SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB
                            ANNUAL REPORT PURSUANT TO
                      SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                   For the Fiscal Year Ended December 31, 2001

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)

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

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

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

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

Common Stock, no par value                  NASDAQ SmallCap Market

     Check whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.

          [X]Yes    [_]No

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

     The Registrant's revenues for the fiscal year ended December 31, 2001, were
$27,446,000.

     Based upon the closing price of $2.70 per share of Registrant's Common
Stock as reported on NASDAQ SmallCap Market at April 8, 2002, the aggregate
market value of the voting stock held by non-affiliates of the Registrant was
then approximately $1,995,000 (Determination of stock ownership by
non-affiliates was made solely for the purpose of responding to the requirements
of the Form and the Registrant is not bound by this determination for any other
purpose).

     The number of shares of the Registrant's Common Stock outstanding as of
April 8, 2002 was 841,644 (excluding treasury shares) and the number of shares
of Class B Common Stock outstanding as of that date was 366,300.

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





PART I

Item No. 1 Description of Business

Business Overview

     CTI Industries Corporation is engaged in the development, manufacture, sale
and distribution of two principal lines of products:

     o    Novelty products, principally balloons, including metalized balloons,
          latex balloons, punch balls and other inflatable toy items.

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

     The Company was organized in 1976 and initially was principally engaged in
the business of manufacturing bag-in-box plastic packaging systems. In 1978, the
Company began manufacturing metalized balloons (sometimes referred to as "foil"
balloons), balloons made of nylon based material with 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. They grew in popularity quickly and the Company's sales
of metalized balloons expanded rapidly during the 1980's.

     In 1985, the Company began marketing latex balloons and began manufacturing
latex balloons in 1988. In 1994, the Company sold its latex balloon
manufacturing equipment to a company in Mexico and entered into an arrangement
with that company to manufacture latex balloons for the Company. The Company
since has acquired majority ownership of the Mexican latex manufacturing
company.

     The Company's metalized and latex balloons and toy products are sold
throughout the United States and in 30 foreign countries through a wide variety
of retail outlets including general merchandise and drugstore chains, grocery
chains, card and gift shops, and party goods stores, as well as through florists
and balloon decorators.

     Most metalized balloons contain printed characters, designs and social
expression messages. The Company maintains licenses on numerous characters and
designs, including, for example, Peanuts(R) characters, Garfield(R), Precious
Moments(R) and Hallmark.

     In order to meet the needs of the metalized balloon market, the Company has
developed sophisticated film products and techniques which have other
applications. The Company's expertise in multi-color printing using water-based
inks, in particular, has enabled the Company to expand its business to include
the production of film for packaging of consumables. The Company produces,
laminates, coats and prints films for food packaging companies and provides
custom film products for other commercial uses.


                                       1



These uses include a consumer storage system with a patented zip-lock closure,
packaging systems and other commercial applications.

Background.

     CTI Industries Corporation (the "Company") was incorporated as Container
Merger Company, Inc. under the laws of the State of Delaware on October 14,
1983, and changed its name to CTI Industries Corporation on August 2, 1985. A
predecessor company, Creative Technology, Inc., was organized as an Illinois
corporation on December 9, 1975 and was merged into the Company in February,
1984. On November 19, 2001, the Company was reincorporated in Illinois and is
now an Illinois corporation. CTI Balloons Ltd. ("CTI Balloons"), the Company's
wholly-owned subsidiary, was organized as a corporation under the laws of the
United Kingdom on October 2, 1996. On October 24, 1996, the Company entered into
an agreement with CTI Balloons pursuant to which all of the assets and
liabilities of the Company in its branch operation in the United Kingdom were
sold and transferred to CTI Balloons and all of the capital stock of CTI
Balloons was issued and delivered to the Company. Unless otherwise specified,
all references to the Company refer to the Company, its predecessor Creative
Technology, Inc., its wholly-owned subsidiaries, CTI Balloons, CTF
International, S.A. de C.V., and its majority-owned subsidiary, CTI Mexico, S.A.
de C.V.

     In March and May of 1996, a group of investors made an equity investment of
$1,000,000 in the Company in return for 366,300 shares of Preferred Stock, $.91
par value. Each share of Preferred Stock was entitled to an annual cumulative
dividend of 13% of the purchase price, and was convertible into one share of
Common Stock. The shares of Preferred Stock, voting separately as a class, were
entitled to elect four of the Company's directors. Members of such investment
group included Howard W. Schwan, John H. Schwan and Stephen M. Merrick, current
members of management.

     In July, 1997, the Company effected a recapitalization (the
"Recapitalization") without a formal reorganization. As part of the
Recapitalization, the Board of Directors approved the creation of Class B Common
Stock, approved a 1 for 2.6 reverse stock split on both the Common Stock and
Preferred Stock, and negotiated a conversion of all then outstanding shares of
the Company's Convertible Preferred Stock into an aggregate of 366,300 shares of
Class B Common Stock. The conversion was effective upon the closing of an
initial public offering of 575,000 shares of the Company's Common Stock on
November 5, 1997. The shares of Class B Common Stock contain rights identical to
shares of Common Stock, except that shares of Class B Common Stock, voting
separately as a class, have the right to elect four of the Company's seven
directors. Shares of Common Stock and Class B Common Stock, voting together as a
class, vote on all other matters, including the election of the remaining
directors. The recapitalization, initial public offering and related
transactions were approved by written consent of the shareholders.

     On October 15, 1999, the Company's Board of Directors approved a 1 for 3
reverse split of the Company's Common Stock and Class B Common Stock. The 1 for
3


                                       2



reverse stock split became effective at the close of business on November 4,
1999, upon the approval and consent of a majority of Common and Class B Common
Stockholders voting together as a single class. As a result of the reverse stock
split, every three shares of the Company's Common Stock were reclassified and
changed into one share of the Company's Common Stock with a new par value of
$.195 per share, and every three shares of the Company's Class B Common Stock
were reclassified and changed into one share of the Company's Class B Common
Stock, with a new par value of $2.73 per share. After the reincorporation of the
Company in the State of Illinois, the Company's Common and Class B Common Stock
ceased to have any par value. Except for the elimination of par values and as
otherwise indicated, share figures in this document have been restated to
reflect the stock splits described above.

     CTI Mexico. The Company's latex balloons are manufactured by CTI Mexico
S.A. de C.V. ("CTI Mexico"), formerly known as Pulidos y Terminados Finos S.A.
de C.V., a Guadalajara, Mexico company engaged principally in the manufacture of
latex balloons. In 1995, the Company entered into an agreement with CTI Mexico
under which (i) the Company sold to CTI Mexico all of its latex balloon
manufacturing equipment (for the manufacture of decorator balloons) and (ii) CTI
Mexico agreed for a period of 10 years to supply balloons exclusively to the
Company for sale in the United States and Canada manufactured on such equipment
and (iii) for such 10 year period, CTI Mexico agreed to supply to the Company,
exclusively in the United States except as to two other companies, all balloons
manufactured by CTI Mexico. Commencing in 1996, CTI Mexico began manufacturing
latex balloons for the Company.

     In January, 1998, the Company and CTI Mexico entered into an agreement
whereby (i) the Company subscribed for 45% of the outstanding capital stock of
CTI Mexico for $800,000, (ii) the Company loaned to CTI Mexico $850,000, which
loan was collateralized by certain latex balloon manufacturing equipment, and
(iii) the 1995 equipment purchase agreement between the parties was cancelled
with respect to two pieces of latex balloon manufacturing equipment; this
equipment was then owned by CTI and leased to CTI Mexico. The purchase of the
capital stock was consummated in February, 1998, and the purchase price for the
capital stock was paid by (i) applying $400,000 of advances made to CTI Mexico
prior to closing and (ii) a cash payment for the balance. The $400,000 debt
owing to the Company from the 1995 acquisition was extinguished as a result of
the cancellation of the sale of the two pieces of equipment to CTI Mexico.

     In November, 1999, the Company acquired additional shares of capital stock
of CTI Mexico, resulting in the Company's ownership of approximately 72% of CTI
Mexico's total outstanding capital stock. The November, 1999 acquisition was
concluded through an agreement with a principal shareholder of CTI Mexico and
the approval of the requisite number of CTI Mexico shareholders at a
shareholders' meeting held on November 12, 1999. In the November, 1999
acquisition transaction, the Company allowed CTI Mexico to capitalize certain of
CTI Mexico's outstanding indebtedness to the Company, amounting to approximately
$989,000, and contributed certain equipment with a total value of approximately
$855,000, in exchange for capital stock of CTI


                                       3



Mexico. In addition, in May of 2000, the Company purchased additional shares of
stock from certain of CTI Mexico's shareholders, resulting in the Company's
ownership of approximately 76% of CTI Mexico's total outstanding capital stock.
The Company also has the right to acquire substantially all of the remaining
outstanding capital stock of CTI Mexico from another shareholder.

     Through CTI Mexico, the Company maintains two manufacturing facilities in
Guadalajara, Mexico totaling approximately 95,000 square feet of manufacturing,
office and warehouse space and operates seven latex balloon machines.

     CTF International. In September, 1996, the Company and CTI Mexico entered
into a joint venture agreement to organize and operate CTF International, a
Mexican corporation ("CTF"). The joint venture was initially owned in equal
measure by the Company and CTI Mexico. CTF engaged in the packaging of balloons
for the Company and CTI Mexico and in the printing of latex balloons. In July,
1999, the Company purchased CTI Mexico's stock in CTF for $40,000 in cash, and
the assignment to CTI Mexico of three of the Company's manual latex silk
screening machines. The functions of CTF have now been incorporated into the
business of CTI Mexico.

Products

     Metalized Balloons. The metalized balloon is actually composed of a base
nylon material which is coated on one side with a vacuum deposited aluminum
coating and on the other with polyethylene. Typically, the balloon film is
printed with graphic designs and messages.

     The Company manufactures over 450 balloon designs, in different shapes and
sizes, including the following:

     o    Superloons(R) - 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.

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

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

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

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


                                       4



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

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

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

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

     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. The Company maintains licenses for Peanuts(R), Garfield(R), Precious
Moments(R), Hallmark, Card Captors(R), Max Steel(R) Elephantz(R), Paddington(R),
Betty Boop(R), Monster Trucks(R) and several others. See "Patents, Trademarks
and Copyrights" below.

     In February, 2002, the Company entered into an agreement with Hallmark
Cards, Inc. under which (i) Hallmark has agreed to license to the Company a
variety of balloon designs developed by the Party Express Division of Hallmark
and (ii) Hallmark may sublicense to CTI licenses it obtains for application on
metalized balloons. To date, Hallmark has agreed to sublicense to CTI designs
for Blues Clues(R), Scooby Doo(R) and Star Wars(R).

     Latex Balloons. The Company sells a high end line of latex balloons under
the product line name Hi-Tex(R) and a standard line of latex balloons marketed
under the name Partyloons(R). The Company also manufactures toy balloon products
including punch balls and water bombs.

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

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


                                       5



The Industries

     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,
the Company and other participants in the market began licensing character and
cartoon images for printing on the balloons and directed marketing of the
balloons to retail outlets including grocery, general merchandise and drug store
chains, card and gift shops, party goods stores as well as florists and balloon
decorators. These outlets now represent the principal means for the sale of
metalized balloons throughout the United States and in a number of other
countries.

     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.

     There are presently at least seven manufacturers of metalized balloons
whose products are sold in the United States. Six of these companies maintain
their own production facilities in the United States. Several companies market
and sell metalized balloons designed by them and manufactured by others for
them.

     Metalized balloons are marketed in the United States and foreign countries
through wholesalers or distributors and directly to retail customers. 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. Although the latex
balloon market overlaps the metalized balloon market, the latex balloon market
has been in existence for a longer period than metalized balloons and extends to
more customers and market categories than metalized balloons.

     Latex Balloons

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


                                       6



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 through many of the same outlets as metalized
balloons including grocery, general merchandise and drug store chains, card and
gift shops, party goods stores, florists and balloon decorators. Latex balloons
are sold in retail stores in packaged form as well as inflated. Also, certain
latex items are sold in retail stores, generally in packaged form, as toy items.

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

     Printed and Specialty Films

     The industry and market for printed and specialty films is highly
fragmented and includes many participants. There are literally hundreds of
manufacturers of printed and specialty film products in the United States and in
other markets. In many cases, companies produce films and film packages for the
packaging of products manufactured and sold by those companies. Many of these
film products are utilized for packaging of a variety of goods, including foods.
Films are utilized for a wide variety of specialized uses - including for
medical applications, "dunnage" in packages and containers for consumer and
other uses.

     The total volume of products manufactured and sold in this industry is
estimated to be well in excess of $1 billion.

