Expense (Income)*





During
      2006, we had income from the settlement of vendor claims totaling $472,000
      and
      we incurred losses on the disposition of assets in the amount of $145,000.
      In
      2005, we did not generate income from the settlement of vendor claims and did
      not have any gain or loss from the disposition of assets.





*Other
      Expense*





During
      2006, the Company incurred $1,691,000 in net interest expense compared to net
      interest expense in 2005 of $1,231,000. The increase in net interest expense
      is
      attributable to the fact that debt levels during 2006 were higher than
      2005.





*Net
      Income or Loss*





The
      company had net income for 2006 of $1,895,000 compared to a net loss of $333,000
      for 2005. The 2006 net income included an income tax benefit of $774,000 and,
      absent the tax benefit was $1,121,000 as compared to loss of $534,000 in 2005.





*Income
      Taxes*





For
      2006,
      the company recognized an income tax benefit of $774,000. On the basis of
      results of operations over the past five quarters, anticipated repatriation
      of
      income from foreign subsidiaries, charges to foreign subsidiaries and the
      expectation of continued achievement of, and improvement in, operating results
      for the foreseeable future, the management of the Company has determined that
      it
      is more likely than not that the Company will realize the value recorded of
      its
      deferred tax assets. In 2005, the Company recognized an income tax benefit
      of
      $200,000 arising from the deferred tax benefit of the loss incurred for the
      year. Management determined based upon the evaluation of certain transactions
      involving the repatriation of profits from its U.K. and Mexico subsidiaries
      that
      it is more likely than not that deferred tax assets will be realized in 2006.
      There can be no assurance that the Company will realize the benefit of its
      deferred tax assets.


32


**Financial
      Condition, Liquidity and Capital Resources**





*Cash
      Flow Provided by Operating Activities* During
      fiscal 2007, cash provided by operating activities amounted to $1,356,000,
      compared to cash flow used in operating activities during fiscal 2006 of
      $1,353,000. Significant changes in working capital items affecting cash flow
      provided by operating activities were:





·
            Depreciation
                and amortization of $1,466,000


·
            An
                increase in net inventory of
                $1,732,000


·
            An
                increase in trade payables of
                $823,000


·
            A
                decrease in accounts receivable of
                $338,000


·
            A
                decrease in prepaid expenses and other assets of
                $270,000





We
      anticipate the level of depreciation to increase in 2008 compared to 2007,
      reflecting investments in plant and equipment during 2007. The increase in
      inventory during 2007 reflects (i) an increase of $880,000 related to the
      Company’s new ZipVacTM line, (ii) an increase of $250,000 in inflated balloons
      for a rollout to a new retail customer and (iii) increase of $400,000 at the
      Company's Mexican subsidiary to support an increased level of sales. We do
      not
      anticipate significant increases in inventory during 2008.





*Cash
      Used in Investing Activities* ** During
      fiscal 2007, cash used in investing activities amounted to $2,848,000 compared
      to cash used in investing activities during fiscal 2006 of $553,000. Cash used
      in investing activities was principally for the purchase of equipment and plant
      improvements. During 2008, we anticipate that our levels of investment in plant
      and equipment will be reduced from 2007 levels.





*Cash
      Provided by Financing Activities* During
      fiscal 2007, cash provided by financing activities amounted to $1,586,000,
      compared to cash provided by financing activities of $2,045,000 during fiscal
      2006. During 2007, we received $1,355,000 from the sale of stock to Cornell
      Capital and $195,000 from the exercise of options and warrants, and we repaid
      long-term debt of $1,242,000. We received, net, $428,000 proceeds under our
      revolving line of credit.





On
      February 1, 2006, we entered into a Loan Agreement with RBS Citizens, N.A.,
      Chicago, Illinois, under which, as amended, the Bank has agreed to provide
      a
      credit facility to our Company in the total amount of $15,300,000, which
      includes (i) a five year mortgage loan secured by our Barrington, Illinois
      property in the principal amount of $2,800,000, amortized over a 20 year period,
      (ii) a five year term-loan secured by our equipment at the Barrington, Illinois
      plant in the amount of $3,500,000 and (iii) a three-year revolving line of
      credit up to a maximum amount of $9,000,000, secured by inventory and
      receivables. The amount we can borrow on the revolving line of credit includes
      85% of eligible accounts receivable and 60% of eligible inventory.


33


Certain
      terms of the loan agreement include:





·
            *Restrictive
                Covenants*:
                The Loan Agreement includes several restrictive covenants under which
                we
                are prohibited from, or restricted in our ability
                to:


o
            Borrow
                money;


o
            Pay
                dividends and make distributions;


o
            Issue
                stock


o
            Make
                certain investments;


o
            Use
                assets as security in other
                transactions;


o
            Create
                liens;


o
            Enter
                into affiliate transactions;


o
            Merge
                or consolidate; or


o
            Transfer
                and sell assets.





·
            *Financial
                Covenants*:
                The loan agreement includes a series of financial covenants we are
                required to meet including:


o
            We
                are required to maintain a tangible net worth in excess of
                $3,500,000;


o
            We
                are required to maintain specified ratios of senior debt to EBITDA
                on an
                annual basis and determined quarterly commencing as of June 30, 2006;
                and,


o
            We
                are required to maintain a specified level of EBITDA to fixed charges
                for
                the six months ending June 30, 2006, the nine months ending September
                30,
                2006 and twelve months thereafter.





As
      of
      December 31, 2007, we were not in compliance with the senior debt to EBITDA
      or
      the EBITDA to fixed charge covenants. We have obtained a waiver from the Bank
      with respect to these covenant violations as of December 31, 2007. We believe
      that we will be in compliance with our debt covenants during 2008.





The
      loan
      agreement provides for interest at varying rates in excess of the Bank’s prime
      rate, depending on the level of senior debt to EBITDA over time. The initial
      interest rate under the loan is prime plus 1.5% per annum. On a quarterly basis,
      this ratio will be measured and the interest rate changed in accordance to
      the
      table below.





When
                Senior Debt to Equity is:
            
            The
                Premium
              to
                the Prime
              Rate
                is:Greater
                or equal to 4.50 to 1.00
            
            1.00%Between
                4.50 to 1.00 and 4.00 to 1.00
            
            0.75%Between
                4.00 to 1.00 and 3.50 to 1.00
            
            0.50%Between
                3.50 to 1.00 and 2.75 to 1.00
            
            0.25%Less
                than 2.75 to 1.00
            
            0.00%





At
      December 31, 2007 the Company was paying a premium of 0.75% over
      Prime.


34


Also,
      under the loan agreement, we are required to purchase a swap agreement with
      respect to at least 60% of the mortgage and term loan portions of our loan.
      On
      April 5, 2006, we entered into a swap arrangement with RBS Citizens, N.A. with
      respect to 60% of the principle amounts of the mortgage loan and the term loan,
      which had the effect of fixing the interest rate for such portions of the
      loans at 8.49% for the balance of the loan terms. These swap arrangements
      are subject to some market variation due to market interest rate variability.
      Management believes that these variations will not materially affect the results
      of the company. As of December 31, 2007 the net effect of these market
      adjustments was $123,000.





Each
      of
      John H. Schwan and Stephen M. Merrick, officers, directors and principal
      shareholders of the Company have personally guaranteed the obligations of the
      company to RBS Citizens, N.A. up to $2,000,000.





On
      November 13, 2007 RBS Citizens, N.A. granted to the Company a capital lease
      line
      of credit of up to $1,500,000 to fund equipment acquisitions by the Company.
      During 2007, the Company received aggregate advances under this line of
      $272,000.





On
      February 1, 2006, two principal officers and shareholders of our Company each
      loaned to our Company the sum of $500,000 in exchange for (i) Promissory Notes
      due January 31, 2011 and bearing interest at the rate of 2% per annum in excess
      of the prime rate determined quarterly and (ii) five year Warrants to purchase
      up to 151,515 shares of common stock of the Company at the price of $3.30 per
      share (110% of the closing market price on the day preceding the date of the
      loans).





On
      June 6, 2006, we entered into a Standby Equity Distribution Agreement with
      Cornell Capital pursuant to which we may, at our discretion, periodically sell
      to Cornell Capital shares of common stock for a total purchase price of up
      to $5
      million. For each share of common stock purchased under the Standby Equity
      Distribution Agreement, Cornell Capital will pay one hundred percent (100%)
      of the lowest volume weighted average price (as quoted by Bloomberg, LP) of
      our
      common stock on the NASDAQ Capital Market or other principal market on which
      our
      common stock is traded for the five (5) days immediately following the
      notice date. The number of shares purchased by Cornell Capital for each advance
      is determined by dividing the amount of each advance by the purchase price
      for
      the shares of common stock. Furthermore, Cornell Capital will receive five
      percent (5%) of each advance in cash under the Standby Equity Distribution
      Agreement as an underwriting discount. Cornell’s obligation to purchase shares
      of our common stock under the Agreement is subject to certain conditions,
      including: (i) we shall have obtained an effective registration statement for
      the shares of common stock sold to Cornell under the Agreement and (ii) the
      amount of each advance requested by us under the Agreement shall not be more
      than $100,000.




Cornell
      Capital is a private limited partnership whose business operations are conducted
      through its general partner, Yorkville Advisors, LLC. In addition, we engaged
      Newbridge Securities Corporation, a registered broker-dealer, as our placement
      agent in connection with the Standby Equity Distribution Agreement. For its
      services, Newbridge received 3,500 shares of our common stock on or about June
      8, 2006, equal to approximately $11,200 based on our stock price of $3.20 when
      the shares were issued on June 26, 2006. The effectiveness of the sale of
      the shares under the Standby Equity Distribution Agreement was conditioned
      upon
      us registering the shares of common stock with the SEC and obtaining all
      necessary permits or qualifying for exemptions under applicable state law.
      Except as stated above, there are no other significant closing conditions to
      draw under the Standby Equity Distribution Agreement.


35


Pursuant
      to the Standby Equity Distribution Agreement, we may periodically sell shares
      of
      common stock to Cornell Capital to raise capital to fund our working capital
      needs. The periodic sale of shares is known as an advance. We may request an
      advance every five (5) trading days. A closing will be held the first trading
      day after the pricing period at which time we will deliver shares of common
      stock and Cornell Capital will pay the advance amount. There are no closing
      conditions imposed on CTI for any of the draws other than that CTI has filed
      its
      periodic and other reports with the SEC, has delivered the stock for an advance,
      and the trading of CTI’s common stock has not been suspended. We may request
      advances under the Standby Equity Distribution Agreement until Cornell Capital
      has advanced $5 million or twenty-four (24) months after the effective date
      of
      this Registration Statement, whichever occurs first. It is unlikely that we
      will
      be able to draw the entire amount of $5 million before twenty-four (24) months
      after the effective date of this Registration Statement, given the limitations
      on the size and frequency with which we may request advances from Cornell
      Capital, unless our stock price increases significantly.




The
      amount of each advance is subject to a maximum amount of $100,000, and we may
      not submit an advance within five (5) trading days of a prior advance. The
      amount available under the Standby Equity Distribution Agreement is not
      dependent on the price or volume of our common stock. Our ability to request
      advances is conditioned upon us registering the shares of common stock with
      the
      SEC. In addition, we may not request advances if the shares to be issued in
      connection with such advances would result in Cornell Capital owning more than
      9.9% of our outstanding common stock. Cornell Capital’s beneficial ownership of
      CTI common stock was 0% before the initial advance. We would be permitted to
      make draws on the Standby Equity Distribution Agreement only so long as Cornell
      Capital’s beneficial ownership of our common stock remains lower than 9.9% and,
      therefore, a possibility exists that Cornell Capital may own more than 9.9%
      of
      CTI’s outstanding common stock at a time when we would otherwise plan to make an
      advance under the Standby Equity Distribution Agreement.




We
      do not
      have any agreements with Cornell Capital regarding the distribution of such
      stock, although Cornell Capital has indicated that it intends to promptly sell
      any stock received under the Standby Equity Distribution Agreement.




We
      cannot
      predict the actual number of shares of common stock that will be issued pursuant
      to the Standby Equity Distribution Agreement, in part, because the purchase
      price of the shares will fluctuate based on prevailing market conditions, and
      we
      have not determined the total amount of advances we intend to draw. Nonetheless,
      we can estimate the number of shares of our common stock that will be issued
      using certain assumptions. We have registered 400,000 shares of common stock
      for
      the sale under the Standby Equity Distribution Agreement. The Company and
      Cornell have agreed that the Company will not sell to Cornell Capital in excess
      of 400,000 shares unless and until the Company shall have obtained shareholder
      approval for such sales. In order to access all funds available to us under
      the
      Standby Equity Distribution Agreement with the 400,000 shares being registered
      in this offering, the average price of shares issued under the Standby Equity
      Distribution Agreement would need to be $12.50.


36


On
      December 28, 2006, we filed a Registration Statement for the registration of
      403,500 shares of our common stock. On January 26, 2007, the Registration
      Statement was declared effective. Since that time, to December 31, 2007, we
      have
      sold an aggregate of 323,625 shares of common stock to Cornell under the SEDA
      and have received net proceeds from the sale of those shares in the amount
      of
      $1,492,000, excluding issuance costs.




*Current
      Assets.* As of
      December 31, 2007, the total current assets of the Company were $17,801,000,
      compared to total current assets of $16,491,000 at December 31, 2006. The change
      in current assets reflects, principally, (i) an increase in inventories of
      $1,727,000, and (ii) an increase in cash and equivalents of $99,000. The
      increase in inventory during 2007 reflects (i) an increase of $880,000 related
      to the Company’s new ZipVacTM line, (ii) an increase of $250,000 in inflated
      balloons for a rollout to a new retail customer and (iii) an increase of
      $400,000 at the Company's Mexican subsidiary to support an increased level
      of
      sales. We do not anticipate significant increases in inventory during
      2008.





*Property,
      Plant and Equipment.* During
      fiscal 2007, the Company invested $2,826,000 in capital items, principally
      in
      production equipment and plan improvements. We anticipate reduced levels of
      capital investment in 2008.





*Current
      Liabilities* .
      Total
      current liabilities increased from $14,643,000 as of December 31, 2006 to
      $16,483,000 as of December 31, 2007. Changes in current liabilities included:
      (i) an increase of $817,000 in trade payables, (ii) an increase in checks in
      excess of bank balance of $508,000 relating to deposits in transit from
      customers and (iii) an increase of the line of credit of $428,000.





*Liquidity
      and Capital Resources.* As of
      December 31, 2007, our current assets exceeded our current liabilities by
      $1,318,000. In addition, during 2008, we anticipate receiving advances under
      our
      capital lease line of credit in amounts up to $1,228,000. We believe that we
      have sufficient cash and financial resources to meet our operating requirements
      through December 31, 2008.





*Shareholders’
      Equity.* Shareholders’
      equity was $6,591,000 as of December 31, 2007 compared to $5,102,000 as of
      December 31, 2006.