Marketing, Sales and Distribution

     The Company markets and sells its metalized balloon, latex balloon and
related novelty products throughout the United States and in over 30 foreign
countries. The Company maintains a marketing, sales staff and support staff of
12 individuals and a customer service department of 7 individuals. European
sales are conducted by CTI Balloons, the Company's subsidiary located in Rugby,
England. CTI Mexico 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.

     The Company sells and distributes its products principally through a
network of approximately 600 distributors and wholesalers situated throughout
the United States and in a number of foreign countries. These distributors and
wholesalers are engaged principally in the sale of balloons and related products
(including such items as plush toys, mugs, containers, floral supplies and other
items). These distributors and wholesalers, in turn, sell balloons and related
products to retail outlets including grocery, general merchandise and drug store
chains, card and gift shops, party goods stores as well as florists and balloon
decorators. Most sales are on an individual order basis.


                                       7



     The Company also sells balloons and related products to certain retail
outlets including some chain stores. The Company's largest chain store customer
is Eckerd Drug Stores. During the 2001 fiscal year, Eckerd Drug Stores accounted
for approximately 6.86% of the Company's total sales revenues.

     In March, 2002, the Company entered into an arrangement with Hallmark
Cards, Inc., under which the Company agreed to produce metalized balloons
incorporating designs provided by the Party Express Division of Hallmark and to
provide these balloons to Party Express. The Company will also be entitled to
market and sell balloons incorporating these designs to its other customers.

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

     The Company markets and sells its printed and laminated films and converted
film products directly and through independent sales representatives. The
Company markets these products to companies which package their products in
plastic wrapping, in particular food products such as candies and coffee. The
Company markets its custom film products, including its "dunnage" bags
(inflatable film products) directly. During the 2001 fiscal year, the Company
sold such products to five principal, and a number of smaller, customers. One
customer represented 23% of the Company's total sales revenue in 2001 and
another represented 14% of total sales revenue.

Manufacturing

     Production and Operations.

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

     The Company owns and operates equipment for the development of films and
plates utilized in the printing of films for metalized balloons and packaging
films. The Company owns and operates three six color presses at its facility in
Barrington, Illinois, as well. The Company's use of water-based ink makes its
printed films attractive to food processors for the packaging of their products


                                       8



     The Company owns and operates two extrusion coating and lamination machines
to produce films for use in metalized balloons, packaging films and specialty
film products. A new extrusion coating and laminating machine was acquired in
1999 which significantly increased the Company's production capacity and
capabilities.

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

     The Barrington facility also includes a computerized customer service
department which receives and fulfills over 56,000 orders annually.

     The Company maintains a finished goods inventory of all balloon products at
the Barrington facility and provides fulfillment for orders throughout the
United States and in a number of foreign countries.

     CTI Mexico. Through CTI Mexico, the Company operates several facilities in
Guadalajara, Mexico, comprising approximately 95,000 square feet of production,
warehouse and office space. At these locations, the Company produces all of its
latex balloon products and also prints and packages latex balloons. CTI Mexico
owns and operates, or leases, seven latex balloon manufacturing machines, two
high-speed latex printing machines and several other latex printing machines.
Balloon products are warehoused at this facility and order fulfillment is
provided for Mexico and Latin America, as well as to the United States and
United Kingdom facilities of the Company. CTI Mexico also conducts sales and
marketing activities for the sale of balloon products in Mexico, Latin America
and certain other markets.

     CTI Balloons Ltd. Through its wholly-owned subsidiary, CTI Balloons Ltd,
the Company conducts a warehouse, fulfillment and sales operation in Rugby,
United Kingdom. Sales and fulfillment for all of the United Kingdom, Europe and
the Middle East are conducted from this facility.

Competition

     The balloon and novelty industry is highly competitive, with numerous
competitors. There are presently seven principal manufacturers of metalized
balloons whose products are sold in the United States including Anagram
International, Inc., M&D Balloons, Inc., Pioneer Balloon, Convertidora
International, Barton Enterprises and Betallic. Several companies, including
American Greetings, Amscan Holdings, Inc. and Flowers, Inc., market and sell
metalized balloons designed by them and manufactured by others for them. In
1998, Anagram International, Inc. was acquired by Amscan and in 2000 M&D
Balloons was acquired by American Greetings. During 2002, Amscan completed the
purchase of M&D Balloons from American Greetings.


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     There are at least seven manufacturers of latex balloons whose products are
sold in the United States. The market for film packaging and custom products is
fragmented, and competition in this area is difficult to gauge. However, there
are numerous participants in this market and the Company can expect to
experience intense quality and price competition.

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

Patents, Trademarks and Copyrights

     In connection principally with its metalized balloon business, the Company
has developed or acquired a number of intellectual property rights which are
significant to its business.

     Copyright Licenses. The most significant of these rights are licenses on a
number of popular characters. The Company presently maintains approximately 13
licenses and produces balloon designs utilizing the characters covered by the
licenses. Licenses are generally maintained for a one or two year term, although
the Company has maintained long term relationships with several of its licensors
and has been able to obtain renewal of its license agreements with them.

     Trademarks. The Company is the owner of 21 registered trademarks in the
United States relating to its products. Many of these trademarks are registered
in foreign countries, principally in the European Community.

     Patent Rights. The Company is the owner of, or licensee under, several
patents. 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) a patent on a combination of a greeting
card and balloon connected by a ribbon contained in single package, (iii) a
patent on a method of inserting and affixing a zipper-closure system in a bag,
and (iv) various metalized balloon design patents, including various shapes for
Valentine's Day, Halloween and birthday parties.


                                       10



Research and Development

     The Company maintains a product development and research department of 7
individuals for the development or identification of new balloons and related
products, product components and sources of supply. Research and development
includes (i) creative product development, (ii) creative marketing, and (iii)
engineering development. During the fiscal years ended December 31, 2000 and
December 31, 2001, the Company estimates that the total amount spent on research
and development activities was approximately $291,000 and $325,000,
respectively.

Employees

     As of December 31, 2001, the Company had 158 full-time employees in the
United States, of whom 12 are executive or supervisory, 10 are in sales, 118 are
in manufacturing and 18 are clerical. As of that same date, the Company had 13
full-time employees in England, of whom one is executive or supervisory, 4 are
in sales, 6 are in warehousing and 2 are clerical. In Mexico, as of December 31,
2001, the Company had 314 full-time employees, of whom 6 are executive or
supervisory, 3 are in sales, 287 are in manufacturing and 18 are clerical. The
Company is not a party to any collective bargaining agreement, has not
experienced any work stoppages and believes that its relationship with its
employees is satisfactory.

Regulatory Matters

     The Company's manufacturing operations are subject to the U.S. Occupational
Safety and Health Act ("OSHA"). The Company believes it is in material
compliance with OSHA. The Environmental Protection Agency regulates the handling
and disposal of hazardous materials. As the Company's printing operations
utilize only water-based ink, the waste generated by the Company's production
process is not deemed hazardous. The Company believes it is in material
compliance with applicable environmental rules and regulations. Several states
have enacted laws limiting or restricting the release of helium filled metalized
balloons. The Company does not believe such legislation will have any material
effect on its operations.

Item No. 2 Description of Property

     The Company owns its principal plant and offices located in Barrington,
Illinois, approximately 45 miles northwest of Chicago, Illinois. The facility
includes approximately 75,000 square feet of office, manufacturing and warehouse
space.

     In August, 1998, the Company purchased a building that is adjacent to its
principal plant and offices. This facility includes approximately 29,000 square
feet of combined office and warehouse space. In November, 1999, the Company sold
this building to a related party, and entered into a 10 year lease for the
building at a monthly rental cost of $17,404. The Company is presently
subleasing approximately 50% of the total square feet of this office and
warehouse space to two separate subtenants. One


                                       11



sublease expires in March, 2002, and has a monthly rent of $3,605; the other
sublease expires in May, 2002, and has a monthly rent of $7,570. All rents due
under these subleases are paid directly to the Company.

     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
2013. This facility is utilized for product packaging operations and to manage
and service the Company's operations in England and Europe.

     Through CTI Mexico, the Company leases four buildings with approximately
95,000 total square feet of production, warehouse and office space in
Guadalajara, Mexico. One plant, consisting of three buildings, has a one-year
lease at a monthly lease rate of $5,500, and the other plant, consisting of one
building, has a three-year lease at a monthly lease rate of $4,500.

Item No. 3 Legal Proceedings

     On March 12, 2001, the Company was joined as a third party defendant in a
pending action filed by Real Fresh, Inc., a California Corporation, against
Packaging Systems, LLC, ("PSI") an Illinois limited liability company. The
action was filed in the United States District Court for the Eastern District of
California. In the action, Real Fresh seeks damages from PSI for losses it
claims it incurred by reason of PSI supplying defective packaging materials. The
Company was a supplier to PSI of certain laminated films utilized by PSI in
these packaging materials. PSI initiated a third-party claim against the Company
for indemnity, contribution and breach of contract. The Company has filed an
answer to the third-party complaint denying the claim and asserting a number of
defenses. In addition, on July 27, 2001, the Company cross-claimed against the
supplier of the base film, Honeywell International, Inc. for indemnity,
contribution and breach of contract. On August 20, 2001, Honeywell, filed a
counterclaim against the Company seeking to recover for film claimed to be sold
to the Company and the Company has filed an answer and affirmative defenses
denying such counterclaim. The Company has notified its insurance carrier of the
claims. Final outcome of these matters is uncertain and a range of loss (beyond
any claims that may be covered by insurance) cannot be estimated at this time.

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

Not Applicable.

PART II

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

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


                                       12



that time, there was no established public trading market for the Company's
Common Stock. There is no public market for the Company's Class B Common Stock,
which is convertible into Common Stock on a share per share basis.

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

                                                  High            Low
                                                  -------------------

     January 1, 2000 to March 31, 2000            3.750           1.375
     April 1, 2000 to June 30, 2000               3.313           1.688
     July 1, 2000 to September 30, 2000           2.000           1.250
     October 1, 2000 to December 31, 2000         2.125            .875
     January 1, 2001 to March 31, 2001            1.031           2.469
     April 1, 2001 to June 30, 2001               1.310           2.125
     July 1, 2001 to September 30, 2001           1.650           2.000
     October 1, 2001 to December 31, 2001         1.350           2.000

     As of March 28, 2002, there were approximately 44 holders of record of the
Company's Common Stock and two holders of record of Class B Common Stock.

     The Company has never paid any dividends on its Common Stock and does not
currently intend to pay dividends on its Common Stock in the foreseeable future.
The Company currently intends to retain all its earnings to finance the
development and expansion of its business. Under the terms of its current loan
agreement, the Company is restricted from declaring any dividends or other
distributions on its shares unless certain minimum financial performance levels
are maintained. The Company expects it to be likely that it will be required to
agree to restrictions on the payment of dividends or other distributions in
connection with future financings, if any.

     Recent Sales of Unregistered Securities. In March and May of 1996, a group
of investors made an equity investment of $1,000,000 in the Company in return
for 1,098,901 shares of Preferred Stock, $.91 par value. CTI Investors, L.L.C.,
an Illinois limited liability company, invested $900,000 in the shares of
Preferred Stock. Members of CTI Investors, L.L.C. include Howard W. Schwan, John
H. Schwan and Stephen M. Merrick, members of management, and one other
accredited investor. An additional accredited investor invested the remaining
$100,000. The sale was exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act") as a transaction not
involving a public offering as sales were made to a small number of accredited
investors, including members of management, who were sophisticated and had
access to information about the Company. The shares of Preferred Stock were
subsequently converted into 1,098,901 shares of Class B Common Stock. These
shares of Class B Common Stock were reverse-split on a 1-for-3 basis along with
the Company's Common Stock on November 4, 1999, resulting in a total of 366,300
shares of Class B Common Stock being presently outstanding.


                                       13



     In December, 1996, Howard W. Schwan, John H. Schwan and Stephen M. Merrick,
members of management, were each issued warrants to purchase up to 25,641 shares
of the Company's Common Stock at an exercise price of $2.73 per share in
consideration of their facilitating and guaranteeing a bank loan to the Company
in the amount of $6.3 million. The issuance was exempt from registration under
Section 4(2) of the Securities Act as a transaction not involving a public
offering as all participants were members of management who were sophisticated
and had access to information about the Company.

     In July, 1998, John H. Schwan and Stephen M. Merrick exercised a total of
6,465 of their warrants to purchase shares of the Company's Common Stock at an
exercise price of $2.73 per share (5,000 and 1,465 warrants, respectively).

     In June, 1997, the Company issued, in a private placement, notes in the
principal amount of $865,000, together with warrants to purchase up to 92,415
shares of the Company's Common Stock at an exercise price of $9.36 per share.
Howard W. Schwan, John H. Schwan, Stephen M. Merrick and John C. Davis, members
of management, purchased $50,000, $350,000, $315,000 and $150,000, respectively,
of the notes and warrants. The offering was exempt from registration under
Section 4(2) of the Securities Act as a transaction not involving a public
offering as all participants were members of management who were sophisticated
and had access to information about the Company.

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

     In June, 1999, the June, 1997, $50,000, $350,000 and $315,000 notes of
Messrs. H. Schwan, J. Schwan and Merrick, respectively, came due. On November 9,
1999, new notes in the same principal amounts were issued to Messrs. H. Schwan,
J. Schwan and Merrick, in payment and replacement of the prior notes with
maturity dates for each of November 9, 2001. As of that date, each payee under
the Notes had executed a consent to extend the maturity on the Notes to March 1,
2004. In November, 1999, the June, 1997 warrants of Messrs. H. Schwan, J. Schwan
and Merrick to purchase up to (respectively) 5,342, 37,393 and 33,653 shares of
the Company's Common Stock at an exercise price of $9.36 per share were
cancelled. At that time, new warrants to purchase up to 29,621, 207,346 and
186,612 shares of the Company's Common Stock at an exercise price of $1.688 per
share were issued to Messrs. H. Schwan, J. Schwan and Merrick, respectively.
These warrants expire on November 9, 2002.

     The 1999 notes and 1999 warrants issued to Messrs. Davis, H. Schwan, J.
Schwan and Merrick were issued in a private offering which was exempt from
registration under


                                       14



Section 4(2) of the Securities Act of 1933, as amended, as a transaction not
involving a public offering as all participants were sophisticated investors who
had access to information about the Company.

     In July, 2001, the Company issued warrants to purchase up to 66,666 shares
of the Company's Common Stock to John H. Schwan and 33,334 shares of the
Company's Common Stock to Stephen M. Merrick. The warrants were issued in
consideration of Mr. Schwan and Mr. Merrick guaranteeing and securing loans to
the Company in the amount of approximately $1,600,000. The warrants are
exercisable for a period of five years at the price of $1.78 per share.

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

General

     The following table sets forth selected financial data of the Company for
the years ended December 31, 2001 and December 31, 2000 (in thousands, except
per share data):


                                       15





                                                          Year ended     Year ended
                                                          December 31,   December 31,
                                                          2001           2000
                                                          ---------------------------
                                                                   
Consolidated Statement of Operations  Data:

Net sales                                                 $    27,446    $    22,978
Cost of sales                                                  19,835         16,375
                                                          --------------------------

Gross profit                                                    7,611          6,603

Operating Expenses:
  General and administrative                                    3,468          3,584
  Selling                                                       1,760          1,840
  Advertising                                                   1,133            966
                                                          --------------------------

Total operating expenses                                        6,361          6,390
                                                          --------------------------

Operating income                                                1,250            213

Other expense                                                  (1,064)        (1,070)
                                                          --------------------------

Income (loss) before income taxes and minority interest           186           (857)

Income tax expense                                               (276)          (107)
                                                          --------------------------

Loss before minority interest                                     (90)          (964)

Minority interest in loss of subsidiary                            58             87
                                                          --------------------------

Net loss                                                  $       (32)   $      (877)
                                                          ==========================

Net loss applicable to common shares                      $       (32)   $      (877)
                                                          ==========================

Net loss per share:
  Basic                                                   $     (0.03)   $     (0.73)
                                                          ==========================
  Diluted                                                 $     (0.03)   $     (0.73)
                                                          ==========================

Weighted average number of common and
  common equivalent shares outstanding:
  Basic                                                     1,207,944      1,207,944
                                                          ==========================
  Diluted                                                   1,207,944      1,207,944
                                                          ===========    ===========



Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Results of Operations

     Net Sales. The Company generates revenue from the sale of three product
lines - metalized balloons, latex balloons and laminated and printed films. All
of the production and revenues for printed and laminated films are generated in
the Company's plant in Barrington, Illinois and virtually all of those sales are
made to domestic U.S. customers. Latex balloons are produced for the Company by
CTI Mexico at its plants in Guadalajara. CTI Balloons sells latex balloons (i)
to the Company for resale in the U.S., (ii) in the domestic Mexico market, (iii)
to CTI Balloons, Ltd (the Company's UK subsidiary) for resale in the United
Kingdom and some other markets in Europe and the Middle East and (iii) to
various other customers in Latin America and other countries. All of the
metalized

                                       16



balloons of the Company are manufactured by the Company in Barrington, Illinois.
The Company sells metalized balloons (i) to domestic U.S. customers, (ii) to
international customers, (iii) to CTI Mexico for resale in Mexico and (iv) to
CTI Balloons, Ltd. for resale in the United Kingdom and Europe.

     For the fiscal year ended December 31, 2001, consolidated revenues from the
sale of all products were $27,446,000, compared to consolidated revenues of
$22,978,000 for the year ended December 31, 2000, an increase of 19%. This
increase in revenues is the result principally of an increase in sales of
laminated and printed films during fiscal 2001. Revenues in that product line
increased from $5,660,000 for fiscal 2000 to $11,438,000 for fiscal 2001, an
increase of 102%. For the fiscal year 2001, on a consolidated basis, metalized
balloons represented 37% of sales, laminated and printed films 44% of sales and
latex balloons 19% of sales. During fiscal 2000, metalized balloons represented
50% of sales, laminated and printed films 25% of sales and latex balloons 25% of
sales.

     Sales and selected financial information on a geographic basis for 2000 and
2001 are set forth below:



                      United States   United Kingdom    Mexico       Eliminations    Consolidated

                                                                      
Year ended 12/31/00
Revenues              $ 19,132,000    $  2,031,000   $  5,162,000    $ (3,347,000)   $ 22,978,000
Operating income           327,000         177,000       (310,000)         19,000         213,000
Net income (loss)         (546,000)        145,000       (380,000)        (95,000)       (877,000)
Total Assets          $ 18,881,000    $    723,000   $  4,849,000    $ (2,235,000)   $ 22,219,000

Year ended 12/31/01
Revenues              $ 24,706,000    $  1,673,000   $  5,940,000    $ (4,873,000)   $ 27,446,000
Operating income         1,323,000          67,000        128,000        (268,000)      1,250,000
Net income (loss)           96,000          50,000         46,000        (224,000)        (32,000)
Total Assets          $ 20,355,000    $    620,000   $  5,785,000    $ (2,096,000)   $ 24,664,000



     Cost of Sales. For fiscal 2001, cost of sales increased to 72.3% of net
sales compared to 71.3% of net sales for fiscal 2000. In fiscal 2001, profit
margins on metalized balloons, latex balloons and laminated and printed film
were 27.1%, 14.1% and 33%, respectively, compared to margins on the same product
lines for 2000 of 30.2%, 15.4% and 28.9%.

     Administrative. For fiscal 2001, administrative expenses were $3,468,000,
or 12.6% of net sales, as compared to $3,585,000 or 15.6% of net sales for
fiscal 2000. The decrease in administrative expenses resulted principally from a
reduction in work force and related expenses in CTI Mexico during fiscal 2001.
Also, the decrease between 2000 and 2001 reflected unusual expenses incurred by
the Company during 2000 in relation to a reverse stock split.

     Selling. For fiscal 2001, selling expenses were $1,760,000 or 6.4% of net
sales compared to $1,840,000, or 8.0% of net sales for fiscal 2000. The decline
in selling


                                       17



expense resulted from reductions in a variety of expenses including royalty
payments, commissions, catalogue and brochure expenses, convention expenses and
others.

     Advertising and Marketing. For fiscal 2001, advertising and marketing
expenses were $1,133,000 or 4.1% of net sales, compared to $966,000 or 4.2% of
sales for fiscal 2000. There were no material changes in these expenses during
2001.

     Other Income and Expense. For fiscal 2001, interest expense and loan fees
totaled $1,001,000. For fiscal 2000, interest expense was $1,099,000. The
Company had currency exchange gains during 2001 of $89,000 compared to currency
losses during fiscal 2000 of $22,000.

     Net Income or Loss. For the fiscal year ended December 31, 2001, the
Company had income before taxes and minority interest of $186,000 compared to a
loss before taxes and minority interest for fiscal 2000 of $857,000. The net
loss for fiscal 2001 was $32,000 compared to a net loss for fiscal 2000 of
$877,000.

     Income Taxes. For the fiscal year ended December 31, 2001, the Company had
income tax expense of $277,000 compared to an income tax expense of $107,000 for
fiscal 2000. The Company did not, in fact, incur any income tax payments for
2001 or 2000. The amount of the income tax expense recognized by the Company for
both 2001 and 2000 reflects adjustments in deferred tax assets and other items
arising from the operating results of the Company for each year.

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

Financial Condition

     Cash Flow Items

     Cash Flow From Operations. Cash flow provided by operations for the fiscal
year ended December 31, 2001 was $452,000. The funds provided resulted
principally from increases in accounts payable, accrued expenses and other
during the year of $2,000,000 and depreciation and amortization of $1,666,000
offset by an increase in accounts receivable of $1,860,000 and inventory of
$1,832,000. Cash flow generated by operations for the fiscal year ended December
31, 2000, was $1,447,000. This resulted primarily from non-cash depreciation and
amortization expenses of $1,751,000.

     Cash Used in Investing Activities. During fiscal 2001, the Company invested
$1,002,000 in machinery and equipment. During fiscal 2000, the Company invested
$637,000 in machinery and equipment.


                                       18



     Cash From Financing Activities. Cash generated from financing activities
during fiscal 2001 was $273,000. The cash from financing activities was
generated principally from the credit facility and loan obtained in January,
2001. During fiscal 2000, cash flow used in financing activities was $410,000.
The primary used of the funds was to pay down existing long-term and short-term
debt.

     In January, 2001, the Company entered into a Loan and Security Agreement
with a new bank under which the bank has provided the Company with a credit
facility in the amount of $9,500,000, secured by equipment, inventory,
receivables and other assets of the Company. The credit facility includes a term
loan of $1,426,000, at an interest rate of prime plus 0.75% per annum, which is
based upon the appraised value of the equipment of the Company, and a revolving
line of credit at an interest rate of prime plus 0.5% per annum, the amount of
which is based on advances of up to 85% of eligible receivables and 50% of the
value of the Company's inventory. The term loan and revolving line of credit are
secured by substantially all assets of the Company. The term of this credit
facility is for a period of three years, which may be extended by either party
for an additional year.

     Also in January, 2001, another bank loaned to the Company the sum of
$2,873,000 in a refinance of the Company's principal office building and
property situated in Barrington, Illinois. This loan is secured by the
aforementioned building and property, and has been made in the form of two
notes: one note is in the principal amount of $2,700,000, bears interest of
9.75% per annum, and has a term of five years with a 25 year amortization, and
the second note is in the principal amount of $173,000, bears interest at 10%
per annum, and has a term of three years.

     Approximately $7,500,000 in proceeds from the foregoing January, 2001, loan
transactions was used to pay off outstanding loans and a line of credit of the
Company.

     Balance Sheet Items

     Cash and cash equivalents. The Company's cash management strategy includes
maintaining limited cash balances and utilizing the revolving line of credit for
liquidity. As of December 31, 2001, the Company had total cash and cash
equivalents of $110,000 compared to cash and equivalents of $393,000 as of
December 31, 2000.

     Current assets. As of December 31, 2001, the total current assets of the
Company were $14,143,000 compared to total current assets of $10,752,000 as of
December 31, 2000. The increase in current assets is attributable principally to
increases during 2001 in accounts receivable and inventory.

     Inventory. The net inventory of the Company increased from $7,061,000 as of
December 31, 2000 to $8,458,000 as of December 31, 2001.  This increase was the
result principally of (i) higher levels of production arising from increasing
sales during 2001, (ii) a seasonal increase in balloon inventory for anticipated
levels of sales in the first quarter of 2002 and (iii) production of balloons to
order for a customer in the fourth quarter of 2001 for delivery in the first
quarter of 2002.

     Property, Plant and Equipment. During fiscal 2001, the Company invested
$1,002,000 in capital items, while the amount in 2000 was $637,000. Most of this
investment was in production equipment and


                                       19



materials and in repair, maintenance and refurbishment of equipment and
production materials.

     Current liabilities. Total current liabilities decreased from $14,614,000
as of December 31, 2000 to $13,117,000 as of December 31, 2001. This decrease is
attributable principally to the reduction of the current portion of the long
term indebtedness of the Company arising from the payment of prior debt out of
the proceeds of the new credit facility and loan obtained in January, 2001.

     Commitments. The Company has long term commitments under leases, license
agreements and notes payable, as follows:

     Operating Leases

     The Company leases office equipment under operating leases which expire on
various dates between May 2003 and December 2006.

     The net lease expense was $338,000 for the year ended December 31, 2000,
and $270,000 for the year ended December 31, 2001.