37


The
      contractual commitments of the Company, determined as of December 31, 2007,
      over
      the next five years are as follows:




**Payments
                due by Period (000 omitted)****2013****Total**
            
            **2008**
            
            **2009-2010**
            
            **2011-2012**
            
            **And Thereafter**Revolving
                line of credit
            
            $
            6,746
            
            $
            6,746
            
            $
            -
            
            $
            -
            
            $
            -Current
                maturities of long-term debt
            
            $
            3,021
            
            $
            3,021
            
            $
            -
            
            $
            -
            
            $
            -Long-Term
                debt, net of current maturities
            
            $
            5,167
            
            $
            -
            
            $
            1,563
            
            $
            3,604
            
            $
            -Estimated
                interest payments
            
            $
            1,457
            
            $
            634
            
            $
            715
            
            $
            108
            
            $
            -Lease
                Obligations
            
            $
            2,021
            
            $
            514
            
            $
            900
            
            $
            245
            
            $
            362License
                Commitments
            
            $
            91
            
            $
            91
            
            $
            -
            
            $
            -
            
            $
            -Total
                contractual obligations
            
            $
            18,503
            
            $
            11,006
            
            $
            3,178
            
            $
            3,957
            
            $
            362





The
      Company does not have any current material commitments for capital expenditures.





**Seasonality**





In
      the
      metalized product line, sales have historically been seasonal with approximately
      45% occurring in the period from December through March of the succeeding year
      and 21% being generated in the period July through October in recent years.
      The
      sale of latex balloons, pouches and laminated film products have not
      historically been seasonal, and as sales in these products lines have increased
      as a percentage of total sales, the seasonality of the Company's total net
      sales
      has decreased.





**Critical
      Accounting Policies**





The
      financial statements of the Company are based on the selection and application
      of significant accounting policies which require management to make various
      estimates and assumptions. The following are some of the more critical judgment
      areas in the application of our accounting policies that currently affect our
      financial condition and results of operation.





*Revenue
      Recognition.* Substantially all of the Company's revenues are derived from the sale of
      products. With respect to the sale of products, revenue from a transaction
      is
      recognized when (i) a definitive arrangement exists for the sale of the product,
      (ii) delivery of the product has occurred, (iii) the price to the buyer has
      been
      fixed or is determinable and (iv) collectibility is reasonably assured. The
      Company generally recognizes revenue for the sale of products when the products
      have been shipped and invoiced. In some cases, product is provided on
      consignment to customers. In those cases, revenue is recognized when the
      customer reports a sale of the product.





*Allowance
      for Doubtful Accounts.* We
      estimate our allowance for doubtful accounts based on an analysis of specific
      accounts, an analysis of historical trends, payment and write-off histories.
      Our
      credit risks are continually reviewed and management believes that adequate
      provisions have been made for doubtful accounts. However, unexpected changes
      in
      the financial condition of customers or changes in the state of the economy
      could result in write-offs, which exceed estimates and negatively impact our
      financial results.


38





*Inventory
      Valuation.* Inventories
      are stated at the lower of cost or market. Cost is determined using standard
      costs which approximate costing determined on a first-in, first out basis.
      Standard costs are reviewed and adjusted at the time of introduction of a new
      product or design, periodically and at year-end based on actual direct and
      indirect production costs. On a periodic basis, the Company reviews its
      inventory levels for estimated obsolescence or unmarketable items, in reference
      to future demand requirements and shelf life of the products. As of December
      31,
      2007, the Company had established a reserve for obsolescence, marketability
      or
      excess quantities with respect to inventory in the aggregate amount of $383,000.
      As of December 31, 2006, the amount of the reserve was $276,000. In addition,
      on
      a periodic basis, the Company disposes of inventory deemed to be obsolete or
      unsaleable and, at such time, records an expense for the value of such
      inventory.





*Valuation
      of Long-Lived Assets.* We
      evaluate whether events or circumstances have occurred which indicate that
      the
      carrying amounts of long-lived assets (principally property and equipment and
      goodwill) may be impaired or not recoverable. Significant factors which may
      trigger an impairment review include: changes in business strategy, market
      conditions, the manner of use of an asset, underperformance relative to
      historical or expected future operating results, and negative industry or
      economic trends. FASB issued Statement No. 142, "Goodwill and Other Intangible
      Assets," which requires that goodwill be evaluated annually for impairment
      by
      applying a fair-value based test. We conduct a valuation analysis in
      consultation with valuation consulting firms of our goodwill in our Mexico
      subsidiary for the year ended December 31, 2007, 2006 and 2005. As of December
      31, 2005, we determined in consultation with a valuation consulting firm, that
      the fair value of the Company’s interest in Flexo Universal was below its
      $1,113,000 carrying value. Then step two of the evaluation was done in which
      the
      value of the goodwill was determined to be $989,000. Accordingly, we recorded
      $124,000 as an expense and reduced the carrying value of the Company’s interest
      in Flexo Universal to $989,000. As of December 31, 2006 and December 31, 2007,
      we determined that the fair value of the Company’s interest in Flexo Universal
      was unchanged from December 31, 2005. Accordingly, we did not change the fair
      value of the Company’s interest in Flexo.





*Foreign
      Currency Translation.* All
      balance sheet accounts are translated using the exchange rates in effect at
      the
      balance sheet date. Statements of operations amounts are translated using the
      average exchange rates for the year-to-date periods. The gains and losses
      resulting from the changes in exchange rates during the period have been
      reported in other comprehensive income or loss. Foreign currency translation
      adjustments exclude income tax expense (benefit) given that our investments
      in
      non-U.S. subsidiaries are deemed to be reinvested for an indefinite period
      of
      time.





*Stock-Based
      Compensation.* On
      January 1, 2006, we adopted Statement of Financial Accounting Standards No.
      123(R), “Share-Based Payments” (“SFAS No. 123(R)”). Prior to the adoption of
      SFAS No. 123(R), we had adopted the disclosure-only provisions of SFAS No.
      123
      and accounted for employee stock-based compensation under the intrinsic value
      method and no expense related to stock options was recognized. We adopted the
      provisions of SFAS 123(R) using the modified prospective transition method.
      Under this method, our consolidated financial statements as of and for the
      years
      ended December 31, 2007 reflect the impact of SFAS 123(R), while the
      consolidated financial statements for prior periods have not been restated
      to
      reflect, and do not include, the impact of SFAS 123(R).


39





We
      used
      the Black-Scholes option pricing model to determine the fair value of stock
      options which requires us to estimate certain key assumptions. As a result
      of
      adopting SFAS 123(R), we incurred employee stock-based compensation cost of
      $14,000 for the year ended December 31, 2007. At December 31, 2007, we had
      $154,000 of unrecognized compensation cost relating to stock
      options.





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





As
      of
      December 31, 2007, the Company had a net deferred tax asset of $1,080,000
      (deferred tax assets of $2,307,000 less a valuation allowance of $1,227,000)
      representing the amount the Company may recover in future years from future
      taxable income. As of December 31, 2006, the amount of the net deferred tax
      asset was $1,127,000. Each quarter and year-end management makes a judgment
      to
      determine the extent to which the deferred tax asset will be recovered from
      future taxable income. At December 31, 2006, the Company reduced the valuation
      allowance against the deferred tax assets as management determined that the
      deferred tax asset is more likely than not to be realized. Management has made
      no change in the amount of the valuation allowance for 2007.





***Accounting
      Pronouncements Not Yet Implemented***





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” which
      defines fair value, establishes a framework for measuring fair value, and
      expands disclosures about fair value measurements. This statement clarifies
      how
      to measure fair value as permitted under other accounting pronouncements but
      does not require any new fair value measurements. In February 2008, the FASB
      issued FASB Staff Position (FSP) 157-1, “Application of FASB Statement No. 157
      to FASB Statement No. 13 and Other Accounting Pronouncements that Address Fair
      Value Measurements for Purposes of Lease Classification or Measurement under
      Statement 13” (FSP 157-1) and FSP 157-2, “Effective Date of FASB Statement No.
      157” (FSP 157-2). FSP 157-1 amends SFAS No. 157 to remove certain leasing
      transactions from its scope. FSP 157-2 delays the effective date of SFAS No.
      157
      for all non-financial assets and non-financial liabilities, except for items
      that are recognized or disclosed at fair value in the financial statements
      on a
      recurring basis (at least annually), until the beginning of the first quarter
      of
      fiscal 2009. The measurement and disclosure requirements related to financial
      and non-financial assets and liabilities are not anticipated to have significant
      impact on our consolidated financial statements.


40


In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities” (SFAS No. 159). SFAS 159 permits
      companies to choose to measure certain financial instruments and other items
      at
      fair value. The standard requires that unrealized gains and losses are reported
      in earnings for items measured using the fair value option. SFAS No. 159 is
      effective for us on January 1, 2008. The adoption of SFAS No. 159 is not
      expected to have a significant impact on our consolidated financial
      statements.





**Item
      No. 7A - Qualitative And Quantitative Disclosures Regarding Market Risk**





The
      Company is exposed to various market risks, primarily foreign currency risks
      and
      interest rate risks.





The
      Company's earnings are affected by changes in interest rates as a result of
      variable rate indebtedness. If market interest rates for our variable rate
      indebtedness averaged 1% more than the interest rate actually paid for the
      years
      ending December 31, 2007, 2006 and 2005, our interest rate expense would have
      increased, and income before income taxes would have decreased by $97,000,
      $96,000 and $72,000, for these years, respectively. These amounts are determined
      by considering the impact of the hypothetical interest rates on our borrowings.
      This analysis does not consider the effects of the reduced level of overall
      economic activity that could exist in such an environment. Further, in the
      event
      of a change of such magnitude, management would likely take actions to reduce
      our exposure to such change. However, due to the uncertainty of the specific
      actions we would take and their possible effects, the sensitivity analysis
      assumes no change in our financial structure.





The
      Company's earnings and cash flows are subject to fluctuations due to changes
      in
      foreign currency rates, particularly the Mexican peso and the British pound,
      as
      the Company produces and sells products in Mexico for sale in the United States
      and other countries and the Company's U.K. subsidiary purchases balloon products
      from the Company in U.S. Dollars. Also, the Mexican subsidiary purchases goods
      from external sources in U.S. Dollars and is affected by currency fluctuations
      in those transactions. Substantially all of the Company's purchases and sales
      of
      goods for its operations in the United States are done in U.S. Dollars. However,
      the Company's level of sales in other countries may be affected by currency
      fluctuations. As a result, exchange rate fluctuations may have an effect on
      sales and gross margins. Accounting practices require that the Company's results
      from operations be converted to U.S. dollars for reporting purposes.
      Consequently, the reported earnings of the Company in future periods may be
      affected by fluctuations in currency exchange rates, generally increasing with
      a
      weaker U.S. dollar and decreasing with a strengthening U.S. dollar. To date,
      we
      have not entered into any transactions to hedge against currency fluctuation
      effects.


41





We
      have
      performed a sensitivity analysis as of December 31, 2007 that measures the
      change in the results of our foreign operations arising from a hypothetical
      10%
      adverse movement in the exchange rate of all of the currencies the Company
      presently has operations in. Using the results of operations for 2007, 2006
      and
      2005 for the Company's foreign operations as a basis for comparison, an adverse
      movement of 10% would create a potential reduction in the Company's net income,
      or increase its net loss, before taxes, in the amount of, for each of those
      years, $187,000, $248,000 and $140,000, respectively.





The
      Company is also exposed to market risk in changes in commodity prices in some
      of
      the raw materials it purchases for its manufacturing needs. However, in the
      past, we have been able to adjust the sales price of our products so as to
      minimize the effect of changes in raw materials pricing and, as a result, we
      do
      not believe this market risk presents a risk that would have a material effect
      on the Company’s results of operations or financial condition.





**Item
      No. 8 Financial Statements and Supplementary Data**





Reference
      is made to the Consolidated Financial Statements contained in Part IV hereof.





**Item
      No. 9 Changes in and Disagreements with Accountants on Accounting and Financial
      Disclosure**





None





**Item
      No. 9A - Controls and Procedures**





**Disclosure
      Controls and Procedures**





As
      required by Rule 13a-15(b) under the Exchange Act, we conducted an evaluation,
      under the supervision and with the participation of our management, including
      our Chief Executive Officer and Chief Financial Officer (together the
“Certifying Officers”), of the effectiveness of the design and operation of our
      disclosure controls and procedures as of December 31, 2007, the end of the
      period covered by this report. Based upon that evaluation, the Certifying
      Officers concluded that our disclosure controls and procedures were effective
      as
      of December 31, 2007 to provide reasonable assurance that the information
      required to be disclosed in our Exchange Act reports is recorded, processed,
      summarized and reported within the time periods specified in the SEC’s rules and
      forms and that such information is accumulated and communicated to our
      management, including our Certifying Officers, as appropriate, to allow for
      timely decisions regarding required disclosure.


42


**Management’s
      Report on Internal Control over Financial Reporting**





Management
      is responsible for establishing and maintaining adequate internal control over
      financial reporting to provide reasonable assurance regarding the reliability
      of
      financial reporting and the preparation of financial statements for external
      purposes in accordance with U.S. generally accepted accounting principles.
      Internal control over financial reporting includes those policies and procedures
      that (i) pertain to the maintenance of records that, in reasonable detail,
      accurately and fairly reflect the transactions and dispositions of assets;
      (ii)
      provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with U.S. generally
      accepted accounting principles, and that receipts and expenditures are being
      made only in accordance with authorizations of the management and the Board;
      and
      (iii) provide reasonable assurance regarding prevention or timely detection
      of
      unauthorized acquisition, use or disposition of Company assets that could have
      a
      material effect on the financial statements.





Our
      management conducted an evaluation of the effectiveness of our internal control
      over financial reporting based on the framework in Internal Control - Integrated
      Framework issued by the Committee Sponsoring Organizations of the Treadway
      Commission. This evaluation included review of the documentation of controls,
      evaluation of the design effectiveness of controls, testing of the operation
      effectiveness of controls and a conclusion on this evaluation. Although there
      are inherent limitations in the effectiveness of any system of internal controls
      over financial reporting, based on our evaluation, management has concluded
      our
      internal controls over financial reporting were effective as of December 31,
      2007.





Management
      personnel, including the Certifying Officers, recognize that our internal
      control over financial reporting cannot prevent or detect all error and all
      fraud. A control system, no matter how well designed and operated, can provide
      only reasonable, not absolute, assurance that the control system’s objectives
      will be met. The design of a control system must reflect the fact that there
      are
      resource constraints, and the benefits of controls must be considered relative
      to their costs. Further, because of the inherent limitations in all control
      systems, no evaluation of controls can provide absolute assurance that
      misstatements due to error or fraud will not occur or that all control issues
      and instances of fraud, if any, have been detected. The design of any system of
      controls is based in part on certain assumptions about the likelihood of future
      events, and there can be no assurance that any design will succeed in achieving
      its stated goals under all potential future conditions.





**Changes
      in Internal Control over Financial Reporting**





There
      has
      been no change during the Company’s fiscal quarter ended December 31, 2007 in
      the Company’s internal control over financial reporting (as such term is defined
      in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially
      affected, or is reasonably likely to materially affect, the company’s internal
      control over financial reporting.


43


**Item
      9B – Other Information**





None





**PART
      III**





**Item
      No. 10 – Directors and Executive Officers of the
      Registrant**





Information
      called for by Item 10 of Part III is incorporated by reference to the definitive
      Proxy Statement for the 2008 Annual Meeting of Shareholders which is expected
      to
      be filed with the Commission within 120 days after December 31,
      2007.





**Item
      No. 11 – Executive Compensation**





Information
      called for by Item 11 of Part III is incorporated by reference to the definitive
      Proxy Statement for the 2008 Annual Meeting of Shareholders which is expected
      to
      be filed with the Commission within 120 days after December 31,
      2007.





**Item
      No. 12 – Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholder Matters**





Information
      called for by Item 12 of Part III is incorporated by reference to the definitive
      Proxy Statement for the 2008 Annual Meeting of Shareholders which is expected
      to
      be filed with the Commission within 120 days after December 31,
      2007.





**Item
      No. 13 – Certain Relationships and Related Transactions**





Information
      called for by Item 13 of Part III is incorporated by reference to the definitive
      Proxy Statement for the 2008 Annual Meeting of Shareholders which is expected
      to
      be filed with the Commission within 120 days after December 31,
      2007.





**Item
      No. 14 – Principal Accountant Fees and Services**





Information
      called for by Item 14 of Part III is incorporated by reference to the definitive
      Proxy Statement for the 2008 Annual Meeting of Shareholders which is expected
      to
      be filed with the Commission within 120 days after December 31,
      2007.





PART
      IV





**Item
      No. 15 Exhibits and Financial Statement Schedules**





1.
                The
                    Consolidated Financial Statements filed as part of this report
                    on Form
                    10-K are listed on the accompanying Index to Consolidated Financial
                    Statements and Consolidated Financial Statement
                    Schedules.


2.
                    Financial
                        schedules required to be filed by Item 8 of this form, and
                        by Item 15(d)
                        below:
 
 Schedule
                  IIValuation
                  and qualifying accounts
 
 All
        other
        financial schedules are not required under the related instructions or are
        inapplicable and therefore have been omitted.
 
 3.
              Exhibits:
 ****


44




ExhibitNumber
            
            Document3.1
            
            Third
                Restated Certificate of Incorporation of CTI Industries Corporation
                (Incorporated by reference to Exhibit A contained in Registrant’s Schedule
                14A Definitive Proxy Statement for solicitation of written consent
                of
                shareholders, as filed with the Commission on October 25,
                1999)3.2
            
            By-Laws
                of CTI Industries Corporation (Incorporated by reference to Exhibits,
                contained in Registrant’s Form SB-2 Registration Statement (File No.
                333-31969) effective November 5, 1997)4.1
            
            Form
                of CTI Industries Corporation’s common stock certificate (Incorporated by
                reference to Exhibits, contained in Registrant’s Form SB-2 Registration
                Statement (File No. 333-31969) effective November 5,
                1997)10.1
            
            CTI
                Industries Corporation 1999 Stock Option Plan (Incorporated by reference
                to Exhibit contained in Registrant’s Schedule 14A Definitive Proxy
                Statement, as filed with the Commission on March 26,
                1999)10.2
            
            CTI
                Industries Corporation 2001 Stock Option Plan (Incorporated by reference
                to Exhibit contained in Registrant’s Schedule 14A Definitive Proxy
                Statement, as filed with the Commission on May 21,
                2001)10.3
            
            CTI
                Industries Corporation 2002 Stock Option Plan (Incorporated by reference
                to Exhibit contained in Registrant’s Schedule 14A Definitive Proxy
                Statement, as filed with the Commission on May 15,
                2002)10.4
            
            CTI
                Industries Corporation 2007 Stock Incentive Plan (Incorporated by
                reference to Exhibit contained in Registrant’s Schedule 14A Definitive
                Proxy Statement, as filed with the Commission on April 30,
                2007)10.5
            
            Employment
                Agreement dated June 30, 1997, between CTI Industries Corporation
                and
                Howard W. Schwan (Incorporated by reference to Exhibits, contained
                in
                Registrant’s Form SB-2 Registration Statement (File No. 333-31969)
                effective November 5, 1997.)


10.6
              
              Warrant
                  dated July 17, 2001 to purchase 79,364 shares of Common Stock John
                  H.
                  Schwan (Incorporated by reference to Exhibits contained in the
                  Registrant’s 2002 10-KSB, as filed with the Commission on May 1,
                  2003)10.7
              
              Warrant
                  dated July 17, 2001 to purchase 39,683 shares of Common Stock Stephen
                  M.
                  Merrick (Incorporated by reference to Exhibits contained in the
                  Registrant’s 2002 10-KSB, as filed with the Commission on May 1,
                  2003)10.8
              
              Note
                  dated January 28, 2003, CTI Industries Corporation to Stephen M.
                  Merrick
                  in the sum of $500,000 (Incorporated by reference to Exhibits contained
                  in
                  the Registrant’s 2002 10-KSB, as filed with the Commission on May 1,
                  2003)10.9
              
              Note
                  dated February 28, 2003, CTI Industries Corporation to Stephen
                  M. Merrick
                  in the sum of $200,000 (Incorporated by reference to Exhibits contained
                  in
                  the Registrant’s 2002 10-KSB, as filed with the Commission on May 1,
                  2003)10.10
              
              Note
                  dated February 10, 2003, CTI Industries Corporation to John H.
                  Schwan in
                  the sum of $150,000 (Incorporated by reference to Exhibits contained
                  in
                  the Registrant’s 2002 10-KSB, as filed with the Commission on May 1,
                  2003)10.11
              
              Note
                  dated February 15, 2003, CTI Industries Corporation to John Schwan
                  in the
                  sum of $680,000 (Incorporated by reference to Exhibits contained
                  in the
                  Registrant’s 2002 10-KSB, as filed with the Commission on May 1,
                  2003)10.12
              
              Note
                  dated March 3, 2003, CTI Industries Corporation to John H. Schwan
                  in the
                  sum of $100,000 (Incorporated by reference to Exhibits contained
                  in the
                  Registrant’s 2002 10-KSB, as filed with the Commission on May 1,
                  2003)10.13
              
              Warrant
                  dated March 20, 2003, to purchase 70,000 shares of Common Stock
                  - Stephen
                  M. Merrick (Incorporated by reference to Exhibits contained in
                  the
                  Registrant’s 2002 10-KSB, as filed with the Commission on May 1,
                  2003)10.14
              
              Warrant
                  dated March 20, 2003, to purchase 93,000 shares of Common Stock
                  - John H.
                  Schwan (Incorporated by reference to Exhibits contained in the
                  Registrant’s 2002 10-KSB, as filed with the Commission on May 1,
                  2003)10.15
              
              Loan
                  and Security Agreement between RBS Citizens, N.A. and the Company
                  dated
                  February 1, 2006 (Incorporated by reference to Exhibits contained
                  in
                  Registrant’s Report on Form 8-K dated February 3, 2006)10.16
              
              Warrant
                  dated February 1, 2006, to purchase 151,515 shares of Common Stock
                  - John
                  H. Schwan (Incorporated by reference to Exhibits contained in Registrant’s
                  Report on Form 8-K dated February 3,
                  2006)


45




10.17
            
            Warrant
                dated February 1, 2006, to purchase 151,515 shares of Common Stock
                -
                Stephen M. Merrick (Incorporated by reference to Exhibits contained
                in
                Registrant’s Report on Form 8-K dated February 3, 2006)10.18
            
            Note
                dated February 1, 2006, CTI Industries Corporation to John Schwan
                in the
                sum of $500,000 (Incorporated by reference to Exhibits contained
                in
                Registrant’s Report on Form 8-K dated February 3, 2006)10.19
            
            Note
                dated February 1, 2006, CTI Industries Corporation to Stephen M.
                Merrick
                in the sum of $500,000 (Incorporated by reference to Exhibits contained
                in
                Registrant’s Report on Form 8-K dated February 3, 2006)10.20
            
            Production
                and Supply Agreement between ITW Spacebag and the Company dated March
                17,
                2006 (Incorporated by reference to Exhibits contained in Registrant’s
                Report on Form 8-K dated March 17, 2006)10.21
            
            License
                Agreement between Rapak, LLC and the Company dated April 28, 2006
                (Incorporated by reference to Exhibit contained in Registrant’s Report on
                Form 8-K dated May 3, 2006)10.22
            
            Standby
                Equity Distribution Agreement between Cornell Capital Partners and
                the
                Company dated December 28, 200610.23
            
            Second
                Amendment to Loan Agreement between RBS Citizens, N.A. and the Company
                dated December 18, 2006 (Incorporated by reference to Exhibit contained
                in
                Registrant’s Report on Form 8-K dated December 21,
                2006.)10.24
            
            Third
                Amendment to Loan Agreement between RBS Citizens, N.A. and the Company
                dated November 13, 2007 (Incorporated by reference to Exhibit contained
                in
                Registrant’s Report on Form 10-Q dated November 13,
                2007)10.25
            
            CTI
                Industries Corporation Incentive Compensation Plan (Incorporated
                by
                reference to Exhibit contained in Registrant’s Report on Form 8-K dated
                October 2, 2007)10.26
            
            Supply
                and License Agreement among Registrant and S.C. Johnson & Son, Inc.
                dated February 1, 2008 (Incorporated by reference to Exhibit contained
                in
                Registrant’s Report on Form 8-K/A dated March 19, 2008)14
            
            Code
                of Ethics (Incorporated by reference to Exhibit contained in the
                Registrant’s Form 10-K/A Amendment No. 2, as filed with the Commission on
                October 8, 2004)21
            
            Subsidiaries
                (description incorporated in Form 10-K under Item No.
                1)23.1
            
            Consent
                of Independent Auditors, Blackman Kallick, LLP23.2
            
            Consent
                of Independent Auditors, Weiser LLP31.1
            
            Certification
                of Chief Executive Officer pursuant to Rule 13a-14(a) and rule 15d-14(a)
                of the Securities Exchange Act, as amended (filed
                herewith)


31.2
            
            Certification
                of Chief Financial Officer pursuant to Rule 13a-14(a) and rule 15d-14(a)
                of the Securities Exchange Act, as amended (filed
                herewith)32
            
            Certification
                of Chief Executive Officer and Chief Financial Officer Pursuant to
                18
                U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
                Act
                of 2002 (filed herewith)





(a)
            The
                Exhibits listed in subparagraph (a)(3) of this Item 15 are attached
                hereto
                unless incorporated by reference to a previous
                filing.


(b)
            The
                Schedule listed in subparagraph (a)(2) of this Item 15 is attached
                hereto.


46





**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 April 15, 2008.





CTI
                INDUSTRIES CORPORATIONBy:
            /s/
                Howard W. SchwanHoward
                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
            
            April
                15, 2008Howard
                W. Schwan/s/
                John H. Schwan
            
            Chairman
                and Director
            
            April
                15, 2008John
                H. Schwan/s/
                Stephen M. Merrick
            
            Executive
                Vice President,
            
            April
                15, 2008Stephen
                M. Merrick
            
            Secretary,
                Chief Financial
              Officer
                and Director/s/
                Stanley M. Brown
            
            Director
            
            April
                15, 2008Stanley
                M. Brown/s/
                Bret Tayne
            
            Director
            
            April
                15, 2008Bret
                Tayne/s/
                John I. Collins
            
            Director
            
            April
                15, 2008John
                I. Collins




47




CTI
      Industries Corporation


and
      Subsidiaries





Consolidated
      Financial Statements





Years
      ended December 31, 2007, 2006 and 2005




**Contents**





Consolidated
                Financial Statements:Reports
                of Independent Registered Public Accounting Firms
            
            
            F-1Consolidated
                Balance Sheets as of December 31, 2007 and 2006
            
            
            F-3Consolidated
                Statements of Operations for the years ended December 31, 2007, 2006
                and
                2005
            
            
            F-4Consolidated
                Statements of Stockholders’ Equity and Comprehensive Loss for the years
                ended December 31, 2007, 2006 and 2005
            
            
            F-5Consolidated
                Statements of Cash Flows for the years ended December 31, 2007, 2006
                and
                2005
            
            
            F-6Notes
                to Consolidated Financial Statements - December 31, 2007
            
            
            F-7Financial
                Statement Schedule:Schedule
                II – Valuation and Qualifying Accounts for the years ended December
                31, 2007, 2006 and 2005
            
            
            F-29





All
      other
      schedules for which provision is made in the applicable accounting regulation
      of
      the Securities and Exchange Commission are not required under the related
      instructions or are inapplicable and, therefore, have been omitted.











Report
      of
      Independent Registered Public Accounting Firm




The
      Board
      of Directors and Stockholders


CTI
      Industries Corporation





We
      have
      audited the accompanying consolidated balance sheet of CTI Industries
      Corporation and Subsidiaries (the “Company”) as of December 31, 2007 and the
      related consolidated statements of operations, stockholders’ equity and
      comprehensive loss and cash flows for the year then ended. Our audit also
      included the financial statement schedule listed in the Index at item 15(a).
      These consolidated financial statements and consolidated schedule are the
      responsibility of the Company’s management. Our responsibility is to express an
      opinion on these consolidated financial statements and consolidated schedule
      based on our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the
      consolidated financial statements are free of material misstatement. The Company
      has determined that it is not required to have, nor were we engaged to perform,
      an audit of its internal control over financial reporting. Our audit included
      consideration of internal control over financial reporting as a basis for
      designing audit procedures that are appropriate in the circumstances, but not
      for the purpose of expressing an opinion on the effectiveness of the Company’s
      internal control over financial reporting. Accordingly, we express no such
      opinion. An audit also includes examining, on a test basis, evidence supporting
      the amounts and disclosures in the consolidated financial statements, assessing
      the accounting principles used and significant estimates made by management,
      as
      well as evaluating the overall financial statement presentation. We believe
      that
      our audit provides a reasonable basis for our opinion.




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of CTI Industries Corporation
      and Subsidiaries as of December 31, 2007, and the results of their
      operations and their cash flows for the year then ended in conformity with
      accounting principles generally accepted in the United States of
      America.




/s/
                Blackman Kallick, LLPChicago,
                IllinoisApril
                15, 2008




F-1





Report
      of
      Independent Registered Public Accounting Firm





The
      Board
      of Directors and Stockholders


CTI
      Industries Corporation




We
      have
      audited the accompanying consolidated balance sheet of CTI Industries
      Corporation and Subsidiaries (the “Company”) as of December 31, 2006 and the
      related consolidated statements of operations, stockholders’ equity and
      comprehensive loss, and cash flows for each of the two years in the period
      ended
      December 31, 2006 and 2005. Our audits also included the financial statement
      schedule listed in the Index at Item 15(a). These consolidated financial
      statements and consolidated schedule are the responsibility of the Company’s
      management. Our responsibility is to express an opinion on these consolidated
      financial statements and consolidated schedule based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits to obtain reasonable assurance about whether the
      financial statements are free of material misstatement. An audit includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements. An audit also includes assessing the accounting
      principles used and significant estimates made by management, as well as
      evaluating the overall financial statement presentation. We believe that our
      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 consolidated financial position of CTI Industries
      Corporation and Subsidiaries as of December 31, 2006, and the consolidated
      results of their operations and their cash flows for each of the two years
      in
      the period ended December 31, 2006 and 2005, in conformity with U.S. generally
      accepted accounting principles. Also, in our opinion, the related consolidated
      financial statement schedule, when considered in relation to the basic
      consolidated financial statements taken as a whole, presents fairly, in all
      respects, the information set forth therein.





As
      discussed in Note 2 to the consolidated financial statements, the Company
      adopted the provisions of Statement of Financial Accounting Standards No. 123
      (Revised 2004), “Share-Based Payment”, applying the modified prospective method
      at the beginning of the year ended December 31, 2006.