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

                      Lease payments      Sublease Income            Net

     2002             $   375,000         $    50,000           $    325,000
     2003                 365,000                  --                365,000
     2004                 294,000                  --                294,000
     2005                 285,000                  --                285,000
     2006                 285,000                  --                285,000
     Thereafter         1,264,000                  --              1,264,000

     Licenses

     The Company has certain merchandising license agreements that require
royalty payments based upon the Company's net sales of the respective products.
The agreements call for guaranteed minimum commitments that are determined on a
calendar year basis. Future guaranteed commitments due, as computed on a pro
rata basis, as of December 31, are as follows:

     2002                                $   282,000
     2003                                    148,000


                                       20



Notes Payable

Long-term debt at December 31, 2001 consists of:


                                                                                
Term Loan, payable in monthly installments of $19,805 plus interest at prime
plus 0.75% due February 1, 2004(*) Collateralized by all assets of the Company     $1,208,000

Term Loan, payable in monthly installments of $24,060 including interest at
9.75% due January 5, 2006. Collateralized by all assets of the Company              2,672,000

Term Loan, payable in monthly installments of $5,582 including interest at
10.00% due January 5, 2004.  Collateralized by all assets of the company              121,000

         Total                                                                     $4,001,000

         Less current portion                                                        (318,000)
                                                                                  -----------

              Total long-term debt                                                 $3,683,000
                                                                                  -----------



                                       21



Future Minimum principal payments for amounts outstanding under these long-term
debt agreements are as follows for the year ended December 31, 2001:

     2002            $   318,000
     2003                338,000
     2004                770,000
     2005                 40,000
     2006              2,535,000
                      ----------

                      $4,001,000
                      ==========


Liquidity and Financial Resources

     At December 31, 2001 the Company's working capital (current assets less
current liabilities) was $1,026,000 compared to a negative working capital as of
December 31, 2000 of ($3,862,000). This significant improvement in working
capital during fiscal 2001 was accomplished principally as the result of the
loan financings obtained by the Company in January, 2001, as well as improved
operating results compared to fiscal 2000.

     The Company has maintained relatively small cash balances and reserves and
relies on its credit facility for liquidity. Under the credit facility, the
Company is able to borrow up to 85% of its eligible receivables and 50% of its
eligible inventory, and utilizes the proceeds of these borrowings for its cash
requirements. If the Company's sales were to decline significantly in any
period, the Company's ability to borrow under this line would be reduced and its
ability to meet its current obligations would be adversely affected.


                                       22



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

Seasonality

     In the metalized product line, sales have historically been seasonal with
approximately 20% to 30% of annual sales of metalized being generated in
December and January, and 11% to 13% of annual metalized sales being generated
in June and July in recent years. The sale of latex balloons and laminated film
products have not historically been seasonal, and as sales in these products
lines increase as a percentage of total sales, the seasonality of the Company's
total net sales has decreased.

Significant 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.

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

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

     Inventories. Inventories are stated at the lower of cost or market. Cost is
determined using standard costs which approximates costing determined on a
first-in, first-out basis. On a periodic basis, the Company reviews its
inventory levels for estimated obsolescence or unmarketable items, as compared
to future demand requirements and shelf life of the various products. Based on
this review, the Company records inventory reserves when appropriate. As of
December 31, 2001, the Company had established a reserve for obsolescence or
marketability with respect to inventory in the aggregate amount of $344,000.

     Property and Equipment. Property and equipment is stated at cost.
Expenditures for maintenance and repairs are charged to operations as incurred.


                                       23



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

     Building                                           25 - 30 years
     Machinery and equipment                            3 - 15 years
     Office furniture and equipment                     5 - 8 years
     Leasehold improvements                             5 - 8 years
     Furniture & equipment at customer locations        2 - 3 years

Depreciation expense was $1,649,000 for the year ended October 31, 2000, and
$1,674,000 for the year ended December 31, 2001.

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

     Comprehensive Income. Comprehensive income is defined as the change in
equity of a business enterprise from non-stockholder transactions impacting
stockholders' equity which are not included in the statement of income and are
reported as a separate component of equity. For all periods presented, other
comprehensive income includes only one component, which is the change in the
foreign currency translation adjustment.

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


                                       24


     Concentration of Credit Risk. Concentration of credit risk with respect to
trade accounts receivable is generally limited due to the number of entities
comprising the Company's customer base. The Company performs ongoing credit
evaluations and provides an allowance for potential credit losses against the
portion of accounts receivable which is estimated to be un-collectible. Such
losses have historically been within management's expectations. For the year
ended December 31, 2001, the Company had two customers that accounted for
approximately 23% and 14%, respectively, of consolidated net sales.
Corresponding percentages of consolidated net sales generated by these customers
for the year ended December 31, 2000, were approximately 19.7% and 7.8%,
respectively. At December 31, 2001, the outstanding accounts receivable balances
due from these two customers were $1,150,000 and $933,000, respectively.

     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 reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates

     Stock-Based Compensation. Effective for the fiscal year ending October 31,
1997, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation". The pronouncement encourages, but does not require, companies to
recognize compensation expense for grants of stock, stock options, and other
equity instruments to employees based on new fair value accounting rules. The
Company did not adopt the new fair value accounting, but instead chose to comply
with the disclosure requirements of SFAS No. 123. Accordingly, the adoption of
SFAS No. 123 did not have a material impact on the Company's financial
statements.

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

Goodwill is amortized over a fifteen year period. Amortization expense of
goodwill for the years ended December 31, 2000 and 2001 was $87,000.

     New Accounting Policies. On July 20, 2001, the Financial Accounting
Standards Board (FASB) issued SFAS No. 141, "Business Combinations," and SFAS
142 "Goodwill and Other Intangible Assets." SFAS 141 is effective for fiscal
years beginning after December 15, 2001; however certain provisions of this
Statement apply to goodwill and other intangible assets


                                       25



acquired between July 1, 2001, and the effective date of SFAS No. 142. Major
provisions and their effective dates are as follows:

     o    All business combinations initiated after June 30, 2001 must use the
          purchase method of accounting.

     o    Intangible assets acquired in a business combination must be recorded
          separately from goodwill if they arise from contractual or other legal
          rights or are separable from the acquired entity and can be sold,
          transferred, licensed, rented, or exchanged, either individually or as
          part of a related contract, asset or liability.

     o    Goodwill and other intangible assets with indefinite lives, acquired
          after June 30, 2001 are not amortized. Effective January 1, 2002, all
          previously recognized goodwill and intangible assets with indefinite
          lives will no longer be subject to amortization.

     o    Effective January 1, 2002, goodwill and intangible assets with
          indefinite lives will be tested for impairment annually and whenever
          there is an impairment indicated.

     o    All acquired goodwill must be assigned to reporting units for purposes
          of impairment testing and segment reporting.

Statement of Financial Accounting Standard No. 141 "Business Combinations." this
new statement should have no material effect on the Company.

Statement of Financial Accounting Standard 142 "Goodwill and other Intangible
Assets." This new statement should have no material effect on the Company

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of
Long-Lived Assets." SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001, and addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This Statement supersedes SFAS No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," and the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30, "Reporting the Result of
Operation-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequent Occurring Events and Transactions," for
the disposal of a segment of a business. The Company plans to adopt SFAS No. 144
at January 1, 2002, and has determined that adoption will not have a material
effect on its results of operations or financial position.

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

     The Company operates in a dynamic and rapidly changing environment that
involves numerous risks and uncertainties. The market for mylar and latex
balloon products is generally characterized by intense competition, frequent new
product introductions and changes in customer tastes which can render existing
products unmarketable. The statements contained in Item 1 (Description of
Business) and Item 6 (Management's Discussion and Analysis of Financial
Condition and Results of Operations) that are not historical facts may be
forward-looking statements (as such term is defined in the rules promulgated
pursuant to the Securities Exchange Act of 1934) that are subject to a variety
of risks and uncertainties more fully described in the Company's filings with
the Securities and Exchange Commission including, without limitation, those
described under "Risk Factors" in the Company's Form SB-2 Registration Statement
(File No. 333-31969) effective November 5, 1997. The forward-looking statements
are based on the beliefs of the Company's management, as well as assumptions
made by, and information currently available to the Company's management.
Accordingly, these statements are subject to significant risks, uncertainties
and contingencies which could cause the Company's actual growth, results,
performance and business prospects and opportunities in 2001 and beyond to
differ materially from those expressed in, or implied by, any such
forward-looking statements. Wherever possible, words such as "anticipate,"
"plan," "expect," "believe," "estimate," and similar expressions have been used
to identify these forward-looking statements, but are not the exclusive means of
identifying


                                       26



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

Item No. 7 Financial Statements

     Reference is made to the Consolidated Financial Statements attached hereto.

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

     Not Applicable.


PART III

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

Directors and Executive Officers

     The Company's current directors and executive officers and their ages, as
of April 1, 2002, are as follows:


                                       27



Name                    Age       Position With The Company

John H. Schwan          57        Chairman and Director

Howard W. Schwan        47        President and Director

Stephen M. Merrick      60        Executive Vice President,
                                  Secretary and Director

Mark Van Dyke           52        Senior Vice President

Brent Anderson          35        Vice President of Manufacturing

Samuel Komar            45        Vice President

Stanley M. Brown        55        Director

Bret Tayne              43        Director

Alfred J. Lescher       37        Controller

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

John H. Schwan, Chairman. Mr. Schwan has been an officer and director of the
Company since January, 1996. Mr. Schwan has been the President and principal
executive officer of Packaging Systems and affiliated companies for over the
last 14 years. Mr. Schwan has over 20 years of general management experience,
including manufacturing, marketing and sales. Mr. Schwan served in the U.S. Army
Infantry in Vietnam from 1966 to 1969, where he attained the rank of First
Lieutenant.

     Howard W. Schwan, President. Mr. Schwan has been associated with the
Company for 20 years, principally in the management of the production and
engineering operations of the Company. Mr. Schwan was appointed as Vice
President of Manufacturing in November, 1990, was appointed as a director in
January, 1996, and was appointed as President in June, 1997.

     Stephen M. Merrick, Executive Vice President and Secretary. Mr. Merrick was
President of the Company from January, 1996 to June, 1997 when he became Chief
Executive Officer of the Company. In October, 1999, Mr. Merrick became Executive
Vice President. Mr. Merrick is a principal of the law firm of Merrick & Klimek,
P.C. of


                                       28



Chicago, Illinois and has been engaged in the practice of law for more than 30
years. Mr. Merrick is also Senior Vice President, Director and a member of the
Management Committee of Reliv International, Inc. (NASDAQ), a manufacturer and
direct marketer of nutritional supplements and food products.

     Mark Van Dyke, Senior Vice President. Mr. Van Dyke rejoined the Company in
August, 2001. Mr. Van Dyke has over 24 years experience in the balloon industry
and was previously employed by the Company for 12 years. Prior to rejoining the
Company, Mr. Van Dyke was employed by M&D Balloons, Inc. for eight years and
became Executive Director of that Company.

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

     Samuel Komar, Vice President of Sales. Mr. Komar has been employed by the
Company since March of 1998, and was named Vice-President of Sales in September
of 2001. Mr. Komar has worked in sales for 15 years, and prior to his employment
with the Company, Mr. Komar was with Bob Gable & Associates, a manufacturer of
sporting goods. Mr. Komar received a Bachelor of Science Degree in Sales and
Marketing from Indiana University.

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

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

     Alfred J. Lescher, Controller. Mr. Lescher has been employed by the Company
as Controller since February, 2002. He has been engaged in accounting since 1994
and has held accounting positions with several companies. He received a Bachelor
of Science Degree in Finance from Arizona State University in 1988 and a
Bachelor of Science in Accounting equivalency at DePaul University in 1993.

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


                                       29



Section 16(a) Beneficial Ownership Reporting Compliance

     Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and with the NASDAQ Stock Market. Officers, directors and greater than
ten-percent shareholders are required by SEC regulation to furnish the Company
with copies of all Section 16(a) forms they file.

     Based solely on a review of such forms furnished to the Company, or written
representations that no Form 5's were required, the Company believes that during
calendar year 2001, all Section 16(a) filing requirements applicable to the
officers, directors and ten-percent beneficial shareholders were complied with.

Item No. 10 Executive Compensation

Executive Compensation

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

                           Summary Compensation Table


                                                                                   Long Term
                                               Annual Compensation               Compensation
----------------------------------------------------------------------------------------------
                                                                 Securities       All Other
Name and                             Salary    Other Annual      Underlying       Compensation
Principal Position        Year        ($)      Compensation      Options                ($)
---------------         -------    -------     -------------     ----------       ------------
                                                                   
Howard W. Schwan          2001     $150,000    $ 5,000               --           $1,765(7)
President                 2000     $135,000    $ 9,719(1)        20,000(2)        $1,650(7)
                          1999     $129,900    $13,675(1)            --           $1,650(7)

Stephen M. Merrick        2001     $ 81,750         --               --               --
Executive                 2000     $ 75,000         --           20,000(3)            --
Vice-President            1999     $ 53,750         --               --               --

Mark Van Dyke             2001     $ 45,900         --           20,000(4)            --
Senior
Vice President

Brent Anderson            2001     $ 82,700         --           15,000(5)            --
Vice President of
Manufacturing

Samuel Komar              2001     $ 85,000         --           10,000(6)            --
Vice President


                       (footnotes continued on next page)


                                       30



(1)  Perquisites include country club membership of $7,360 in 1999 and $3,950 in
     2000.

(2)  Stock options to purchase up to 20,000 shares of the Company's Common Stock
     at $2.25 per share.

(3)  Stock options to purchase up to 20,000 shares of the Company's Common Stock
     at $2.475 per share.

(4)  Stock options to purchase up to 20,000 shares of the Company's Common Stock
     at $1.75 per share.

(5)  Stock options to purchase up to 15,000 shares of the Company's Common Stock
     at $1.75 per share.

(6)  Stock options to purchase up to 10,000 shares of the Company's Common Stock
     at $1.75 per share

(7)  Company contribution to the Company 401(k) Plan as pre-tax salary deferral.

     Certain Named Executive Officers have received warrants to purchase Common
Stock of the Company in connection with their guarantee of certain bank loans
secured by the Company and in connection with their participation in a private
offering of notes and warrants conducted by the Company. See Item No. 12. The
following stock option grants were made to certain of the Company's executive
officers in the fiscal year ending December 31, 2001.

                        Option Grants in Last Fiscal Year
                                Individual Grants



                           Number of
                           Securities          % of Total Options
                           Underlying          Granted to Employees in     Exercise Price
Name                       Options Granted     Fiscal Year                 ($/share)          Expiration Date
----                       ---------------     -----------                 ---------          ---------------
                                                                                  
Mark Van Dyke              20,000              22.2%                       $1.75              12/27/2011

Brent Anderson             15,000              16%                         $1.75              12/27/2011

Samuel Komar               10,000              11.1%                       $1.75              12/27/2011



                                       31



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




                                                       Number of Securities      Value of Unexercised In-
                                                            Underlying              the-Money Options
                           Shares        Value        Unexercised Options at        at Fiscal Year End
                        Acquired on     Realized           Year End (#)                    ($)
         Name           Exercise (#)      ($)        Exercisable/Unexercisable   Exercisable/Unexercisable
         ----           ------------      ---        -------------------------   -------------------------
                                                                              
John H. Schwan               0             0                  33,333/0                    $0/0(1)

Stephen M. Merrick           0             0                  33,333/0                    $0/0(1)

Mark Van Dyke                0             0                  20,000/0                    $0.0(1)

Howard W. Schwan             0             0                  33,333/0                    $0/0(1)

Samuel Komar                300            0                  27,700/0                    $0/0(1)

Brent Anderson               0             0                  26,000/0                    $0/0(1)


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

(1)  The value of unexercised in-the-money options is based on the difference
     between the exercise price and the fair market value of the Company's
     Common Stock on December 31, 2001.

Employment Agreements

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

Director Compensation

     John Schwan was compensated in the amount of $74,500 in fiscal 2001 for his
services as Chairman of the Board of Directors. Except for John Schwan,
directors received no cash compensation for their services as directors.

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

Principal Stockholders

     The following table sets forth certain information with respect to the
beneficial ownership of the Company's capital stock, as of March 25, 2002 by (i)
each stockholder who is known by the Company to be the beneficial owner of more
than 5% of the Company's Common Stock or Class B Common Stock, (ii) each
director and executive officer of the Company who owns any shares of Common
Stock or Class B Common Stock, and (iii) all executive officers and directors as
a group. Except as otherwise


                                       32



indicated, the Company believes that the beneficial owners of the shares listed
below have sole investment and voting power with respect to such shares.



                                    Shares of Class B                Shares of Common
                                    Common Stock                     Stock Beneficially             Percent of
Names and Address(1)                Beneficially Owned(2)(3)         Owned(2)                       Common Stock
-----------------                   ------------------               -----                          ------------
                                                                                            
John H. Schwan                                109,890                    369,354(4)                  37.5(5)

Stephen M. Merrick                             73,260                    329,429(6)                  33.8(5)

Howard W. Schwan                               54,945                     91,463(7)                  14.9(5)

Brent Anderson                                     --                     30,700(8)                   3.5(5)

Samuel Komar                                       --                     20,900(9)                   2.4(5)

Mark Van Dyke                                      --                     20,000(10)                  2.3(5)

Stanley M. Brown                                   --                      6,952(11)                    *
  747 Glenn Avenue
  Wheeling, Illinois 60090

Bret Tayne                                         --                      5,837(12)                    *
  6834 N. Kostner Avenue
  Lincolnwood, Illinois 60712

Michael Schrimmer                                  --                    102,000                     12.1
  1161 Lake Cook Road
  Suite B
  Deerfield, Illinois 60015

Frances Ann Rohlen                             91,575                     51,170                     15.3(5)
  c/o Cheshire Partners
  1504 N. Wells Street
  Chicago, Illinois 60610

Philip W. Colburn                              36,630                     37,884(13)                  8.5(5)

All directors and executive                   238,095                    874,635                     47.2(5)
officers as a group (8 persons)


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

* less than one percent

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

                       (footnotes continued on next page)


                                       33



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

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

(4)  Includes warrants to purchase up to 20,641 shares of Common Stock at $2.73
     per share, warrants to purchase up to 207,346 shares of Common Stock at
     $1.688 per share, warrants to purchase up to 66,666 shares of Common Stock
     at $1.78 per share, options to purchase up to 13,333 shares of Common Stock
     at $8.25 per share granted under the Company's 1997 Stock Option Plan and
     options to purchase up to 20,000 shares of Common Stock at $2.475 per share
     granted under the Company's 1999 Stock Option Plan.

(5)  Assumes conversion of all shares of Class B Common Stock owned by the named
     person or collective into shares of Common Stock and the exercise of all
     warrants and options owned by the named person or collective into shares of
     Common Stock.

(6)  Includes warrants to purchase up to 24,176 shares of Common Stock at $2.73
     per share, warrants to purchase up to 186,612 shares of Common Stock at
     $1.688 per share, warrants to purchase up to 33,334 shares of Common Stock
     at $1.78 per share, options to purchase up to 13,333 shares of Common Stock
     at $8.25 per share granted under the Company's 1997 Stock Option Plan and
     options to purchase up to 20,000 shares of Common Stock at $2.475 per share
     granted under the Company's 1999 Stock Option Plan.

(7)  Includes warrants to purchase up to 25,641 shares of Common Stock at $2.73
     per share, warrants to purchase up to 29,621 shares of Common Stock at
     $1.688 per share, options to purchase up to 13,333 shares of Common Stock
     at $7.50 per share granted under the Company's 1997 Stock Option Plan and
     options to purchase up to 20,000 shares of Common Stock at $2.25 per share
     granted under the Company's 1999 Stock Option Plan.

                       (footnotes continued on next page)


                                       34



(8)  Includes options to purchase up to 4,000 shares of Common Stock at $7.50
     per share granted under the Company's 1997 Stock Option Plan, options to
     purchase up to 7,000 shares of Common Stock at $2.25 per share granted
     under the Company's 1999 Stock Option Plan and options to purchase up to
     15,000 shares of Common Stock at $1.75 per share, granted under the
     Company's 2001 Stock Option Plan.

(9)  Includes options to purchase up to 4,000 shares of Common Stock at $7.00
     per share granted under the Company's 1997 Stock Option Plan, options to
     purchase up to 6,700 shares of Common Stock at $2.25 per share granted
     under the Company's 1999 Stock Option Plan, options to purchase up to
     10,000 shares of Common Stock at $1.75 per share granted under the
     Company's 2001 Stock Option Plan, and 200 shares of Common Stock held by
     immediate family members.

(10) Includes options to purchase up to 20,000 shares of Common Stock at $1.75
     per share granted under the Company's 2001 Stock Option Plan.

(11) Includes options to purchase up to 1,667 shares of Common Stock at $7.50
     per share and options to purchase up to 1,667 shares of Common Stock at
     $12.00 per share, both granted under the Company's 1997 Stock Option Plan,
     and options to purchase up to 3,000 shares of Common Stock at $2.25 per
     share granted under the Company's 1999 Stock Option Plan.

(12) Includes options to purchase up to 1,667 shares of Common Stock at $7.50
     per share granted under the Company's 1997 Stock Option Plan and options to
     purchase up to 3,000 shares of Common Stock at $2.25 per share granted
     under the Company's 1999 Stock Option Plan.

(13) Includes shares held by immediate family members.

Item No. 12 Certain Relationships and Related Transactions

Certain Transactions

     In March and May of 1996, a group of investors made an equity investment of
$1,000,000 in the Company in return for 366,300 shares of Preferred Stock, $2.73
par value. Each share of Preferred Stock was entitled to an annual cumulative
dividend of 13% of the purchase price, and was convertible into one share of
Common Stock. The shares of Preferred Stock, voting separately as a class, were
entitled to elect four of the Company's directors. CTI Investors, L.L.C., an
Illinois limited liability company, invested $900,000 in the shares of Preferred
Stock. Members of CTI Investors, L.L.C. include Howard W. Schwan, John H. Schwan
and Stephen M. Merrick, members of management, and Frances Ann Rohlen.


                                       35



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

     In June, 1997, the Company issued in a private placement notes in the
principal amount of $865,000, together with warrants to purchase up to 92,415
shares of the Company's Common Stock at an exercise price of $9.36 per share.
The warrants had a term of five years. Howard W. Schwan, John H. Schwan, Stephen
M. Merrick and John C. Davis, members of management, purchased $50,000, $350,000
and $315,000 and $150,000, respectively, of the notes and warrants. Mr. John
Schwan and Mr. Merrick applied advances of $200,000 each, made to the Company in
January, 1997, toward the purchase of the notes and warrants.

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

     In June, 1999, the June, 1997, $50,000 $350,000 and $315,000 notes of
Messrs. H. Schwan, J. Schwan and Merrick, respectively came due. On November 9,
1999, new notes in the same principal amounts were issued to these persons, in
payment and replacement of the prior notes, with maturity dates for each of
November 9, 2001. As of that date, each payee under the Notes had executed a
consent to extend the maturity on the Notes to March 1, 2004. In November, 1999,
the June, 1997, warrants of Messrs. H. Schwan, J. Schwan and Merrick to purchase
up to (respectively) 5,342, 37,393 and 33,653 shares of the Company's Common
Stock at an exercise price of $9.36 per share were cancelled. At that time, new
warrants to purchase up to 29,621, 207,346, and 186,612 shares of the Company's
Common Stock at an exercise price of $1.688 per share were issued to Messrs. H.
Schwan, J. Schwan and Merrick, respectively. These warrants expire on November
9, 2002.

     In July, 2001, the Company issued warrants to purchase up to 66,666 shares
of the Company's Common Stock to John H. Schwan and 33,334 shares of the
Company's Common Stock to Stephen M. Merrick. The warrants were issued in
consideration of Mr. Schwan and Mr. Merrick guaranteeing and securing loans to
the Company in the aggregate amount of approximately $1,600,000.00. The warrants
are exercisable for a period of five years at the price of $1.78 per share.

     Stephen M. Merrick, Executive Vice President of the Company, is a principal
of the law firm of Merrick & Klimek, P.C., which serves as general counsel of
the


                                       36



Company. In addition, Mr. Merrick is a principal stockholder of the Company.
Other principals of the firm of Merrick & Klimek, P.C. own less than 1% of the
Company's outstanding Common Stock. Legal fees incurred from the firm of Merrick
& Klimek, P.C. for the fiscal years ended December 31, 2000 and December 31,
2001 were $124,000 and $121,000, respectively. Mr. Merrick is also an officer
and director of Reliv International, Inc. (NASDAQ-RELV).

     John H. Schwan is President of Packaging Systems, L.L.C. and affiliated
companies. The Company made purchases of packaging materials from these entities
in the amount of $235,000 and $143,000 during each of the years ended December
31, 2000, and December 31, 2001, respectively.

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

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

Exhibits

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

*    3.1     Third Restated Certificate of Incorporation of CTI Industries
             Corporation
**   3.2     By-laws of CTI Industries Corporation
**   4.1     Form of Certificate for Common Stock of CTI Industries
             Corporation
***  10.1    CTI Industries Corporation Stock Option Plan
**   10.2    Employment Agreement dated April 29, 1996 between CTI
             Industries Corporation and John C. Davis
**   10.3    Stock Redemption Agreement dated March 1, 1996 between CTI
             Industries Corporation and John C. Davis
**   10.4    Agreement dated June 27, 1997 between CTI Industries
             Corporation and John C. Davis
**   10.6    Form of Warrant dated December 3, 1996 to purchase shares of Common
             Stock
**   10.7    Form of Subscription Agreement dated March, 1996, for purchase of
             Preferred Stock
**   10.8    Form of Subscription Agreement dated June 20, 1997 for promissory
             notes and warrants to purchase shares of Common Stock
**   10.9    Employment Agreement dated June 30, 1997, between CTI Industries
             Corporation and Howard W. Schwan
**   10.10   Joint Venture Agreement dated September 16, 1996, between CTI
             Industries Corporation and Pulidos & Terminados Finos S.A. de C.V.
**   10.11   Agreement for purchase of assets dated September 8, 1995, between
             CTI Industries Corporation and Pulidos & Terminados Finos S.A. de
             C.V.