/s/
                Weiser LLPNew
                York, New YorkApril
                9, 2007




F-2




**CTI
      Industries Corporation and Subsidiaries**


**Consolidated
      Balance Sheets**





**December 31, 2007**
            
            **December 31, 2006**ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            483,112
            
            $
            384,565Accounts
                receivable, (less allowance for doubtful accounts of $312,000 and
                $210,000, respectively)
            
            
            5,950,551
            
            
            6,442,765Inventories,
                net
            
            
            9,700,618
            
            
            7,974,113Net
                deferred income tax asset
            
            
            1,014,451
            
            
            1,025,782Prepaid
                expenses and other current assets
            
            
            651,969
            
            
            664,020Total
                current assets
            
            
            17,800,701
            
            
            16,491,245Property,
                plant and equipment:Machinery
                and equipment
            
            
            19,520,741
            
            
            18,763,007Building
            
            
            3,035,250
            
            
            2,689,956Office
                furniture and equipment
            
            
            1,900,219
            
            
            1,782,691Intellectual
                Property
            
            
            305,017
            
            
            305,017Land
            
            
            250,000
            
            
            250,000Leasehold
                improvements
            
            
            465,838
            
            
            459,502Fixtures
                and equipment at customer locations
            
            
            2,381,921
            
            
            2,330,483Projects
                under construction
            
            
            1,836,877
            
            
            289,22929,695,863
            
            
            26,869,885Less
                : accumulated depreciation and amortization
            
            
            (19,599,708
            )
            
            (18,277,611
            )Total
                property,plant and equipment, net
            
            
            10,096,155
            
            
            8,592,274Other
                assets:Deferred
                financing costs, net
            
            
            113,209
            
            
            207,049Goodwill
            
            
            989,108
            
            
            989,108Net
                deferred income tax asset
            
            
            133,756
            
            
            101,102Other
                assets (due from related party $66,000 and $30,000,
                respectively)
            
            
            191,206
            
            
            264,161Total
                other assets
            
            
            1,427,279
            
            
            1,561,420TOTAL
                ASSETS
            
            
            29,324,135
            
            
            26,644,939LIABILITIES
                AND STOCKHOLDERS' EQUITYCurrent
                liabilities:Checks
                written in excess of bank balance
            
            
            616,583
            
            
            108,704Trade
                payables
            
            
            4,227,954
            
            
            3,410,869Line
                of credit
            
            
            6,746,213
            
            
            6,317,860Notes
                payable - current portion
            
            
            863,513
            
            
            948,724Notes
                payable - officers, current portion, (net of debt discount of $89,000
                and
                $90,000)
            
            
            2,157,065
            
            
            2,155,284Accrued
                liabilities
            
            
            1,871,781
            
            
            1,701,933Total
                current liabilities
            
            
            16,483,109
            
            
            14,643,374Long-term
                liabilities:Other
                liabilities (related parties $1,070,000 and $1,274,000)
            
            
            1,070,151
            
            
            1,294,272Notes
                payable, net of current portion
            
            
            4,351,743
            
            
            4,866,008Notes
                payable - officers, subordinated, (net of debt discount of $185,000
                and
                $273,000)
            
            
            815,296
            
            
            726,688Total
                long-term liabilities
            
            
            6,237,190
            
            
            6,886,968Minority
                interest
            
            
            12,534
            
            
            12,672Stockholders'
                equity:Preferred
                Stock — no par value 2,000,000 shares authorized 0 shares issued and
                outstanding
            
            
            -
            
            
            -Common
                stock - no par value, 5,000,000 shares authorized, 2,569,124 and
                2,412,297
                shares issued and 2,569,124 and 2,142,097 outstanding,
                respectively
            
            
            3,764,020
            
            
            3,764,020Paid-in-capital
            
            
            6,754,077
            
            
            6,100,587Warrants
                issued in connection with subordinated debt and bank debt
            
            
            1,038,487
            
            
            1,038,487Accumulated
                deficit
            
            
            (4,363,999
            )
            
            (4,445,897
            )Accumulated
                other comprehensive loss
            
            
            (601,283
            )
            
            (297,490
            )Less:
                Treasury stock - 270,200 shares at December 31, 2006
            
            
            -
            
            
            (1,057,782
            )Total
                stockholders' equity
            
            
            6,591,302
            
            
            5,101,925TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            29,324,135
            
            $
            26,644,939





See
      accompanying notes to consolidated financial statements




F-3




**CTI
      Industries Corporation and Subsidiaries**


**Consolidated
      Statements of Operations**





For
                the Year Ended December 31,2007
            
            2006
            
            2005Net
                Sales
            
            $
            36,509,710
            
            $
            35,428,155
            
            $
            29,189,974Cost
                of Sales
            
            
            27,825,493
            
            
            26,531,045
            
            
            22,725,825Gross
                profit
            
            
            8,684,217
            
            
            8,897,110
            
            
            6,464,149Operating
                expenses:General
                and administrative
            
            
            5,211,470
            
            
            4,554,324
            
            
            3,846,538Selling
            
            
            753,571
            
            
            847,244
            
            
            928,444Advertising
                and marketing
            
            
            1,474,289
            
            
            1,200,782
            
            
            913,071Loss
                on sale of asset
            
            
            -
            
            
            144,936
            
            
            -Other
                income
            
            
            -
            
            
            (471,802
            )
            
            -Asset
                impairment loss
            
            
            -
            
            
            -
            
            
            124,000Total
                operating expenses
            
            
            7,439,330
            
            
            6,275,484
            
            
            5,812,053Income
                from operations
            
            
            1,244,887
            
            
            2,621,626
            
            
            652,096Other
                income (expense):Interest
                expense
            
            
            (1,294,726
            )
            
            (1,713,801
            )
            
            (1,230,964
            )Interest
                income
            
            
            8,762
            
            
            22,976
            
            
            -Foreign
                currency gain
            
            
            173,510
            
            
            191,270
            
            
            45,128Total
                other expense
            
            
            (1,112,454
            )
            
            (1,499,555
            )
            
            (1,185,836
            )Income
                (loss) before income taxes and minority interest
            
            
            132,433
            
            
            1,122,071
            
            
            (533,740
            )Income
                tax expense (benefit)
            
            
            50,673
            
            
            (774,195
            )
            
            (200,392
            )Income
                (loss) before minority interest
            
            
            81,760
            
            
            1,896,266
            
            
            (333,348
            )Minority
                interest in (income) loss of subsidiary
            
            
            (138
            )
            
            1,517
            
            
            (139
            )Net
                income (loss)
            
            $
            81,898
            
            $
            1,894,749
            
            $
            (333,209
            )Other
                Comprehensive (Loss) Income:Unrealized
                loss on derivative instruments
            
            $
            (99,636
            )
            
            -
            
            
            -Foreign
                currency adjustment
            
            $
            (204,157
            )
            $
            (74,070
            )
            $
            (146,536
            )Comprehensive
                (loss) income
            
            $
            (303,793
            )
            $
            1,820,679
            
            $
            (479,745
            )Basic
                income (loss) per common share
            
            $
            0.03
            
            $
            0.91
            
            $
            (0.17
            )Diluted
                income (loss) per common share
            
            $
            0.03
            
            $
            0.85
            
            $
            (0.17
            )Weighted
                average number of shares and equivalent shares of common stock
                outstanding:Basic
            
            
            2,346,126
            
            
            2,087,145
            
            
            1,977,235Diluted
            
            
            2,589,960
            
            
            2,234,901
            
            
            1,977,235




See
      accompanying notes to consolidated financial statements




F-4




**CTI
        Industries Corporation and Subsidiaries**
 **Consolidated
        Statements of Stockholders' Equity and Comprehensive Loss**
 
 Value of warrants
              
              
              
              Accumulatedissued in
              
              
              
              Other
              
              LessCommon Stock
              
              Paid-in
              
              connection with
              
              Accumulated
              
              Comprehensive
              
              Treasury StockShares
              
              Amount
              
              Capital
              
              subordinated debt
              
              Deficit
              
              Loss
              
              Shares
              
              Amount
              
              TOTALBalance,
                  December 31, 2004
              
              
              2,185,897
              
              $
              3,764,020
              
              $
              5,615,411
              
              $
              595,174
              
              $
              (6,007,437
              )
              $
              (76,884
              )
              $
              231,796
              
              $
              (939,114
              )
              $
              2,951,170Options
                  Exercised
              
              
              32,144
              
              
              
              
              $
              53,501
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              53,501Stock
                  issued in settlement of  vendor obligations
              
              
              50,229
              
              
              
              
              $
              200,916
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              200,916Net
                  Loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (333,209
              )
              
              
              
              
              
              
              
              
              
              $
              (333,209
              )Other
                  comprehensive loss Foreign currency translation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (146,536
              )
              
              
              
              
              
              
              $
              (146,536
              )Total
                  comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (479,745
              )Balance,
                  December 31, 2005
              
              
              2,268,270
              
              $
              3,764,020
              
              $
              5,869,828
              
              $
              595,174
              
              $
              (6,340,646
              )
              $
              (223,420
              )
              
              231,796
              
              $
              (939,114
              )
              $
              2,725,842Options
                  Exercised
              
              
              21,477
              
              
              
              
              $
              41,577
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              41,577Warrants
                  Exercised
              
              
              119,050
              
              
              
              
              $
              178,192
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              178,192Shares
                  Surrendered to Exercise Warrants
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              38,404
              
              $
              (118,668
              )
              $
              (118,668
              )Issue
                  of warrants related to subordinated debt
              
              
              
              
              
              
              
              
              
              
              $
              443,313
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              443,313Stock
                  issued in advance for services relating to the SEDA
                  agreement
              
              
              3,500
              
              
              
              
              $
              10,990
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              10,990Net
                  Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              1,894,749
              
              
              
              
              
              
              
              
              
              
              $
              1,894,749Other
                  comprehensive income Foreign currency translation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (74,070
              )
              
              
              
              
              
              
              $
              (74,070
              )Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              1,820,679Balance,
                  December 31, 2006
              
              
              2,412,297
              
              $
              3,764,020
              
              $
              6,100,587
              
              $
              1,038,487
              
              $
              (4,445,897
              )
              $
              (297,490
              )
              
              270,200
              
              $
              (1,057,782
              )
              $
              5,101,925Options
                  Exercised
              
              
              93,576
              
              $
              -
              
              $
              228,467
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              195,466Shares
                  issued under SEDA agreement (net of issuance costs)
              
              
              323,625
              
              $
              -
              
              $
              1,354,824
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              1,354,824Shares
                  issued under consulting agreement
              
              
              17,000
              
              
              
              
              $
              79,050
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              79,050Cancellation
                  of Treasury Shares
              
              
              (270,200
              )
              
              
              
              $
              (1,057,782
              )
              
              
              
              
              
              
              
              
              
              
              (270,200
              )
              $
              1,057,782
              
              $
              -Compensation
                  relating to Option Issuance
              
              
              
              
              
              
              
              $
              14,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              14,000Excess
                  tax benefit - Options
              
              
              
              
              
              
              
              $
              67,932
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              67,932Shares
                  Surrendered to Exercise Options
              
              
              (7,174
              )
              
              
              
              $
              (33,001
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              -Net
                  Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              81,898
              
              
              
              
              
              
              
              
              
              
              $
              81,898Other
                  comprehensive incomeUnrealized
                  loss on derivative instruments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (99,636
              )
              
              
              
              
              
              
              $
              (99,636
              )Foreign
                  currency translation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (204,157
              )
              
              
              
              
              
              
              $
              (204,157
              )Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (303,793
              )
              
              
              
              
              
              
              $
              (221,895
              )Balance,
                  December 31, 2007
              
              
              2,569,124
              
              $
              3,764,020
              
              $
              6,754,077
              
              $
              1,038,487
              
              $
              (4,363,999
              )
              $
              (601,283
              )
              
              -
              
              $
              -
              
              $
              6,591,302
  See
        accompanying notes to consolidated financial statements




F-5




**CTI
        Industries Corporation and Subsidiaries**
 **Consolidated
        Statements of Cash Flows**
 
 For
                  the Year Ended December 31,2007
              
              2006
              
              2005Cash
                  flows from operating activities:Net
                  income (loss)
              
              $
              81,898
              
              $
              1,894,749
              
              
              (333,209
              )Adjustment
                  to reconcile net income (loss) to cash provided by (used in) operating
                  activities:Depreciation
                  and amortization
              
              
              1,466,419
              
              
              1,424,385
              
              
              1,479,916Amortization
                  of debt discount
              
              
              90,389
              
              
              102,939
              
              
              35,967Stock
                  Based Compensation
              
              
              14,000
              
              
              -
              
              
              -Excess
                  tax benefits from stock-based compensation
              
              
              (35,373
              )
              
              -
              
              
              -Minority
                  interest in loss of subsidiary
              
              
              138
              
              
              1,517
              
              
              65Loss
                  on sale of asset
              
              
              -
              
              
              144,936
              
              
              -Loss
                  on impairment of goodwill
              
              
              -
              
              
              -
              
              
              124,000Gain
                  on cancellation of vendor claim
              
              
              -
              
              
              (471,802
              )
              
              -Provision
                  for losses on accounts receivable
              
              
              105,153
              
              
              202,571
              
              
              145,000Provision
                  for losses on inventories
              
              
              141,305
              
              
              218,730
              
              
              205,000Stock
                  issued for services and vendor settlements
              
              
              43,917
              
              
              -
              
              
              200,916Deferred
                  income taxes
              
              
              (21,323
              )
              
              (774,195
              )
              
              (200,392
              )Change
                  in assets and liabilities:Accounts
                  receivable
              
              
              338,142
              
              
              (2,440,174
              )
              
              1,680,617Inventories
              
              
              (1,872,903
              )
              
              (1,063,203
              )
              
              1,129,594Prepaid
                  expenses and other assets
              
              
              270,117
              
              
              106,112
              
              
              167,332Trade
                  payables
              
              
              823,185
              
              
              (1,351,823
              )
              
              (825,275
              )Accrued
                  liabilities
              
              
              (88,874
              )
              
              651,861
              
              
              (1,151,032
              )Net
                  cash provided by (used in) operating activities
              
              
              1,356,190
              
              
              (1,353,397
              )
              
              2,658,499Cash
                  flows from investing activities:Proceeds
                  from sale of property, plant and equipment
              
              
              -
              
              
              -
              
              
              151,206Purchases
                  of property, plant and equipment
              
              
              (2,848,003
              )
              
              (552,798
              )
              
              (551,256
              )Net
                  cash used in investing activities
              
              
              (2,848,003
              )
              
              (552,798
              )
              
              (400,050
              )Cash
                  flows from financing activities:Change
                  in checks written in excess of bank balance
              
              
              507,932
              
              
              (390,748
              )
              
              (14,225
              )Net
                  change in revolving line of credit
              
              
              428,353
              
              
              1,267,107
              
              
              (1,350,472
              )Proceeds
                  from issuance of long-term debt and warrants(received
                  from related party $1,000,000 in 2006)
              
              
              325,913
              
              
              2,647,879
              
              
              231,392Repayment
                  of long-term debt (related parties $224,000, $15,000 and
                  $45,000)
              
              
              (1,241,757
              )
              
              (959,647
              )
              
              (850,986
              )Repayment
                  of short-term debt
              
              
              -
              
              
              (363,358
              )
              
              (402,324
              )Excess
                  tax benefits from stock-based compensation
              
              
              35,373Proceeds
                  from exercise of stock options and warrants
              
              
              195,467
              
              
              101,101
              
              
              53,501Proceeds
                  from issuance of stock, net
              
              
              1,354,821
              
              
              -
              
              
              -Cash
                  paid for deferred financing fees
              
              
              (20,213
              )
              
              (256,884
              )
              
              (141,316
              )Net
                  cash provided by (used in) financing activities
              
              
              1,585,889
              
              
              2,045,450
              
              
              (2,474,430
              )Effect
                  of exchange rate changes on cash
              
              
              4,472
              
              
              (16,672
              )
              
              (48,506
              )Net
                  increase (decrease) in cash and cash equivalents
              
              
              98,548
              
              
              122,583
              
              
              (264,487
              )Cash
                  and cash equivalents at beginning of period
              
              
              384,565
              
              
              261,982
              
              
              526,469Cash
                  and cash equivalents at end of period
              
              $
              483,113
              
              $
              384,565
              
              $
              261,982Supplemental
                  disclosure of cash flow information:Cash
                  payments for interest
              
              $
              1,201,228
              
              $
              1,215,596
              
              
              950,280Cash
                  payments for taxes
              
              $
              81,900
              
              $
              80,508
              
              
              88,151Accounts
                  payable converted to notes payable
              
              $
              -
              
              
              -
              
              $
              453,503Issue
                  of Warrants related to Subordinated Debt
              
              $
              -
              
              $
              443,313
              
              
              -Stock
                  Issued to Placement Agent
              
              $
              -
              
              $
              10,990
              
              
              -
  See
        accompanying notes to consolidated financial statements




F-6




December
      31, 2007





**1.
      Nature of Business**





***Nature
      of Operations***





CTI
      Industries Corporation, its United Kingdom subsidiary (CTI Balloons Limited),
      its Mexican subsidiaries (Flexo Universal, S.A. de C.V., CTI Mexico Corporation,
      S.A. de C.V. and CTF International S.A. de C.V.), and CTI Helium, Inc. (the
      “Company”) (i) design, manufacture and distribute metalized and latex balloon
      products throughout the world and (ii) operate systems for the production,
      lamination, coating and printing of films used for food packaging and other
      commercial uses and for conversion of films to flexible packaging containers
      and
      other products.