                                       37



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

**   10.12   Amendment dated May 24, 1996, to Agreement for purchase of assets
             between CTI Industries Corporation and Pulidos & Terminados Finos
             S.A. de C.V.
**** 10.13   Form of Agreement dated July 14, 1997 between CTI Industries
             Corporation and Pulidos & Terminados Finos S.A. de C.V.
     10.14   Loan and Security Agreement dated January 12, 2001, between the
             Company and Congress Financial Corporation (Central)
     10.15   Term Note in the sum of $1,426,000 dated January 12, 2001 made by
             CTI Industries Corporation to Congress Financial Corporation
             (Central)
     10.16   Mortgage dated January 12, 2001 for the benefit of Banco Popular,
             N.A.
     10.17   Secured Promissory Note in the sum of $2,700,000 dated December 15,
             2000 made by CTI Industries Corporation to Banco Popular, N.A.
     10.18   Secured Promissory Note in the sum of $173,000 dated December 15,
             2000, made by CTI Industries Corporation to Banco Popular, N.A.
     10.19   Guaranties dated January 12, 2001, by Stephen M. Merrick and John
             H. Schwan for benefit of Congress Financial Corporation (Central)
     10.20   Guaranties dated January 12, 2001, by John H. Schwan, Stephen M.
             Merrick and Howard W. Schwan for the benefit of Banco Popular, N.A.
**   10.21   Form of Financial Advisory and Consulting Agreement
*****10.22   Subscription and Loan Agreement dated January 26, 1998, between CTI
             Industries Corporation and Pulidos & Terminados Finos S.A. de C.V.
     10.23   Consent of Independent Auditors
     11.1    Computation of Earnings Per Share - Annual
     21      Subsidiaries (incorporate description in Form 10-KSB under Item
             No. 1)
     27      Financial Data Schedule

*      Incorporated by reference to Exhibit A contained in Registrant's Schedule
       14A Definitive Proxy Statement for solicitation of written consent of
       shareholders, as filed with the Commission on October 25, 1999.

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

***    Incorporated by reference to Exhibit contained in Registrant's Schedule
       14A Definitive Proxy Statement, as filed with the Commission on March 26,
       1999.

****   Incorporated by reference to Exhibits contained in Registrant's Form
       10KSB Annual Report, for the fiscal year ended October 31, 1998.

*****  Incorporated by reference to Exhibit contained in Registrant's Form 10
       KSB Annual Report, for year ended October 31, 1997.

Reports on Form 8-K

     The Company did not file a report on Form 8-K during the last quarter of
fiscal 2001.


                                       38



                                   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 16, 2002.


                                        CTI INDUSTRIES CORPORATION



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

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

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

 /s/ Howard W. Schwan              President and Director         April 16, 2002
--------------------------
Howard W. Schwan

 /s/ John H. Schwan                Chairman and Director          April 16, 2002
--------------------------
John H. Schwan

 /s/ Stephen M. Merrick            Executive Vice President,      April 16, 2002
--------------------------         Secretary, Chief Financial
Stephen M. Merrick                 Officer and Director

 /s/ Stanley M. Brown              Director                       April 16, 2002
--------------------------
Stanley M. Brown

 /s/ Bret Tayne                    Director                       April 16, 2002
--------------------------
Bret Tayne


                                       39


                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders of CTI Industries Corporation

We have audited the accompanying consolidated balance sheets of CTI Industries
Corporation and Subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the 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, 2001 and 2000, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.



/s/ Grant Thornton, LLP


Chicago, Illinois
April 10, 2002


                                      F - 1


CTI Industries Corporation and Subsidiaries
Consolidated Balance Sheets



                                                                               December 31, 2001  December 31, 2000
                                                                               -----------------  -----------------
                                                                                               
                                    ASSETS
Current assets:
  Cash                                                                            $    110,488       $    392,534
  Accounts receivable  (less allowance for doubtful accounts of $375,755 and
   $312,572 at December 31, 2001 and December 31, 2000, respectively)                4,385,050          2,573,577
  Inventories                                                                        8,458,421          7,060,996
  Deferred tax assets                                                                  290,816             65,700
  Other                                                                                898,130            659,371
                                                                                  ------------       ------------

      Total current assets                                                          14,142,905         10,752,178

Property and equipment:
  Machinery and equipment                                                           14,635,962         13,472,187
  Building                                                                           2,398,039          2,370,644
  Office furniture and equipment                                                     1,731,848          1,652,823
  Land                                                                                 250,000            250,000
  Leasehold improvements                                                               161,885            161,885
  Fixtures and equipment at customer locations                                       2,206,096          2,202,743
  Projects under construction                                                          316,230            405,748
                                                                                  ------------       ------------
                                                                                    21,700,060         20,516,030
    Less :  accumulated depreciation and amortization                              (13,000,561)        11,342,792
                                                                                  ------------       ------------

      Total property and equipment, net                                              8,699,499          9,173,238

Other assets:
  Deferred financing costs, net                                                         82,653             11,412
  Goodwill associated with acquisition of CTI Mexico, net                            1,113,108          1,199,771
  Deferred tax assets                                                                  361,567            812,591
  Other assets                                                                         264,493            269,600
                                                                                  ------------       ------------

      Total other assets                                                             1,821,821          2,293,374
                                                                                  ------------       ------------

TOTAL ASSETS                                                                      $ 24,664,225       $ 22,218,790
                                                                                  ============       ============


See accompanying notes


                                     F - 2



                      LIABILITIES AND STOCKHOLDERS' EQUITY



                                                                     December 31,       December 31,
                                                                         2001               2000
                                                                     ------------       ------------
                                                                                  
Current liabilities:
  Accounts payable                                                      5,492,488          5,045,773
  Line of credit                                                        5,697,717          3,609,541
  Notes payable - current portion                                         318,443          4,176,934
  Accrued liabilities                                                   1,608,071          1,781,984
                                                                      -----------        -----------

      Total current liabilities                                        13,116,719         14,614,232

Long-term liabilities:
  Other liabilities                                                     2,535,826            802,596
  Notes payable - net of current portion                                3,682,137          1,301,022
  Subordinated debt                                                       486,640            496,640
                                                                      -----------        -----------

      Total long-term liabilities                                       6,704,603          2,600,258

Commitments and contingencies                                                  --                 --
Minority interest                                                         180,830            238,787

Stockholders' equity:
  Common stock  - no par value with a stated par value of
    $.195, 5,000,000 shares authorized, 966,327 shares
    issued, 841,644 shares outstanding                                    188,434            188,434
  Class B Common stock  - no par value with a stated
    par value of $2.73, 500,000 shares authorized,
    366,300 shares issued and outstanding                               1,000,000          1,000,000
  Paid-in-capital                                                       5,554,332          5,554,332
  Warrants issued in connection with subordinated debt                    228,360            228,360
  Accumulated deficit                                                  (1,559,206)        (1,526,829)
  Accumulated other comprehensive earnings                               (118,007)           (42,244)
    Less:
      Treasury stock - 124,683 shares                                    (575,384)          (575,384)
      Stock subscription receivable                                            --             (4,700)
      Notes receivable from stockholders                                  (56,456)           (56,456)
                                                                      -----------        -----------

      Total stockholders' equity                                        4,662,073          4,765,513
                                                                      -----------        -----------

TOTAL LIABILITIES & STOCKHOLDERS' EQUITY                              $24,664,225        $22,218,790
                                                                      ===========        ===========


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


                                     F - 3



CTI Industries Corporation and Subsidiaries
Consolidated Statements of Operations



                                                                              Year ended         Year ended
                                                                             December 31,       December 31,
                                                                                 2001               2000
                                                                             -------------------------------
                                                                                          
Net Sales                                                                    $ 27,446,494       $ 22,978,117

Cost of Sales                                                                  19,835,066         16,374,720
                                                                             -------------------------------

      Gross profit on sales                                                     7,611,428          6,603,397

Operating expenses:
  Administrative                                                                3,468,389          3,584,516
  Selling                                                                       1,760,138          1,839,906
  Advertising and marketing                                                     1,132,977            965,981
                                                                             -------------------------------

      Total operating expenses                                                  6,361,504          6,390,403
                                                                             -------------------------------

Income from operations                                                          1,249,924            212,994

Other income (expense):
  Interest expense                                                             (1,000,949)        (1,099,194)
  Interest income                                                                   6,160             14,238
  (Loss) gain on sale of assets                                                    (6,816)            30,046
  Other                                                                           (62,100)           (14,977)
                                                                             -------------------------------

      Total other income (expense)                                             (1,063,705)        (1,069,887)
                                                                             -------------------------------

Income (loss) before income taxes and minority interest                           186,219           (856,893)

Income tax expense                                                                276,553            106,910
                                                                             -------------------------------

Loss before minority interest                                                     (90,333)          (963,803)

Minority interest in loss of subsidiary                                            57,957             86,843
                                                                             -------------------------------

      Net Loss                                                               $    (32,377)      $   (876,960)
                                                                             ===============================

Basic loss per common and common equivalent shares                           $      (0.03)      $      (0.73)
                                                                             ===============================

Diluted loss per common and common equivalent shares                         $      (0.03)      $      (0.73)
                                                                             ===============================

Weighted average number of shares and equivalent shares of common stock
  outstanding:
    Basic                                                                       1,207,944          1,207,944
                                                                             ===============================

    Diluted                                                                     1,207,944          1,207,944
                                                                             ===============================


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


                                     F - 4



CTI Industries Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity



                                                                                                     Warrants
                                    Common Stock          Class B Common Stock                       issued in
                                    ------------          --------------------        Paid-in     connection with     Retained
                                 Shares      Amount       Shares       Amount         Capital     subordinated debt   Earnings
                              ----------------------------------------------------------------------------------------------------
                                                                                               
Balance, January 1, 2000         966,327   $ 188,434      366,300   $ 1,000,000     $ 5,554,332      $      --      $  (649,869)

Expiration of stock
  redemption period

Warrants issued in connection
  with subordinated debt                                                                             $ 228,360

Net loss                                                                                                            $  (876,960)

Other comprehensive income
  Foreign currency translation


Total comprehensive loss
                              ----------------------------------------------------------------------------------------------------

Balance, December 31, 2000       966,327   $ 188,434      366,300   $ 1,000,000     $ 5,554,332      $ 228,360      $(1,526,829)
                              ====================================================================================================

Expiration of stock
  redemption period

Net Income                                                                                                          $   (32,377)

Other comprehensive income
  Foreign currency translation

Total comprehensive loss
                              ----------------------------------------------------------------------------------------------------

Balance, December 31, 2001       966,327   $ 188,434      366,300   $ 1,000,000     $ 5,554,332      $ 228,360      $(1,559,206)
                              ====================================================================================================



                                                                           Less
                                               ---------------------------------------------------------------
                               Accumulated
                                  Other          Treasury Stock
                              Comprehensive      --------------        Redeemable      Stock    Notes Receivable
                                 Earnings      Shares       Amount     Common Stock  Sub Recvble  Shareholders    TOTAL
                              ---------------------------------------------------------------------------------------------
                                                                                          
Balance, December 31, 1999      $ (14,247)    124,683    ($575,384)    $ 413,406      $ 4,700     ($ 56,456)   $  5,028,704

Expiration of stock
  redemption period                                                     $(413,406)                             $    413,406

Warrants issued in connection
  with subordinated debt                                                                                       $    228,360

Net loss                                                                                                       $   (876,960)

Other comprehensive income
  Foreign currency translation  $ (27,997)                                                                     $    (27,997)
                                                                                                               -------------

Total comprehensive loss                                                                                       $   (904,957)
                              ----------------------------------------------------------------------------------------------

Balance, December 31, 2000      $ (42,244)    124,683   ($ 575,384)    $      --      $ 4,700     ($ 56,456)   $  4,765,513
                              ==============================================================================================

Expiration of stock
  redemption period                                                                    $(4,700)                $      4,700

Net loss                                                                                                       $    (32,377)

Mexico 2000 R/E Adjustment

Other comprehensive income
  Foreign currency translation  $ (75,763)                                                                     $    (75,763)

Total comprehensive loss                                                                                       $   (108,140)
                              ----------------------------------------------------------------------------------------------

Balance, December 31, 2001      $(118,007)     124,683  ($ 575,384)    $      --     $    --     ($ 56,456)   $  4,662,073
                              ==============================================================================================

The accompanying notes are an integral part of this financial statement.