**2.
      Summary of Significant Accounting Policies**





***Principles
      of Consolidation***




The
      consolidated financial statements include the accounts of CTI Industries
      Corporation, its wholly owned subsidiaries CTI Balloons Limited, CTF
      International S.A. de C.V., and CTI Helium, Inc. and its majority owned
      subsidiaries, Flexo Universal and CTI Mexico Corporation. All significant
      intercompany accounts and transactions have been eliminated upon
      consolidation.




***Foreign
      Currency Translation***




The
      financial statements of foreign subsidiaries are translated into U.S. dollars
      using the exchange rate at each balance sheet date for assets and liabilities,
      the historical exchange rate for stockholders’ equity, and a weighted average
      exchange rate for each period for revenues and expenses. Translation adjustments
      are recorded in accumulated other comprehensive income (loss) as the local
      currencies of the subsidiaries are the functional currencies. Foreign currency
      transaction gains and losses are recognized in the period incurred and are
      included in the Consolidated Statements of Operations.




***Use
      of Estimates***




In
      preparing financial statements in conformity with accounting principles
      generally accepted in the United States of America, management makes estimates
      and assumptions that affect the amounts reported of assets and liabilities,
      disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amount of revenues and expenses during the reporting
      period in the financial statements and accompanying notes. Actual results may
      differ from those estimates. The Company’s significant estimates include
      valuation allowances for doubtful accounts, lower of cost or market of inventory
      and deferred tax assets, and recovery value of goodwill.




F-7




***Cash
      and Cash Equivalents***




Cash
      and
      cash equivalents include cash on hand, demand deposits and short term
      investments with original maturities of three months or less. At December 31,
      2006, cash balances exceeded FDIC insured amounts by approximately
      $141,000.




***Accounts
      Receivable***




Trade
      receivables are carried at original invoice amount less an estimate for doubtful
      receivables based on a review of all outstanding amounts on a monthly basis.
      Management determines the allowance for doubtful accounts by identifying
      troubled accounts, evaluating the individual customer receivables through
      consideration of the customer’s financial condition, credit history and current
      economic conditions and use of historical experience applied to an aging of
      accounts. A trade receivable is considered to be past due if any portion of
      the
      receivable balance is outstanding for a period over the customer’s normal terms.
      Trade receivables are written off when deemed uncollectible. Recoveries of
      trade
      receivables previously written off are recorded when received.





***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,
      to
      reflect the actual cost of production of inventories.




Production
      costs of work in process and finished goods include material labor and overhead.
      Work in process and finished goods are not recorded in excess of net realizable
      value.





In
      2006,
      the Company adopted SFAS No. 151, “Inventory Costs” which clarifies that
      abnormal amounts of idle facility expense, freight, handling costs, and wasted
      material (spoilage) should be recognized as period charges, rather than as
      an
      inventory value. This standard also requires the allocation of fixed production
      overheads to inventory based on the normal capacity of the production
      facilities. The Company’s pre-existing accounting policy for inventory valuation
      was generally consistent with this guidance, and therefore, the adoption of
      SFAS
      No. 151 did not have a significant impact on 2006 financial
      results.





***Property,
      Plant and Equipment***




Property
      and equipment are stated at cost. Expenditures for maintenance and repairs
      are
      charged to operations as incurred. Depreciation is computed using the
      straight-line and declining-balance methods over estimated useful lives of
      the
      related assets. Leasehold improvements are amortized on a straight-line method
      over the lesser of the estimated useful life or the lease term. The estimated
      useful lives range as follows:




F-8




Building
            
            
            25
                - 30 yearsMachinery
                and equipment
            
            
            3
                - 15 yearsOffice
                furniture and equipment
            
            
            5
                - 8 yearsLeasehold
                improvements
            
            
            5
                - 8 yearsFurniture
                and equipment at customer locations
            
            
            1
                - 3 years




Projects
      in process represent those costs capitalized in connection with construction
      of
      new assets and/or improvements to existing assets including a factor for
      interest on funds committed to projects in process of $83,000. Upon completion,
      these costs are reclassified to the appropriate asset class.




***Goodwill***




The
      Company applies the provisions of SFAS 142, “Goodwill and Other Intangible
      Assets”, under which goodwill is tested at least annually for impairment.
      Goodwill on the accompanying balance sheets relates to the Company’s acquisition
      of Flexo Universal in a prior year. It is the Company’s policy to perform
      impairment testing for Flexo Universal annually as of December 31, or as
      circumstances change. An annual impairment review was completed and no
      impairment was noted for the year ended December 31, 2007 and 2006 (see note
      14). While the Company believes that its estimates of future cash flows are
      reasonable, different assumptions regarding such cash flows could materially
      affect these evaluations.




***Valuation
      of Long Lived Assets***




The
      Company evaluates whether events or circumstances have occurred which indicate
      that the carrying amounts of long-lived assets (principally property, plant
      and
      equipment) may be impaired or not recoverable. The significant factors that
      are
      considered that could trigger an impairment review include: changes in business
      strategy, market conditions, or the manner of use of an asset; underperformance
      relative to historical or expected future operating results; and negative
      industry or economic trends. In evaluating an asset for possible impairment,
      management estimates that asset’s future undiscounted cash flows and appraised
      values to measure whether the asset is recoverable, the Company measures the
      impairment based on the projected discounted cash flows of the asset over its
      remaining life.




***Deferred
      Financing Costs***




Deferred
      financing costs are amortized on a straight line basis over the term of the
      loan. Upon a refinancing, existing unamortized deferred financing costs are
      expensed.





***Income
      Taxes***




The
      Company accounts for income taxes using the liability method. As such, deferred
      income taxes reflect the net tax effects of temporary differences between
      carrying amounts of assets and liabilities for financial reporting purposes
      and
      the amount used for income tax purposes. Deferred tax assets and liabilities
      are
      measured using enacted tax rates expected to be in effect when the anticipated
      reversal of these differences is scheduled to occur. Deferred tax assets are
      reduced by a valuation allowance when, management cannot determine, in its
      opinion, that it is more likely than not that the Company will recover that
      recorded value of the deferred tax asset.. The Company is subject to U.S.
      Federal, state and local taxes as well as foreign taxes in the United Kingdom
      and Mexico.




F-9




In
      July
      2006, the FASB issued Interpretation (“FIN”) No. 48, Accounting for
      Uncertainty in Income Taxes — An Interpretation of FASB Statement
      No. 109 (“FIN 48”). FIN 48 provides detailed guidance for the
      financial statement recognition, measurement and disclosure of uncertain tax
      positions recognized in an enterprise’s financial statements in accordance with
      SFAS 109. Income tax positions must meet a more-likely-than-not recognition
      threshold at the effective date to be recognized upon the adoption of
      FIN 48 and in subsequent periods. We adopted FIN 48 effective
      January 1, 2007, and the provisions of FIN 48 have been applied to all
      income tax positions commencing from that date. There was no material impact
      from this adoption.





***Fair
      Value of Financial Instruments***




The
      fair
      value of the Company’s financial instruments relating to accounts receivable,
      trade payables and accrued expenses approximates fair value due to their
      short-term nature. The fair value of debt approximates its carrying value as
      the
      interest rates applicable to these debt instruments are comparable to current
      market rates for similar maturities.




***Other
      Comprehensive Income (Loss)***




For
      the
      year ended December 31, 2007 the Company began recording the changes in the
      valuation of the company’s swap agreements in other comprehensive income (loss).
      For the years ended December 31, 2007, 2006 and 2005 comprehensive income (loss)
      also reflected foreign currency translation adjustments. Both are components
      of
      accumulated other comprehensive loss within stockholder’s equity.




***Revenue
      Recognition***




The
      Company recognizes revenue when title transfers upon shipment. Revenue from
      a
      transaction is not recognized until (i) a definitive arrangement exists, (ii)
      delivery of the product has occurred or the services have been performed and
      legal title and risk are transferred to the customer, (iii) the price to the
      buyer has been fixed or is determinable and (iv) collectibility is reasonably
      assured. In some cases, product is provided on consignment to customers. For
      these cases, revenue is recognized when the customer reports a sale of the
      product.




F-10




***Stock-Based
      Compensation***





On
      January 1, 2006, the Company adopted Statement of Financial Accounting Standards
      No. 123, “Share-Based Payments” (“SFAS No. 123(R)”) using the modified
      prospective transition method. Under this method, the Company’s consolidated
      financial statements for prior periods have not been restated and do not include
      the impact of SFAS No. 123(R). Accordingly, no compensation expense related
      to
      stock option awards was recognized in the year ended December 31, 2005 because
      all stock options granted had an exercise price equal to the fair market value
      of the underlying common stock on the date of grant. The following table shows
      the effect on net income and earnings per share as if the fair-value-based
      method of accounting had been applied to all outstanding and unvested stock
      options prior to adoption of SFAS No. 123(R). For purposes of this pro forma
      disclosure, the estimated fair value of the stock option award is assumed to
      be
      expensed over the award’s vesting periods (immediate) using the Black-Scholes
      model.





At
      December 31, 2005, the Company had 4 stock-based compensation plans, which
      are
      described more fully in Note 16. The Company accounted for those plans under
      the
      recognition and measurement principles of APB Opinion No. 25, “Accounting for
      Stock Issued to Employees” and related interpretations. The Company recognized
      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. Accordingly, no stock-based employee compensation cost had been recognized
      in 2005, as all options granted under those plans had an exercise price equal
      to
      the market value of the underlying common stock on the date of grant.





**Year
                Ended**
              **December
                31, **2005****Net
                Profit (loss):Reported
            
            $
            (333,000
            )Deduct
                total stock-based employee compensation expense determined under
                fair
                value method for all awards, net of related tax effects
            
            $
            (124,000
            )Pro
                forma net income (loss)
            
            $
            (457,000
            )Net
                income (loss) per share:Basic
                - As reported
            
            $
            (0.17
            )Basic
                - Proforma
            
            $
            (0.23
            )Diluted
                - As reported
            
            $
            (0.17
            )Diluted
                - Proforma
            
            $
            (0.23
            )





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:





**2005**Expected
                life (years)
            
            
            5Volatility
            
            
            138.86
            %Risk-free
                interest rate
            
            
            3.89
            %Dividend
                yield
            
            
            -




F-11




***Research
      and Development***




The
      Company conducts product development and research activities which includes
      (i)
      creative product development and (ii) engineering. During the years ended
      December 31, 2007, 2006 and 2005, research and development activities totaled
      $350,000, $230,000 and $224,000, respectively.




***Advertising
      Costs***




The
      Company expenses advertising costs as incurred. Advertising expenses amounted
      to
      $194,000, $116,000 and $50,000 for the years ended December 31, 2007, 2006
      and
      2005, respectively.





***Reclassifications***




A
        reclassification of personnel from sales to marketing was made to the year
        end
        2005 statement of operations to conform to the 2006 and 2007
        presentation.





A
      reclassification of Intellectual property from office furniture and equipment
      to
      a new line item was made to the 2006 balance sheet to conform to the 2007
      presentation.





***Derivative
      Instruments and Hedging Activities***





SFAS
      No.
      133 “Accounting for Derivative Instruments and Hedging Activities,” SFAS No.
      137, “Accounting for Derivative Instruments and Hedging Activities - Deferral of
      the Effective Date of SFAS No. 133,” SFAS No. 138,”Accounting for Certain
      Derivative Instruments and Certain Hedging Activities” and SFAS No. 149,
“Amendment of Statement 133 on Derivative Instruments and Hedging Activities,
      (Collectively “SFAS 133”) require an entity to recognize all derivatives as
      either assets for liabilities in the consolidated balance sheet and to measure
      those instruments at fair value. Under certain conditions, a derivative may
      be
      specifically designated as a fair value hedge or a cash flow hedge. For
      the
      period from February 2006 to June 30, 2007, the Company accounted for changes
      in
      the valuation of the swap agreement as items of income or expense. The net
      effect of such changes on income for the year through June 30, 2007 was $31,000.
      Subsequent to June 30, 2007, the Company designated the swap agreements as
      cash
      flow hedges and began recording the changes in fair value in other comprehensive
      income.




F-12




**3** ***.*** **New
      Accounting Pronouncements**





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” which
      defines fair value, establishes a framework for measuring fair value, and
      expands disclosures about fair value measurements. This statement clarifies
      how
      to measure fair value as permitted under other accounting pronouncements but
      does not require any new fair value measurements. In February 2008, the FASB
      issued FASB Staff Position (FSP) 157-1, “Application of FASB Statement No. 157
      to FASB Statement No. 13 and Other Accounting Pronouncements that Address Fair
      Value Measurements for Purposes of Lease Classification or Measurement under
      Statement 13” (FSP 157-1) and FSP 157-2, “Effective Date of FASB Statement No.
      157” (FSP 157-2). FSP 157-1 amends SFAS No. 157 to remove certain leasing
      transactions from its scope. FSP 157-2 delays the effective date of SFAS No.
      157
      for all non-financial assets and non-financial liabilities, except for items
      that are recognized or disclosed at fair value in the financial statements
      on a
      recurring basis (at least annually), until the beginning of the first quarter
      of
      fiscal 2009. The measurement and disclosure requirements related to financial
      and non-financial assets and liabilities are not anticipated to have significant
      impact on our consolidated financial statements.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities” (SFAS No. 159). SFAS 159 permits
      companies to choose to measure certain financial instruments and other items
      at
      fair value. The standard requires that unrealized gains and losses are reported
      in earnings for items measured using the fair value option. SFAS No. 159 is
      effective for us on January 1, 2008. The adoption of SFAS No. 159 is not
      expected to have a significant impact on our consolidated financial
      statements.





**4** ***.*** **Major
      Customers**





For
      the
      year ended December 31, 2007, the Company had 3 customers that accounted for
      approximately 20.3%, 19.1% and 10.3%, respectively, of consolidated net sales.
      In 2006, the company had 2 customers that accounted for approximately 24.3%,
      and
      20.1% respectively. See
      note
      13 for disclosure of related parties major customer in 2006 and 2005.Corresponding percentages of consolidated net sales generated by these
      customers for the year ended December 31, 2005, were approximately 13.6%, 23.5%
      and 13.3% respectively. At December 31, 2007, the outstanding accounts
      receivable balances due from these three customers were $2,905,000, $519,000
      and
      $113,000, respectively. At December 31, 2006, the outstanding accounts
      receivable balances due from these three customers were $2,641,000 and $598,000,
      respectively.





**5.
      Inventories**




Inventories
      are stated at the lower of cost or market. Cost is determined using standard
      costs which approximate costing determined on a first-in, first out basis.
      Standard costs are reviewed and adjusted periodically and at year end based
      on
      actual direct and indirect production costs. On a periodic basis, the Company
      reviews its inventory levels for estimated obsolescence or unmarketable items,
      in reference to future demand requirements and shelf life of the
      product.




F-13




Inventories
      are comprised of the following:





**December
                31,**
            
            **December
                31,****2007**
            
            **2006**Raw
                materials
            
            $
            1,452,000
            
            $
            1,449,000Work
                in process
            
            
            1,423,000
            
            
            945,000Finished
                goods
            
            
            7,208,000
            
            
            5,855,000Allowance
                for excess quantities
            
            
            (382,000
            )
            
            (275,000
            )Total
                inventories
            
            $
            9,701,000
            
            $
            7,974,000




**6.**  **Notes
      Payable**




Long
      term
      debt consists of:





Dec.
                31, 2007
            
            Dec.
                31, 2006Term
                Loan with bank, payable in monthly installments of $58,333 plus interest
                at prime (7.25% and 8.25% at December 31, 2007 and 2006, respectively)
                plus 0.75% (8.00%) and 0.25% (8.50%) at December 31, 2007 and 2006,
                respectively (amortized over 60 months) balance due January 31,
                2011
            
            $
            2,256,636
            
            $
            2,936,242Mortgage
                Loan with bank, payable in monthly installments of $9,333 plus interest
                at
                prime (7.25% and 8.25% at December 31, 2007 and 2006, respectively)
                plus
                0.75% (8.00%) and 0.25% (8.50%) at December 31, 2007 and 2006,
                respectively (amortized over 25 years) balloon balance of $2,249,000
                due
                January 31, 2011
            
            $
            2,677,851
            
            $
            2,741,763(2006)
                Vendor Notes, at various rates of interest (weighted average of 6%)
                maturing through December 2007
            
            $
            -
            
            $
            136,725Subordinated
                Notes (Officers) due 2008, interest at 9% net of debt discount of
                $0 and
                $1,781 at December 31, 2007 and 2006, respectively (See Notes
                7,13)
            
            $
            $
                1,431,500
            
            $
            1,429,781Subordinated
                Notes (Officers) due 2008, interest at 8% (See Notes 7,13)
            
            $
            814,233
            
            $
            814,233Subordinated
                Notes (Officers) due 2011, interest at prime (7.25% and 8.25% at
                December
                31, 2007 and 2006, respectively) + 2%, 9.25% and 10.25% as of December
                31,
                2007 and 2006, respectively, net of debt discount of $273,372 and
                $362,040
                at December 31, 2007 and 2006, respectively.
            
            $
            726,628
            
            $
            637,960(2007)
                Asset Financing Loans: Forklift, payable in monthly installments
                of $426
                (amortized over 5 years) annual interest rate of 10.5%; Pouch Machine
                #6;
                payable in monthly installments of $5,626 (amortized over 5 years)
                annual
                interest rate of 8.78%
            
            $
            280,768
            
            $
            -Total
                long-term debt
            
            $
            8,187,616
            
            $
            8,696,704Less
                current portion
            
            $
            (3,020,578
            )
            $
            (3,104,008
            )Total
                Long-term debt, net of current portion
            
            $
            5,167,038
            
            $
            5,592,696




F-14




On
      February 1, 2006, the Company entered into a Loan Agreement with RBS Citizens,
      N.A., Chicago, Illinois, previously referred to as Charter One Bank, under
      which, as amended, the Bank has agreed to provide a credit facility to the
      Company in the total amount of $15,300,000, which includes (i) a five year
      mortgage loan secured by the Barrington, Illinois property in the principal
      amount of $2,800,000, amortized over a 25 year period, (ii) a five year term
      loan secured by the equipment at the Barrington, Illinois plant in the amount
      of
      $3,500,000 and (iii) a three-year revolving line of credit up to a maximum
      amount of $9,000,000, secured by inventory and receivables. The amount the
      Company can borrow on the revolving line of credit includes 85% of eligible
      receivables and 60% of eligible inventory. The Loan Agreement includes a number
      of covenants including financial covenants relating to Tangible Net Worth,
      Senior Debt to EBITDA, and Fixed Charge coverage. As of December 31, 2007,
      we
      were not in compliance with the senior debt to EBITDA or the EBITDA to fixed
      charge covenants. We have obtained a waiver from the Bank with respect to
      these covenant violations as of December 31, 2007. We believe that we will
      be in
      compliance with our debt covenants during 2008. On February 1, 2006, proceeds
      of
      these loans totaling $10,349,653 were utilized to pay the entire outstanding
      principal amount of the Company’s then outstanding debt obligations to Cole
      Taylor Bank and Banco Popular.





The
      Company used interest rate swaps as a cash flow hedge to manage interest costs
      and the risk associated with changing interest rates of long-term debt. During
      the second quarter ended June 30, 2006, the Company entered into two separate
      forward-starting interest rate swap agreements as a means of managing its
      interest rate exposure on its variable rate $2.8 million mortgage and $3.5
      million term loan. These agreements were effective beginning on May 1, 2006
      and
      were designated to swap a variable rate of prime plus varying rates for a fixed
      rate ranging of 8.49%. The aggregate notional amount of the swaps was $6.2
      million. The swap agreements expire on January 1, 2011. The
      net
      effect of such changes on for the six month ended June 30, 2007 was $31,000.
      For
      the third quarter 2007 and thereafter, the Company will record changes in the
      valuation of the swap agreement as items of other comprehensive income or
      loss.





Each
      of
      John H. Schwan and Stephen M. Merrick, officers, directors and principal
      shareholders of the Company have personally guaranteed the obligations of the
      Company to RBS Citizens, N.A. up to $2,000,000.





As
      of
      December 31, 2007 the balance outstanding on the revolving line of credit with
      RBS Citizens, N.A. was $6,746,000 with an interest rate of 8%.




F-15




Future
      minimum principal payments, exclusive of debt discount, for amounts outstanding
      under these long-term debt agreements for each of the years ended December
      31:




2008
            
            $
            3,021,0002009
            
            
            779,0002010
            
            
            784,0002011
            
            
            3,556,0002012
            
            
            48,000Thereafter
            
            
            -$
            8,188,000





**7.**  **Subordinated
      Debt**




In
      February 2003, the Company received $1,630,000 from certain shareholders in
      exchange for (a) two year 9% subordinated notes, and (b) five year warrants
      to
      purchase 163,000 common shares at $4.87 per share. The proceeds were to (i)
      re-finance the bank loan
      of
      CTI Mexico in the amount of $880,000 and (ii) to provide financing for CTI
      Mexico and Flexo Universal. The value of the warrants was $460,000 calculated
      using Black-Scholes option pricing formula. The Company applied the discount
      against the subordinated debt. The discount is being amortized using the
      effective interest method to interest expense over the term of the debt.
      These loans are subordinated to the Bank debt of the Company. On February 8,
      2008 those shareholders exercised these warrants in exchange for a reduction
      on
      these notes of $794,000.




In
      February 2006, the Company received $1,000,000 from certain shareholders in
      exchange for (a) five year subordinated notes bearing interest at 2% over the
      prime rate determined on a quarterly basis, and (b) five year warrants to
      purchase an aggregate of 303,030 shares of common stock of the Company at the
      price of $3.30 per share. The proceeds were to fund capital improvements and
      give additional liquidity to the Company. The value of the warrants was $443,000
      using the Black-Scholes option pricing formula. The Company applied the discount
      against the subordinated debt. The discount is amortized using the effective
      interest method to interest expense over the term of the debt. These loans
      are
      subordinated to the Bank debt of the Company.




At
      various times during 2003, John H. Schwan loaned an aggregate of $795,204 to
      the
      Company in exchange for notes bearing interest at various annual rates (5%-8%).
      These notes are subordinated to the bank loan of the Company. Mr. Merrick also
      advanced $19,209 to the Company in December 2005.




F-16


**8.**  **Income
        Taxes**
  The
        income tax provisions are comprised of the following:


Dec.
                31 2007
            
            Dec.
                31 2006
            
            Dec.
                31 2005Current:Federal
            
            $
            -
            
            $
            -
            
            $
            -State
            
            
            -
            
            
            -
            
            
            -Foreign
            
            
            162,218
            
            
            -
            
            
            -$
            162,218
            
            $
            -
            
            $DeferredFederal
            
            $
            (94,934
            )
            $
            (806,683
            )
            $
            (180,134
            )State
            
            
            (16,611
            )
            
            32,488
            
            
            (24,797
            )Foreign
            
            
            -
            
            
            -
            
            
            4,539(111,545
            )
            
            (774,195
            )
            
            (200,392
            )Total
                Income Tax Provision
            
            $
            50,673
            
            $
            (774,195
            )
            $
            (200,392
            )




The
      components of the net deferred tax asset at December 31 are as
      follows:





2007
            
            2006Deferred
                tax assets:Allowance
                for doubtful accounts
            
            $
            113,265
            
            $
            73,047Inventory
                allowances
            
            
            110,156
            
            
            47,166Accrued
                liabilities
            
            
            71,576
            
            
            64,859Unicap
                263A adjustment
            
            
            114,774
            
            
            109,111Net
                operating loss carryforwards
            
            
            2,972,715
            
            
            3,036,424Alternative
                minimum tax credit carryforwards
            
            
            342,673
            
            
            338,612State
                investment tax credit carryforward
            
            
            30,512
            
            
            30,512Other
                foreign tax items
            
            
            55,556
            
            
            55,556Foreign
                asset tax credit carryforward
            
            
            38,872
            
            
            136,744Total
                deferred tax assets
            
            
            3,850,099
            
            
            3,892,031Deferred
                tax liabilities:Book
                over tax basis of capital assets
            
            
            (1,193,457
            )
            
            (1,346,794
            )Other
                foreign tax items
            
            
            (281,434
            )
            
            (191,352
            )2,375,208
            
            
            2,353,885Less:
                Valuation allowance
            
            
            (1,227,001
            )
            
            (1,227,001
            )Net
                deferred tax asset
            
            $
            1,148,207
            
            $
            1,126,884




F-17




The
      Company maintains a valuation allowance with respect to deferred tax assets
      as a
      result of the uncertainty of ultimate realization. At December 31, 2007, the
      Company has net operating loss carryforwards of approximately $7,474,000
      expiring in various years through 2025. In addition, the Company has
      approximately $339,000 of alternative minimum tax credits as of December 31,
      2007, which have no expiration date.





For
      2007
      the Company determined that it is more likely than not it will not realize
      the
      value recorded of its deferred tax assets. In 2006, the Company recognized
      an
      income tax benefit of $774,000. On the basis of results of operations over
      the
      past five quarters, anticipated repatriation of income from foreign
      subsidiaries, charges to foreign subsidiaries and the expectation of continued
      achievement of, and improvement in, operating results for the foreseeable
      future.





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




**Years
                Ended December 31,****2007**
            
            **2006**
            
            **2005**Taxes
                at statutory rate
            
            $
            46,352
            
            $
            392,725
            
            $
            (186,809
            )State
                income taxes
            
            
            6,381
            
            
            54,061
            
            
            (25,716
            )Nondeductible
                expenses
            
            
            18,317
            
            
            20,530
            
            
            12,757Decrease in
                deferred tax valuation allowance
            
            
            -
            
            
            (1,227,001
            )
            
            -Foreign
                taxes and other
            
            
            (20,377
            )
            
            (14,510
            )
            
            (624
            )Income
                tax provision
            
            $
            50,673
            
            $
            (774,195
            )
            $
            (200,392
            )




The
      Company files tax returns in the U.S. federal and
      U.K. and Mexico foreign tax jurisdictions and various state jurisdictions.
      The
      tax years 2004 through 2006 remain open to examination. Our policy is to
      recognize interest and penalties related to uncertain tax positions in income
      tax expense. During the twelve months ended December 31, 2007, the Company
      did
      not recognize expense for interest or penalties, and do not have any amounts
      accrued at December 31, 2007, as the Company does not believe it has taken
      any
      uncertain tax positions.




**9.**  **Other
      Income/Expense**




Other
      income/expense set forth on the Company’s Consolidated Statement of Income for
      the fiscal year ended December 31, 2007 included gains of $174,000 from currency
      variability. In 2006 and 2005, the Company had a gain of $191,000 and $45,000,
      respectively, related to currency variability items.





**10.**  **Other
      Operating Expense (Income)**





Other
      income/expense set forth on the Company’s Consolidated Statement of Income for
      the fiscal year ended December 31, 2006 included gains of $472,000 related
      to
      the settlement of certain vendor claims in consideration for the payment of
      an
      amount less than the amount accrued.




F-18




**11.**  **Other
      Liabilities**




Items
      identified as Other Liabilities in the Company’s Consolidated Balance Sheet as
      of December 31, 2007 include (i) loans by officers/shareholders to Flexo
      Universal totaling $1,056,000, and (ii) $14,000 owed to others. Items identified
      as Other Liabilities in the Company’s Consolidated Balance Sheet as of December
      31, 2006 include (i) loans by officers/shareholders to Flexo Universal totaling
      $1,090,000, (ii) loans by officers/shareholders to CTI Balloons Limited of
      $184,000 and (iii) $20,000 owed to others..




**12.
      Employee Benefit Plan**





The
      Company has a defined contribution plan for substantially all employees. Profit
      sharing contributions may be made at the discretion of the Board of Directors.
      Effective January 1, 2006, the Company amended its defined contribution plan.
      Under the amended plan, the maximum contribution for the Company is 5% of gross
      wages. Employer contributions to the plan totaled $105,000, $91,000 and $52,000
      for the years ended December 31, 2007, 2006 and 2005, respectively.




**13.**  **Related
      Party Transactions**




Stephen
      M. Merrick is of counsel to a law firm from which we received legal services
      during the year. Mr. Merrick is both a director and a shareholder of the
      Company. Legal fees incurred with this firm or predecessor, were $106,000,
      $120,000 and $117,000 for the years ended December 31, 2007, 2006 and 2005,
      respectively.




John
      H.
      Schwan, Chariman of the Company, is principal of Shamrock Packaging and
      affiliated companies. The Company made purchases of packaging materials from
      Shamrock of approximately $622,000, $368,000 and $165,000 during the years
      ended
      December 31, 2007, 2006 and 2005, respectively.