                                     F - 5



CTI Industries Corporation and Subsidiaries
Consolidated Statements of Cash Flows



                                                              For the twelve months ended December 31
                                                                      2001              2000
                                                                    (Audited)         (Audited)
                                                                   -----------       -----------
                                                                               
Cash flows from operating activities:
  Net loss                                                         $   (32,377)      $  (876,960)
  Adjustment to reconcile net loss to cash (used in)                        --                --
      provided by operating activities:                                     --                --
    Depreciation and amortization                                    1,665,758         1,751,318
    Equity in loss of subsidiary and joint venture                          --                --
    Minority interest in loss of subsidiary                            (57,957)          (86,843)
    Amortization of deferred gain on sale/leaseback                    (30,046)          (30,046)
    Provision for losses on accounts receivable & inventory            240,000           317,856
    Deferred income taxes                                              225,908            21,933
    Change in assets and liabilities:                                       --                --
      Accounts receivable                                           (1,859,791)        1,455,886
      Inventory                                                     (1,832,182)         (707,564)
      Other assets                                                     132,809            31,906
      Accounts payable accrued expenses and other                    2,000,348          (430,466)
                                                                   -----------       -----------

          Net cash provided by operating activities                    452,470         1,447,020

Cash flows from investing activities:
  Purchases of property and equipment                               (1,002,136)         (636,917)
  Purchase additional interest in CTI Mexico                                --          (109,547)
                                                                   -----------       -----------

          Net cash used in investing activities                     (1,002,136)         (746,464)

Cash flows from financing activities:
  Net change in revolving line of credit                             2,088,176          (239,662)
  Proceeds from issuance of long-term debt                           4,299,000                --
  Proceeds from issuance of short-term debt                                  0         1,470,000
  Repayment of long-term debt                                       (5,604,248)         (970,493)
  Repayment of short-term debt                                        (500,000)         (554,973)
  Repayment of subordinated debt                                       (10,000)         (115,000)
                                                                   -----------       -----------

          Net cash used in financing activities                        272,928          (410,128)

Effect of exchange rate changes on cash                                 (5,308)          (27,997)
                                                                   -----------       -----------

Net (decrease) increase in cash                                       (282,046)          262,431

Cash and Cash Equivalents at Beginning of Period                       392,534           130,103
                                                                   -----------       -----------

Cash and Cash Equivalents at End of Period                         $   110,488       $   392,534
                                                                   ===========       ===========

Supplemental Disclosure:
  cash paid on interest                                                   open       $ 1,079,548



                                     F - 6



CTI Industries Corporation and Subsidiaries

Notes to the Consolidated Financial Statements


1.   Nature of Operations

CTI Industries Corporation (the "Company"), its United Kingdom subsidiary (CTI
Balloons Limited), and Mexican subsidiaries (CTI Mexico Corporation, S.A. de
C.V. and CTF International S.A. de C.V.) (i) design, manufacture and distribute
balloon products throughout the world and (ii) operates 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 and CTF
International S.A. de C.V., and its majority owned subsidiary CTI Mexico
Corporation, S.A. de C.V. All significant intercompany accounts and transactions
have been eliminated upon consolidation.

Foreign Currency Translation

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

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, demand deposits and short term
investments purchased with original maturities of three months or less.

Inventories

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

Property and Equipment

Property and equipment is stated at cost. Expenditures for maintenance and
repairs are charged to operations as incurred. Depreciation and amortization is
computed using the straight-line and declining-balance methods over estimated
useful lives of the related assets. The estimated useful lives range as follows:

        Building                                        25 - 30 years
        Machinery and equipment                         3 - 15 years
        Office furniture and equipment                  5 - 8 years
        Leasehold improvements                          5 - 8 years
        Furniture & equipment at customer locations     2 - 3 years

Depreciation and amortization expense was $1,649,437 for the year ended December
31, 2000, and $ 1,524,913 for the year ended December 31, 2001.


                                     F - 7



CTI Industries Corporation and Subsidiaries

Notes to the Consolidated Financial Statements


2.   Summary of Significant Accounting Policies, continued

Deferred Financing Costs

Year end 2000 deferred financing costs consist of unamortized financing costs
incurred in connection with the refinancing of long-term debt during fiscal 1996
and year end 2001 deferred financing costs consist of the subsequent refinancing
of long-term debt in January of 2001. These costs are being amortized on a
straight-line basis over the term of the loans. Amortization expense was $15,217
for the year ended December 31, 2000 and $54,181 for the year ended December 31,
2001.

Fair Value of Financial Instruments

The fair value of financial instruments are not materially different from their
carrying values.

Income Taxes

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

Comprehensive Income

Comprehensive income is defined as the change in equity of a business enterprise
from non-stockholder transactions impacting stockholders' equity which are not
included in the statement of income and are reported as a separate component of
equity. For all periods presented, other comprehensive income includes only one
component, which is the change in the foreign currency translation adjustment.

Revenue Recognition

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

Shipping and Handling Fees and Costs

In September 2000, the Emerging Issues Task Force ("EITF") released Issue No.
00-10, "Accounting for Shipping and Handling Fees and Costs". The Issue requires
that shipping and handling costs be classified as costs of goods sold, and
shipping and handling fees billed to customers be classified as revenues.
Previously, the Company had netted its revenues from shipping and handling fees
billed to customers against the related costs, and included the net amount as a
component of cost of goods sold.

Effective for the year ended December 31, 2000, the Company has reclassified all
shipping and handling fees billed to customers from cost of goods sold to net
sales for all periods presented.


                                     F - 8



CTI Industries Corporation and Subsidiaries

Notes to the Consolidated Financial Statements


2.   Summary of Significant Accounting Policies, continued

Concentration of Credit Risk

Concentration of credit risk with respect to trade accounts receivable is
generally limited due to the number of entities comprising the Company's
customer base. The Company performs ongoing credit evaluations and provides an
allowance for potential credit losses against the portion of accounts receivable
which is estimated to be un-collectible. Such losses have historically been
within management's expectations. For the year ended December 31, 2001, the
Company had two customers that accounted for approximately 23% and 14%,
respectively, of consolidated net sales. Corresponding percentages of
consolidated net sales generated by these customers for the year ended December
31, 2000, were approximately 19.7% and 7.8%, respectively. At December 31, 2001,
the outstanding accounts receivable balances due from these two customers were
$1,149,856 and $932,707, respectively. At December 31, 2000, the outstanding
accounts receivable balances due from these two customers were $1,045,965 and
$219,243.

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 reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Stock-Based Compensation

Effective for the fiscal year ending October 31, 1997, the Company adopted SFAS
No. 123, "Accounting for Stock-Based Compensation". The pronouncement
encourages, but does not require, companies to recognize compensation expense
for grants of stock, stock options, and other equity instruments to employees
based on new fair value accounting rules. The Company did not adopt the new fair
value accounting, but instead chose to comply with the disclosure requirements
of SFAS No. 123. Accordingly, the adoption of SFAS No. 123 did not have a
material impact on the Company's financial statements.

Impairment of Long-Lived Assets and Goodwill

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

Goodwill is amortized over a fifteen year period. Amortization expense of
goodwill for the years ended December 31, 2000 and 2001 was $86,663.

New Accouting Pronouncement

On July 20, 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations," and SFAS 142 "Goodwill and Other Intangible
Assets." SFAS 141 is effective for fiscal years beginning after December 15,


                                     F - 9



CTI Industries Corporation and Subsidiaries

Notes to the Consolidated Financial Statements


2001; however certain provisions of this Statement apply to goodwill and other
intangible assets acquired between July 1, 2001, and the effective date of SFAS
No. 142. Major provisions and their effective dates are as follows:

     o    All business combinations initiated after June 30, 2001 must use the
          purchase method of accounting.

     o    Intangible assets acquired in a business combination must be recorded
          separately from goodwill if they arise from contractual or other legal
          rights or are separable from the acquired entity and can be sold,
          transferred, licensed, rented, or exchanged, either individually or as
          part of a related contract, asset or liability.

     o    Goodwill and other intangible assets with indefinite lives, acquired
          after June 30, 2001 are not amortized. Effective January 1, 2002, all
          previously recognized goodwill and intangible assets with indefinite
          lives will no longer be subject to amortization.

     o    Effective January 1, 2002, goodwill and intangible assets with
          indefinite lives will be tested for impairment annually and whenever
          there is an impairment indicated.

     o    All acquired goodwill must be assigned to reporting units for purposes
          of impairment testing and segment reporting.

The adoption of Statement of Financial Accounting Standard No. 141 "Business
Combinations" should have no material effect on the Company.

The adoption of Statement of Financial Accounting Standard 142 "Goodwill and
other Intangible Assets" should have no material effect on the Company.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of
Long-Lived Assets." SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001, and addresses financial, accounting and reporting for the
impairment or disposal of long-lived assets. This Statements supercedes SFAS No.
121 "Accounting for the Impairment of Long-Lived Assets" and for Long-Lived
Assets to be Disposed Of," and the accounting and reporting provision of
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequent Occurring Events and Transactions," for
the disposal of a segment of a business. The Company plans to adopt SFAS No. 144
at January 1, 2002, and should not have a material effect on its results of
operations or financial positions.

3.   Inventory

Inventory is comprised of the following:

                                         December 31, 2001     December 31, 2000
     Raw materials                       $     728,344         $     693,166
     Work in process                         2,302,440               975,360
     Finished goods                          5,427,637             5,392,470
                                         -----------------     -----------------
       Total inventory                   $   8,458,421         $   7,060,996
                                         =================     =================


4.   Line of Credit

In January 2001, the Company entered into a Loan and Security Agreement with a
lender under which the lender has provided the Company with a credit facility in
the amount of $9,500,000, collateralized by equipment, inventory, receivables,
and other assets of the Company. The credit facility includes a term loan in the
initial amount of $1,426,000, at an interest rate of prime plus 0.75%, and a
revolving line of credit at an interest rate of prime plus 0.50%, the amount of
which is based on advances of up to 85% of eligible receivables and 50% of the
value of the Company's inventory. The credit facility is collateralized by
substantially all assets of the Company. The term of this credit facility is for
a period of three years, which may be extended by either party for an additional
year. As of December 31, 2001, the balance outstanding was $5,697,717 while
$847,920 was available to the Company to be borrowed under the revolving line of
credit.

5.   Subordinated Debt

In November, 1999, the Company received $715,000 from certain shareholders in
exchange for (a) two year 10% subordinated notes, and (b) three year warrants to
purchase 423,579 common shares at $1.69 per share. The cash proceeds were
allocated to the note and warrants based upon the relative fair value of the
securities issued. The value of the warrants was $228,360 calculated using the
Black Scholes option pricing formula. The $715,000 proceeds were allocated to
subordinated notes in the amount of $486,640 and warrants issued in connection
with subordinated debt, within stockholders' equity, of $228,360 based upon the
relative fair values.

In November 2001, the subordinated notes maturity dates were extended to March
1, 2004.



                                     F - 10



CTI Industries Corporation and Subsidiaries

Notes to the Consolidated Financial Statements


6.   Notes Payable

Notes Payable consists of:



                                                                                December 31,    December 31,
                                                                                    2001            2000
                                                                                 ----------      ----------
                                                                                           
     Term Loan, payable in monthly installments of $19,805 plus interest at
     prime plus 0.75% due February 1, 2004. Collateralized by all assets of
     the Company.                                                                $1,208,145      $       --

     Term Loan, payable in monthly installments of $24,060 including interest
     at 9.75% due January 5, 2006.  Collateralized by all assets of the
     Company.                                                                     2,671,546              --

     Term Loan, payable in monthly installments of $5,582 including interest
     at 10.00% due January 5, 2004.  Collateralized by all assets of the
     Company.                                                                       120,889              --

     Term Loan, payable in monthly installments of $43,979 including
     interest at 8.25% due May, 2002. Collateralized by all assets of the
     Company.                                                                            --         702,837

     Term Loan, payable in monthly installments of $19,617 including
     interest at 8.25% due September, 2001. Collateralized by all assets of
     the Company.                                                                        --       1,959,525

     Term Loan, payable in monthly installments of $46,195 including
     interest at 8.25% due February 2004. Collateralized by all assets of
     the Company.                                                                        --       1,482,291

     Single payment note due January 31, 2001. Interest at prime rate.
     Unsecured.                                                                          --         250,000

     Single payment notes payable to an officer/shareholder. Interest at 9%,
     payable on demand. Unsecured.                                                       --         350,000

     Single payment notes payable to an officer/shareholder. Interest at 9%,
     payable on demand. Unsecured.                                                       --         370,000

     Installment Loan, payable in monthly installments of $3,633 including
     interest at 8.25% due May, 2001. Collateralized by equipment.                       --          11,137

     Single payment note due September, 2003 Interest at 26%. Unsecured.                 --          51,071

     Note payable on demand. Interest at 48%. Unsecured.                                 --          83,440
     Interest payable monthly.