John
      H.
      Schwan was an officer of an affiliate of Rapak, LLC. Mr. Schwan ended his
      affiliation with Rapak in 2006. Rapak’s purchases of products from the Company
      totaled $7,110,000 and $6,860,000 in each of the years ended December 31, 2006
      and 2005, respectively. (see note 4)




John
      H. Schwan, Chairman of the Company, is one of
      the owners of White Horse Production, Inc. The Company made purchases from
      White
      Horse of approximately $16,500 during the year ended December 31, 2007. The
      Company did not make any purchase from White Horse prior to 2007.




John.
      H. Schwan, Chairman of the Company, is the
      brother of Gary Schwan, one of the owners of Schwan Incorporated, which provides
      building maintenance and remodeling services to the Company. The Company made
      purchases from Schwan Incorporated of approximately $111,000 during the year
      ended December 31, 2007. The Company made purchases from Schwan Incorporated
      of
      approximately $13,000 during the year ended December 31, 2006.





In
      January 2006, an officer of Flexo Universal acquired the loan of Flexo Universal
      payable to a Mexican financial institution. During 2006, Flexo Universal made
      payments of $24,000 and $8,400 for the years ending December 31, 2007 and 2006
      respectively, in principal and interest on this loan to the
      officer.





Messrs.
      Schwan and Merrick made advances to the Company’s Mexican affiliate, Flexo
      Universal in the amount of $113,000 and $142,000, respectively in 2005. These
      advances are reflected in demand notes bearing interest at the rate of 7%.
      Additionally, Messrs. Schwan and Merrick advanced $130,000 and $155,000, in
      2005
      respectively to the Company’s UK affiliate, CTI Balloons Ltd. The advances made
      to CTI Balloons Ltd. were paid back in full in 2007.




F-19




On
      February 1, 2006, Mr. Schwan and Mr. Merrick advanced $500,000 each to the
      Company in exchange for (a) five year promissory notes bearing interest at
      2%
      over the prime rate determined quarterly and (b) five year warrants to purchase
      an aggregate of 303,030 shares of common stock of the Company at the price
      of
      $3.30 per share (110% of the market price on the day proceeding the day of
      the
      loan) **.**




Interest
      paid to related parties during 2007, 2006 and 2005, was 299,000, $277,000 and
      $147,000, respectively.





**14.**  **Goodwill
      and Intangible Assets**





Under
      the
      provisions of SFAS 142, goodwill is subject to at least annual assessments
      for
      impairment by applying a fair-value based test. SFAS 142 also requires that
      an
      acquired intangible asset should be separately recognized if the benefit of
      the
      intangible asset is obtained through contractual or other legal rights, or
      if
      the asset can be sold, licensed, rented or exchanged, regardless of the
      acquirer’s intent to do so. The Company has no acquired intangible assets other
      than goodwill.




As
      of
      December 31, 2005, we determined in consultation with a valuation consultant
      that the fair value of the Company’s interest in Flexo Universal was below its
      $1,113,000 carrying value. Then step two of the evaluation was done in which
      the
      value of the goodwill was determined to be $989,000. Accordingly, in fiscal
      2005, we recorded $124,000 as an expense and have reduced the carrying value
      of
      the Company’s interest in Flexo Universal to $989,000. As of December 31, 2006
      and 2007 we determined, in consultation with a valuation consultant, that the
      fair value of the Company’s interest in goodwill related to Flexo Universal was
      not impaired.




The
      carrying amount of goodwill as of December 31, 2007, 2006 and 2005 was $989,000.





**15.**  **Commitments
      and Contingencies**




Operating
      Leases





In
      September of 2005, the Company signed a lease to rent 16,306 square feet of
      space from Trinity Assets. This lease has a 2-year term. In September of 2006,
      the Company signed an extension to this lease to run through September of 2009.
      The Company’s United Kingdom subsidiary also maintains a lease for office and
      warehouse space, which expires in 2019. The Company’s Mexico subsidiary signed a
      five-year lease in January of 2003 to rent 43,000 square feet of warehouse
      and
      office space at a cost of approximately $18,000 per month. In February 2008,
      Flexo Universal entered into a new 3-year lease at the cost of $19,200 per
      month. The Company leases office and warehouse equipment under operating leases,
      which expire on various dates through December 2011.




F-20




The
      net
      lease expense was $430,000, $312,000 and $598,000 for the years ended December
      31, 2007, 2006, and 2005 respectively.




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




**Trinity**
              **Assets**
            
            **Other**
            
            **Total**
              **Lease**
              **Payments**2008
            
            $
            104.000
            
            $
            410,000
            
            $
            514,0002009 –
                2010
            
            
            79,000
            
            
            820,000
            
            
            899,0002011 –
                2012
            
            
            
            
            
            245,000
            
            
            245,0002013
                and thereafter
            
            
            
            
            
            362,000
            
            
            362,000Total
            
            $
            183,000
            
            $
            1,837,000
            
            $
            2,020,000





**Licenses**




The
      Company has certain merchandising license agreements, which are of a one to
      two
      year duration 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 December 31, are as
      follows:




2008
            
            $
            92,000




**16.**  **Stockholders’
      Equity**





**Stock
      Options**





On
      January 1, 2006, the Company adopted SFAS 123(R). Prior to the adoption of
      SFAS
      123(R), the Company had adopted the disclosure-only provisions of SFAS 123
      and
      accounted for employee stock-based compensation under the intrinsic value
      method, and no expense related to stock options was recognized. The Company
      adopted the provisions of SFAS 123(R) using the modified prospective transition
      method. Under this method, stock based compensation expense for 2007 and 2006
      includes the requisite service period portion of the grant date fair value
      of:
      (a) all awards of equity instruments granted prior to, but not yet vested as
      of,
      January 1, 2006; and (b) all awards of equity instruments granted subsequent
      to
      January 1, 2006.




F-21




As
      of
      December 31, 2007, the Company had five stock-based compensation plans pursuant
      to which stock options may be granted. The
      Plans
      provide 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. When a
      new stock option plan is adopted no further options will be issued under any
      previous stock option plan.





Under
      the
      Company’s 1997 Stock Option Plan (effective July 1, 1997), a total of 119,050
      shares of Common Stock were reserved for issuance under the Stock Option Plan.
      As of December 31, 2007, 98,415 shares of Common Stock have been granted
      and were fully vested at the time of grant, 49,606 remain outstanding.
      During 2007, 4,762 options were exercised and proceeds of $30,001 were received
      from this plan.




On
      March
      19, 1999, the Board of Directors approved for adoption, effective May 6, 1999,
      the 1999 Stock Option Plan (“Plan”). The Plan authorizes the grant of options to
      purchase up to an aggregate of 158,733 shares of the Company’s Common Stock. As
      of December 31, 2007, 148,217 shares have been granted under the 1999
      Stock Option Plan and were fully vested at the time of grant, 29,762 remain
      outstanding. During 2007, 23,812 options were exercised and proceeds of $45,005
      were received from this plan.




On
      April
      12, 2001, the Board of Directors approved for adoption, effective December
      27,
      2001, the 2001 Stock Option Plan (the “Plan”). The Plan authorizes the grant of
      options to purchase up to an aggregate of 119,050 shares of the Company’s Common
      Stock. As of December 31, 2007, 137,955 shares have been granted and
      were fully vested at the time of grant, 41,692 remain outstanding. During
      2007, 5,953 options were exercised and $8,751 in proceeds were received from
      this plan.




On
      April
      24, 2002, the Board of Directors approved for adoption, effective October 12,
      2002, the 2002 Stock Option Plan (“Plan”). The Plan authorizes the grant of
      options to purchase up to an aggregate of 142,860 shares of the Company’s Common
      Stock . **** As
      of
      December 31, 2007, 123,430 shares have been granted and were fully
      vested at the time of grant, 49,500 remain outstanding. In 2007, 59,049 options
      were exercised and proceeds of $144,711 were received from this plan. 7,174
      shares were surrendered to exercise 14,826 of these options.





In
      December 2005, certain members of company management were issued incentive-based
      options to purchase 79,000 shares of the Company’s Common Stock at an exercise
      price of $2.88 per share. These options have a term of 10 years.





The
      fair
      value of the options granted in 2005 were estimated at the date of grant using
      a
      Black-Scholes option pricing model with the following weighted average
      assumptions: risk-free interest rate of 3.9%; dividend yield of 0%; volatility
      factor of the expected price of the Company’s stock was 138.9%; and a weighted
      average expected life of 5 years. The weighted average fair value of the options
      granted during 2005 was $2.56 per share. The fair value of
      these options was $202,000, which were fully vested at the time of
      grant.




F-22


**2007**
              
              **2006**
              
              **2005**Options
                  granted
              
              
              74,000
              
              
              -
              
              
              79,000Options
                  vested
              
              
              -
              
              
              -
              
              
              79,000
 The following is a summary of options exercised during
          the
          years ended December 31:
  **2007**
                  
                  **2006**
                  
                  **2005****Shares**
                  
                  **Intrinsic**
                    **Value**
                  
                  **Shares**
                  
                  **Intrinsic**
                    **Value**
                  
                  **Shares**
                  
                  **Intrinsic**
                    **Value**1997
                      Plan
                  
                  
                  4,762
                  
                  $
                  17,000
                  
                  
                  -
                  
                  $
                  -
                  
                  
                  -
                  
                  $
                  -1999
                      Plan
                  
                  
                  23,813
                  
                  $
                  166,000
                  
                  
                  3,572
                  
                  $
                  6,000
                  
                  
                  17,263
                  
                  $
                  57,0002001
                      Plan
                  
                  
                  5,953
                  
                  $
                  34,000
                  
                  
                  17,905
                  
                  $
                  42,000
                  
                  
                  14,881
                  
                  $
                  84,0002002
                      Plan
                  
                  
                  59,049
                  
                  $
                  119,000
                  
                  
                  -
                  
                  $
                  -
                  
                  
                  -
                  
                  $
                  -


On
      June
      22, 2007, the Board of Directors approved for adoption, effective October 1,
      2007, the 2007 Incentive Stock Plan (“Plan”). The Plan authorizes the grant of
      options to purchase up to an aggregate of 150,000 shares of the Company’s Common
      Stock **.** On
      October 1, 2007, the company issued 74,000 shares under the 2007 Plan. The
      fair
      value of these options was estimated at the date of grant using a Black-Scholes
      option pricing model with the following weighted average assumptions: risk-free
      interest rate of 3.89%; dividend yield of 0%; volatility factor of the expected
      price of the Company’s stock was 60.67%; and a weighted average expected life of
      2.8 years. The weighted average fair value of the options granted during 2007
      was $1.854 per share. Through December 31, 2007 the Company has recorded $14,000
      in share based compensation expense relating to this option program. The
      Company has $152,000 of unrecognized compensation cost as of December 31, 2007,
      which relates to non vested shares. This expense will be recognized over the
      next 11 quarters.




**Vesting
                  of 2007 Options****%**
              
              **Date**25
              
              
              April
                  1, 200850
              
              
              October
                  1, 200875
              
              
              October
                  1, 2009100
              
              
              October
                  1, 2010


The
      Compensation Committee administers the Plan. 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 Compensation Committee at whatever price
      the Committee may determine in good faith. Unless the Committee 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 Committee 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. Officers, directors,
      and
      employees of, and consultants to, the Company or any parent or subsidiary
      corporation selected by the Committee are eligible to receive options under
      the
      Plan. Subject to certain restrictions, the Committee 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, vesting and other terms.




The
      valuation assumptions were determined as follows:





Historical
      stock price volatility: The Company used the monthly closing price to calculate
      historical annual volatility.





Risk-free
      interest rate: The Company bases the risk-free interest rate on the rate payable
      on US treasury securities in effect at the time of the grant.





Expected
      life: The expected life of the option represents the period of time options
      are
      expected to be outstanding. The Company uses one half of the life of the
      option.





Dividend
      yield: The estimate for dividend yield is 0.0%, because the Company has not
      historically paid, and does not intend for the foreseeable future to pay, a
      dividend.




F-23




The
      following is a summary of the activity in the Company’s stock option plans and
      other options for the years ended December 31, 2007, 2006 and 2005,
      respectively.





**Weighted**
            
            
            
            **Weighted**
            
            
            
            **Weighted****Avg.**
            
            
            
            **Avg.**
            
            
            
            **Avg.****Dec.
                31,**
            
            **Exercise**
            
            **Dec.
                31,**
            
            **Exercise**
            
            **Dec.
                31,**
            
            **Exercise****2007**
            
            **Price**
            
            **2006**
            
            **Price**
            
            **2005**
            
            **Price**Exercisable,
                beginning of period
            
            
            337,941
            
            $
            3.42
            
            
            361,402
            
            $
            3.36
            
            
            405,422
            
            $
            3.25Granted
            
            
            -
            
            
            4.75
            
            
            -
            
            
            3.30
            
            
            79,000
            
            
            2.88Exercised
            
            
            (93,576
            )
            
            2.44
            
            
            (21,477
            )
            
            1.88
            
            
            (32,144
            )
            
            1.70Cancelled
            
            
            (50,000
            )
            
            5.75
            
            
            (1,984
            )
            
            6.30
            
            
            (90,876
            )
            
            1.77Exercisable
                at the end of period
            
            
            194,365
            
            $
            3.32
            
            
            337,941
            
            $
            3.42
            
            
            361,402
            
            $
            3.36




**Weighted**
            
            
            
            **Weighted**
            
            
            
            **Weighted****Avg.**
            
            
            
            **Avg.**
            
            
            
            **Avg.****Dec.
                31,**
            
            **Exercise**
            
            **Dec.
                31,**
            
            **Exercise**
            
            **Dec.
                31,**
            
            **Exercise****2007**
            
            **Price**
            
            **2006**
            
            **Price**
            
            **2005**
            
            **Price**Outstanding,
                beginning of period
            
            
            337,941
            
            $
            3.42
            
            
            361,402
            
            $
            3.36
            
            
            405,422
            
            $
            3.25Granted
            
            
            74,000
            
            
            4.75
            
            
            -
            
            
            3.30
            
            
            79,000
            
            
            2.88Exercised
            
            
            (93,576
            )
            
            2.44
            
            
            (21,477
            )
            
            1.88
            
            
            (32,144
            )
            
            1.70Cancelled
            
            
            (50,000
            )
            
            5.75
            
            
            (1,984
            )
            
            6.30
            
            
            (90,876
            )
            
            1.77Outstanding
                at the end of period
            
            
            268,365
            
            $
            3.71
            
            
            337,941
            
            $
            3.42
            
            
            361,402
            
            $
            3.36




At
      December 31, 2007, available options to grant were 76,000.




Significant
      option groups outstanding at December 31, 2007 and related weighted average
      price and remaining life information are as follows:





**Grant
                Date**
            
            **Outstanding**
            
            **Exercisable**
            
            **Exercise**
              **Price**
            
            **Remaining**
              **Life (Years)**September
                1998
            
            
            49,604
            
            
            49,604
            
            $
            6.30
            
            
            0.9September
                1998
            
            
            11,905
            
            
            11,905
            
            $
            2.10
            
            
            0.9March
                2000
            
            
            29,759
            
            
            29,759
            
            $
            1.89
            
            
            2.3December
                2001
            
            
            26,192
            
            
            26,192
            
            $
            1.47
            
            
            4.0April
                2002
            
            
            11,905
            
            
            11,905
            
            $
            2.10
            
            
            4.4December
                2005
            
            
            65,000
            
            
            65,000
            
            $
            2.88
            
            
            8.0October
                2007
            
            
            74,000
            
            
            -
            
            $
            4.75
            
            
            3.9268,365
            
            
            194,365




The
      aggregate intrinsic value of options were $220,000 as of December 31, 2007
      for
      all options in the money, outstanding and exercisable.




F-24




**Warrants**





In
      July
      2001, certain members of company management were issued warrants to purchase
      119,050 shares of the Company’s Common Stock at an exercise price of $1.50 per
      share in consideration of their facilitating and guaranteeing and securing
      bank
      loans to the Company in the amount of $1.4 million and for advancing additional
      monies to the company that were repaid in 2001. On June 12, 2006 one member
      of
      the company management paid $59,524 to exercise warrants for 39,683 shares
      and
      another member of the company management turned in 38,404 shares with a market
      value of $3.09 per share on the day of the transaction, or $118,666, to pay
      for
      the shares issued under the warrant





In
      February 2003, certain members of company management were issued warrants to
      purchase 163,000 shares of the Company’s Common Stock at an exercise price of
      $4.87 per share in consideration of their loaning the company $1,630,000. On
      February 8, 2008 those shareholders exercised these options in exchange for
      a
      reduction on these notes of $794,000.





In
      February 2006, certain members of company management were issued warrants,
      which
      fully vested immediately, to purchase 303,030 shares of the Company’s Common
      Stock at an exercise price of $3.30 per share in consideration of their loaning
      the company $1,000,000. The fair value of the warrants granted on February
      1,
      2006, was $443,000 which was estimated at the date of grant using a
      Black-Scholes pricing model with the following weighted average assumptions:
      risk-free interest rate of 3.9%; dividend yield of 0%; volatility factor of
      the
      expected price of the Company’s stock was 138.9%; and a weighted average
      expected life of 5 years. The weighted average fair value of the warrants
      granted during 2006 was $2.56 per share.





**Dec.
                31,**
              **2007**
            
            **Weighted**
              **Avg.**
              **Exercise**
              **Price**
            
            **Dec.
                31,**
              **2006**
            
            **Weighted**
              **Avg.**
              **Exercise**
              **Price**
            
            **Dec.
                31,**
              **2005**
            
            **Weighted**
              **Avg.**
              **Exercise**
              **Price**Outstanding
                and exercisable, beginning of period
            
            
            466,030
            
            $
            3.85
            
            
            282,050
            
            $
            3.45
            
            
            282,050
            
            $
            3.45Granted
            
            
            -
            
            
            -
            
            
            303,030
            
            
            3.30
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -
            
            
            (119,050
            )
            
            1.50
            
            
            -
            
            
            -Cancelled
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            -
            
            
            -Outstanding
                and exercisable at the end of period
            
            
            466,030
            
            $
            3.85
            
            
            466,030
            
            $
            3.85
            
            
            282,050
            
            $
            3.45




The
      aggregate intrinsic value of warrants were $155,000 as of December 31, 2007
      for
      all warrants in the money, outstanding and exercisable.


**Intrinsic
                  value of Warrants Exercised****2007**
              
              **2006**
              
              **2005****Shares**
              
              **Intrinsic**
                **Value**
              
              **Shares**
              
              **Intrinsic**
                **Value**
              
              **Shares**
              
              **Intrinsic**
                **Value**2001
                  Warrants
              
              
              -
              
              $
              -
              
              
              119,050
              
              $
              146,000
              
              
              -
              
              $
              -




F-25





**17.**  **Earnings
      Per Share**





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




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




**CTI
      Industries Corporation and Subsidiaries**


**Consolidated
      Earnings per Share**





Year
                Ended December 31,2007
            
            2006
            
            2005**Basic**Average
                shares outstanding:Weighted
                average number of shares outstanding during the period
            
            
            2,346,126
            
            
            2,087,145
            
            
            1,977,235**Earnings:**Net
                income (loss):
            
            $
            81,898
            
            $
            1,894,749
            
            $
            (333,209
            )Amount
                for per share Computation
            
            $
            81,898
            
            $
            1,894,749
            
            $
            (333,209
            )Net
                earnings (loss) applicable to Common Shares
            
            $
            0.03
            
            $
            0.91
            
            $
            (0.17
            )**Diluted**Average
                shares outstanding:
            
            
            2,346,126
            
            
            2,087,145
            
            
            1,977,235Weighted
                average shares Outstanding Common stock equivalents (options, warrants)
            
            
            243,834
            
            
            147,756
            
            
            0Weighted
                average number of shares outstanding during the period
            
            
            2,589,960
            
            
            2,234,901
            
            
            1,977,235**Earnings:**Net
                income (loss)
            
            $
            81,898
            
            $
            1,894,749
            
            $
            (333,209
            )Amount
                for per share computation
            
            $
            81,898
            
            $
            1,894,749
            
            $
            (333,209
            )Net
                income (loss) applicable to Common Shares
            
            $
            0.03
            
            $
            0.85
            
            $
            (0.17
            )




F-26




**18.**  **Geographic
      Segment Data**





The
      Company’s operations consist of a business segment which designs, manufactures,
      and distributes film products. Transfers between geographic areas were primarily
      at cost. The Company’s subsidiaries have assets consisting primarily of trade
      accounts receivable, inventory and machinery and equipment. Sales and selected
      financial information by geographic area for the years ended December 31, 2007,
      2006 and 2005, respectively:





**United States**
            
            **United Kingdom**
            
            **Mexico**
            
            **Eliminations**
            
            **Consolidated**Year
                ended 12/31/07Revenues
            
            $
            28,657,000
            
            $
            2,913,000
            
            $
            7,189,000
            
            $
            (2,249,000
            )
            $
            36,510,000Operating
                income
            
            $
            810,000
            
            $
            215,000
            
            $
            345,000
            
            $
            (125,000
            )
            $
            1,245,000Net
                (loss) income
            
            $
            (128,000
            )
            $
            167,000
            
            $
            168,000
            
            $
            (125,000
            )
            $
            82,000Total
                Assets
            
            $
            27,854,000
            
            $
            2,948,000
            
            $
            5,780,000
            
            $
            (7,258,000
            )
            $
            29,324,000Year
                ended 12/31/06Revenues
            
            $
            28,808,000
            
            $
            2,925,000
            
            $
            6,564,000
            
            $
            (2,869,000
            )
            $
            35,428,000Operating
                income
            
            $
            2,116,000
            
            $
            64,000
            
            $
            578,000
            
            $
            (25,000
            )
            $
            2,733,000Net
                income
            
            $
            1,544,000
            
            $
            93,000
            
            $
            284,000
            
            $
            (26,000
            )
            $
            1,895,000Total
                Assets
            
            $
            25,245,000
            
            $
            2,627,000
            
            $
            5,050,000
            
            $
            (6,288,000
            )
            $
            26,634,000Year
                ended 12/31/05Revenues
            
            $
            23,564,000
            
            $
            2,573,000
            
            $
            4,536,000
            
            $
            (1,483,000
            )
            $
            29,190,000Operating
                income (loss)
            
            $
            602,000
            
            $
            290,000
            
            $
            (240,000
            )
            
            
            
            $
            652,000Net
                (loss) income
            
            $
            (342,000
            )
            $
            220,000
            
            $
            (211,000
            )
            
            
            
            $
            (333,000
            )




**19.**  **Litigation**





On
      December 20, 2006, Pliant Corporation filed an action against the Company in
      the
      Circuit Court of Cook County, Illinois. In the action, Pliant claims that there
      is due from the Company to Pliant the sum of $245,000 for goods sold and
      delivered by Pliant to the Company as well as interest on such amount. On
      February 21, 2007, the Company filed and answer to the complaint and
      counterclaim denying liability and asserting certain claims against Pliant
      for
      damages for the sale by Pliant to the Company of defective products. Management
      intends to defend the claims of Pliant in this action and to pursue its
      counterclaims and believes that the Company has established adequate reserves
      regarding the claim.





In
      addition, the Company is also party to certain lawsuits arising in the normal
      course of business. The ultimate outcome of these matters is unknown, but in
      the
      opinion of management, the settlement of these matters is not expected to have
      a
      significant effect on the future financial position, cash flows or results
      of
      operations of the Company.




F-27




**20. 
      Quarterly Financial Data (Unaudited):**




The
      following table sets forth selected unaudited statements of income for each
      quarter of fiscal 2007, 2006 and 2005:





For
                the Year Ended December 31, 2007 (1)1st
              Quarter
            
            2nd
              Quarter
            
            3rd
              Quarter
            
            4th
              QuarterNet
                sales
            
            $
            8,279,000
            
            $
            9,259,000
            
            $
            8,673,000
            
            $
            10,299,000Gross
                profit
            
            $
            1,903,000
            
            $
            2,744,000
            
            $
            1,617,000
            
            $
            2,420,000Net
                (loss) income
            
            $
            (52,000
            )
            $
            423,000
            
            $
            (414,000
            )
            $
            125,000Earnings
                per common shareBasic
            
            $
            (0.02
            )
            $
            0.18
            
            $
            (0.18
            )
            $
            0.05Diluted
            
            $
            (0.02
            )
            $
            0.17
            
            $
            (0.18
            )
            $
            0.05





(1)
            Earnings
                per common share are computed independently for each of the quarters
                presented. Therefore, the sum of thequarterly per common share information may not equal the annual earnings
                per common share




For
                  the Year Ended December 31, 2006 (1)1st
                Quarter
              
              2nd
                Quarter
              
              3rd
                Quarter
              
              4th
                Quarter
                  (2)Net
                  sales
              
              $
              8,156,000
              
              $
              8,997,000
              
              $
              8,603,000
              
              $
              9,672,000Gross
                  profit
              
              $
              1,953,000
              
              $
              2,197,000
              
              $
              2,253,000
              
              $
              2,494,000Net
                  income
              
              $
              220,000
              
              $
              206,000
              
              $
              315,000
              
              $
              1,154,000Earnings
                  per common shareBasic
              
              $
              0.11
              
              $
              0.10
              
              $
              0.15
              
              $
              0.54Diluted
              
              $
              0.10
              
              $
              0.10
              
              $
              0.15
              
              $
              0.49





(1)
            Earnings
                per common share are computed independently for each of the quarters
                presented. Therefore, the sum of thequarterly per common share information may not equal the annual earnings
                per common share





(2)
            During
                the fourth quarter 2006, management of the Company conducted an analysis
                of the recoverability of the deferred taxasset based on results of operations during the fourth quarter of
                2005 and
                for the full year of 2006, expected continuedachievement of and continuing improvement in operating results for
                the
                forseeable future and anticipated repatriations ofprofits and services income to be generated from the Company's foreign
                subsidiaries. As a result of such analysis, managementdetermined that the net recorded deferred tax asset in the amount
                of
                $1,127,000 is more likely than not to be
                realized.




For
                the Year Ended December 31, 2005 (1)1st
              Quarter
            
            2nd
              Quarter
            
            3rd
              Quarter
            
            4th
              QuarterNet
                sales
            
            $
            9,103,000
            
            $
            7,573,000
            
            $
            6,034,000
            
            $
            6,480,000Gross
                profit
            
            $
            1,874,000
            
            $
            1,583,000
            
            $
            1,242,000
            
            $
            1,765,000Net
                income (loss)
            
            $
            84,000
            
            $
            (54,000
            )
            $
            (416,000
            )
            $
            52,000Earnings
                per common shareBasic
            
            $
            0.04
            
            $
            (0.03
            )
            $
            (0.21
            )
            $
            0.03Diluted
            
            $
            0.04
            
            $
            (0.03
            )
            $
            (0.21
            )
            $
            0.02





(1)
            Earnings
                per common share are computed independently for each of the quarters
                presented. Therefore, the sum of thequarterly per common share information may not equal the annual earnings
                per common share




F-28




**21.
      Subsequent Events**





On
      January 28, 2008 the Company employed an interest rate swap as a cash flow
      hedge
      to manage interest costs and the risk associated with changing interest rates
      of
      our revolving debt. This first payment under this agreement is due on May 1,
      2008 and was designated to swap a variable rate of prime plus varying rates
      for
      a fixed rate ranging of 6.17%. The aggregate notional amount of the swap was
      $3.0 million. The swap agreements expire on January 1, 2011. T he
      Company will record changes in the valuation of the swap agreement as items
      of
      other comprehensive income or loss.







In
      February 2003, the Company received $1,630,000 from certain shareholders in
      exchange for (a) two year 9% subordinated notes, and (b) five year warrants
      to
      purchase 163,000 common shares at $4.87 per share. The proceeds were to (i)
      re-finance the bank loan of CTI Mexico in the amount of $880,000 and (ii) to
      provide financing for CTI Mexico and Flexo Universal. The value of the warrants
      was $460,000 calculated using Black-Scholes option pricing formula. The Company
      applied the discount against the subordinated debt. The discount is being
      amortized using the effective interest method in interest expense over the
      term
      of the debt. These loans are subordinated to the Bank debt of the Company.
      On
      February 8, 2008 those shareholders exercised these options in exchange for
      a
      reduction on these notes of $794,000.





**Schedule
      II - Valuation and Qualifying Accounts:**





The
      following is a summary of the allowance for doubtful accounts related to
      accounts receivable for the years ended December 31:





2007
            
            2006
            
            2005Balance
                at beginning of year
            
            $
            210,000
            
            $
            80,000
            
            $
            404,000Charged
                to expenses
            
            $
            105,000
            
            $
            203,000
            
            $
            145,000Uncollectible
                accounts written off
            
            $
            (3,000
            )
            $
            (73,000
            )
            $
            (469,000
            )Balance
                at end of year
            
            $
            312,000
            
            $
            210,000
            
            $
            80,000




The
      following is a summary of the allowance for excess inventory for the years
      ended December 31:





2007
            
            2006
            
            2005Balance
                at beginning of year
            
            $
            276,000
            
            $
            255,000
            
            $
            187,000Charged
                to expenses
            
            $
            231,000
            
            $
            219,000
            
            $
            205,000Obsolete
                inventory written off
            
            $
            (124,000
            )
            $
            (198,000
            )
            $
            (137,000
            )Balance
                at end of year
            
            $
            383,000
            
            $
            276,000
            
            $
            255,000




F-29




The
      following is a summary of property and equipment and the related accounts of
      accumulated depreciation for the years ended December 31:




2007
            
            2006
            
            2005**Cost
                Basis**Balance
                at beginning of year
            
            $
            26,869,885
            
            $
            26,704,366
            
            $
            26,224,962Additions
            
            $
            2,825,978
            
            $
            604,028
            
            $
            549,547Disposals
            
            $
            -
            
            $
            (438,509
            )
            $
            (70,143
            )Balance
                at end of year
            
            $
            29,695,863
            
            $
            26,869,885
            
            $
            26,704,366**Accumulated
                depreciation**Balance
                at beginning of year
            
            $
            18,277,611
            
            $
            17,087,622
            
            $
            15,636,451Depreciation
            
            $
            1,322,097
            
            $
            1,189,989
            
            $
            1,463,369Disposals
            
            $
            -
            
            $
            -
            
            $
            (12,198
            )Balance
                at end of year
            
            $
            19,599,708
            
            $
            18,277,611
            
            $
            17,087,622Property
                and equipment, net
            
            $
            10,096,155
            
            $
            8,592,274
            
            $
            9,616,744






F-30