     Note payable on demand. Interest at 48%. Unsecured.                                 --         125,160
     Interest payable monthly.

     Term Loan, payable in monthly installments of $3,854 plus interest at 4%
     over the CTP rate(20.25% at Dec. 31,2000), due December, 2002. Unsecured.           --          92,495
                                                                                 --------------------------

     Total                                                                       $4,000,580      $5,477,956

     Less current portion                                                           318,443       4,176,934
                                                                                 --------------------------

          Total long-term debt                                                   $3,682,137      $1,301,022
                                                                                 --------------------------



                                     F - 11



CTI Industries Corporation and Subsidiaries

Notes to the Consolidated Financial Statements


Future Minimum principal payments for amounts outstanding under these long-term
debt agreements are as follows for the years ending December 31, 2001:

     2002                                     $   318,443
     2003                                         338,482
     2004                                         770,108
     2005                                          39,541
     2006                                       2,534,006
                                              -----------
                                              $ 4,000,580
                                              ===========

The agreements impose limitations on the Company with respect to dividends and
also contain a clause allowing for the subjective acceleration of amounts due
under the loan agreements in the event of material adverse changes.

7.   Stock Redemption

In March 1996, the Company entered into a Stock Redemption agreement with a
shareholder which was subsequently amended June 27, 1997. Under the amended
Stock Redemption Agreement, the Company has the right but not the obligation to
redeem up to 111,111 shares of Common Stock owned by the shareholder at the
price of $5.85 per share at any time through January 31, 1998. Commencing March
1, 1998 through February 28, 2000, the Company is obligated to redeem shares at
$5.85 per share. The number of shares required to be redeemed quarterly is based
on the sum of (i) an amount equal to 2% of the Company's pretax profits each
fiscal quarter (beginning with the quarter ended February 28, 1998) and (ii) an
amount equal to 2% (but not to exceed $3,000) of the amount that latex and
metalized balloon revenues exceed $1.3 million in any month. The company also
has the right to redeem additional shares of Common Stock from the shareholder
during this period at $5.85 per share, provided total number of shares subject
to redemption under the Stock Redemption Agreement does not exceed 111,111.
Redeemable Common Stock has been reflected as a liability with a contra equity
account on the balance sheet. As of December 31, 2000, the obligation to redeem
shares had expired, and 40,444 shares of Common Stock were redeemed under the
Stock Redemption Agreement.

8.   Income Taxes

The income tax provisions are comprised of the following:

                                               Dec. 31, 2001       Dec. 31, 2000
                                               -------------       -------------
Current:
  Federal                                        $       --          $      --
  State                                                  --                 --
  Foreign                                            22,316             84,917
                                          -------------------------------------
                                                     22,316             84,917

Deferred:
  Federal                                           199,340                 --
  State                                                  --                 --
  Foreign                                            54,897             21,993
                                          -------------------------------------

                                                                        21,933
                                                    254,237
                                          -------------------------------------

Total income tax provision                       $  276,553          $ 106,910
                                          =====================================


                                     F - 12



CTI Industries Corporation and Subsidiaries

Notes to the Consolidated Financial Statements


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



                                                                   2001         2000
                                                                      
     Deferred tax assets:
       Allowance for doubtful accounts                        $   141,915   $  112,400
       Inventory valuation                                        196,092      142,600
       Accrued liabilities                                        192,870      167,900
       Cash basis of foreign inventory purchases                 (396,974)    (357,200)
       Net operating loss carryforwards                         1,760,106    1,910,300
       Alternative minimum tax credit carryforwards               338,600      381,300
                                                              ------------  -----------

        Total deferred tax assets                               2,232,609    2,357,300


     Deferred tax liabilities:
       Book over tax basis of capital assets                      841,626      767,709
                                                              ------------  -----------

                                                                1,390,983    1,589,591

     Less:  Valuation allowance                                  (738,600)    (711,300)
                                                              ------------  -----------

         Net deferred tax asset                               $   652,383   $  878,291
                                                              ============  ===========


The Company maintains a valuation allowance with respect to deferred tax assets
as a result of the uncertainty of ultimate realization. At December 31, 2001,
the Company has net operating loss carryforwards of approximately $4,200,000,
expiring in various years through 2021. In addition, the Company has
approximately $381,000 and $338,600 of alternative minimum tax credits as of
December 31, 2000 and 2001, respectively, which have no expiration date.
Unremitted earnings of foreign subsidiaries have been indefinitely reinvested.

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

                                      December 31, 2001      December 31, 2000
Taxes at statutory rate                  $  100,257              $ (291,300)
State income taxes                           22,115                 (41,300)
Increase in deferred tax
   Valuation allowance                       27,300                 214,900
Foreign tax on assets                          -                     42,700
Foreign taxes and other                     126,881                 181,910
                                         ----------              ----------

Income tax provision (benefit)           $  276,553              $  106,910
                                         ==========              ==========



                                     F - 13



CTI Industries Corporation and Subsidiaries

Notes to the Consolidated Financial Statements


9.   Research and Development

The Company conducts product development and research activities which includes
(i) creative product development, (ii) creative marketing, and (iii) engineering
development. During the year ended December 31, 2000, and the year ended
December 31, 2001, the Company estimates that the total amount spent on research
and development activities was approximately, $291,000 and $325,000,
respectively.

10.   Employee Benefit Plan

Effective January 1, 1993, the Company established a defined contribution plan
for substantially all employees. The plan provides for the Company matching
contributions on the first $300 of employee contributions with an additional
bonus match of 1% of compensation for all participants who are employees on the
last date of the plan year. Profit sharing contributions may also be made at the
discretion of the Board of Directors. Employer contributions to the plan totaled
$54,012 for the year ended December 31, 2000, and $57,160 for the year ended
December 31, 2001.

11.  Related Party Transactions

The Company obtains legal services from a law firm in which two shareholders of
the law firm are also shareholders of the Company, and in which one shareholder
of the law firm is both a director and a shareholder of the Company. Legal fees
incurred with this firm were $124,308 for the year ended December 31, 2000 and
$121,305 for the year ended December 31, 2001.

In 1998, the Company advanced funds totaling $81,352 to officers of the Company.
$56,456 of these funds were used to purchase common stock of the Company and is
reflected as a contra equity account at December 31, 2000 and 2001.

In November 1999, the Company sold one of its buildings to a related party. See
Note 14.


12.  Investment in Subsidiary

On January 26, 1998, the Company and CTI Mexico Corporation S.A. de C.V. ("CTI
Mexico") entered into an agreement under which (i) the Company subscribed for
45% of the outstanding capital stock of CTI Mexico for $800,000, (ii) the
Company loaned to CTI Mexico $850,000 collateralized by certain latex balloon
manufacturing equipment, and (iii) the 1995 equipment purchase agreement between
the parties was cancelled with respect to two pieces of latex balloon
manufacturing equipment, which were then leased to CTI Mexico. The purchase of
the capital stock was effective February 1, 1998. The Company accounted for the
investment using the equity method.

On November 12, 1999, the Company entered into an agreement to acquire
additional shares of CTI Mexico, bringing the Company's Common Stock ownership
to approximately 74%. The Company contributed to the capital of CTI Mexico


                                     F - 14



CTI Industries Corporation and Subsidiaries

Notes to the Consolidated Financial Statements


certain outstanding indebtedness of CTI Mexico to the Company in the amount of
$989,400, and certain equipment valued at $855,600, in exchange for capital
stock of CTI Mexico. The acquisition resulted in the recording of goodwill in
the amount of $1,216,704, which is being amortized over a period of 15 years. On
March 8, 2000, the Company acquired an additional 2% interest in CTI Mexico. The
new shares were purchased for $109,547, resulting in $83,250 of additional
goodwill.

Amortization expense of goodwill for the years ended December 31, 2000 and
December 31, 2001 was $86,664.

13.  Commitments and Contingencies

Operating Leases

The Company entered into a 10-year lease agreement for office and warehouse
facilities in November 1999. Approximately 50% of the facility is subleased
through March 2002. The Company's United Kingdom subsidiary also maintains a
lease for office and warehouse space which expires in 2019.

The Company leases office equipment under operating leases which expire on
various dates between May 2003 and December 2006.

The net lease expense was $338,213 for the year ended December 31, 2000, and
$269,643 for the year ended December 31, 2001.

The future aggregate minimum net lease payments under existing agreements as of
December 31, 2001 as follows:

                        Lease Payments        Sublease Income             Net

     2002               $   374,713            $    49,800           $   324,913
     2003                   365,390                     --               365,390
     2004                   294,323                     --               294,323
     2005                   285,257                     --               285,257
     2006                   285,257                     --               285,257
     Thereafter           1,263,825                     --             1,263,825

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:

               2002                            $   281,500
               2003                            $   147,500


                                     F - 15



CTI Industries Corporation and Subsidiaries

Notes to the Consolidated Financial Statements


14. Sales/Leaseback of Building

In November, 1999, the Company sold its building located next to its
headquarters in Barrington, Illinois for a gain of $300,467, and entered into an
agreement to lease back the facility. The building is owned by an entity in
which officers/shareholders of the Company have a controlling interest. The gain
realized on the sale was deferred and is being recognized into income over the
10 years lease term.

15.  Stock Options

On March 19, 1999, the Board of Directors approved for adoption, effective May
6, 1999, the 1999 Stock Option Plan ("Plan"). The Plan authorizes the grant of
options to purchase up to an aggregate of 133,333 shares of the Company's Common
Stock. As of December 31, 2001, 124,500 options had been granted under the 1999
Stock Option Plan. The options are exercisable immediately upon grant, and have
a term of ten years.

On April 12, 2001 the Board of Directors approved for adoption, effective
December 27, 2001, the 2001 Stock Option Plan ("Plan"). The Plan authorizes the
grant of options to purchase up to and an aggregate of 100,000 shares of the
Company's Common Stock. As of December 31, 2001, 92,000 options had been granted
under the 2001 Stock Option Plan. The options are exercisable immediately upon
grant and have a term of ten years.

Under the Company's 1997 Stock Option Plan (effective July 1, 1997), a total of
100,000 shares of Common Stock are reserved for issuance under the Stock Option
Plan. Options to purchase 83,000 shares of Common Stock have been granted as of
October 31, 1998, and remain outstanding at December 31, 2001. The options are
exercisable immediately upon grant and have a term of ten years. The Plan
provides for the award of options, which may either be incentive stock options
("ISOs") within the meaning of Section 422A of the Internal Revenue Code of
1986, as amended (the "Code") or non-qualified options ("NQOs") which are not
subject to special tax treatment under the Code. The Plan is administered by the
Board or a committee appointed by the Board (the "Administrator"). Officers,
directors, and employees of, and consultants to, the Company or any parent or
subsidiary corporation selected by the Administrator are eligible to receive
options under the Plan. Subject to certain restrictions, the Administrator is
authorized to designate the number of shares to be covered by each award, the
terms of the award, the date on which and the rates at which options or other
awards may be exercised, the method of payment and other terms.

The exercise price for ISOs cannot be less than the fair market value of the
stock subject to the option on the grant date (110% of such fair market value in
the case of ISOs granted to a stockholder who owns more than 10% of the
Company's Common Stock). The exercise price of a NQO shall be fixed by the
Administrator at whatever price the Administrator may determine in good faith.
Unless the Administrator determines otherwise, options generally have a 10-year
term (or five years in the case of ISOs granted to a participant owning more
than 10% of the total voting power of the Company's capital stock). Unless the
Administrator provides otherwise, options terminate upon the termination of a
participant's employment, except that the participant may exercise an option to
the extent it was exercisable on the date of termination for a period of time
after termination.

In September, 1998 the Company issued an option to purchase 10,000 shares of the
Company's Common Stock at an exercise price of $7.50 per share to Thornhill
Capital LLC in consideration for services. The option has a term of 10 years.

In December, 1996, certain members of company management were issued warrants to
purchase 76,923 shares of the Company's Common Stock at an exercise price of
$2.73 per share in consideration of their facilitating and guaranteeing a bank
loan to the Company in the amount of $6.3 million. The warrants have a term of
six years.


                                     F - 16



CTI Industries Corporation and Subsidiaries

Notes to the Consolidated Financial Statements


In June, 1997, the Company issued in a private placement notes in the principal
amount of $865,000, together with warrants to purchase up to 92,415 shares of
the Company's Common Stock at an exercise price of $9.36 per share. The warrants
had a term of five years.

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

In November 1999, warrants issued in June, 1997 to purchase up to 92,415 shares
of the Company's Common Stock for $9.36 were cancelled. New warrants to purchase
up to 423,579 shares of the Company's Common Stock at $1.688 were issued. The
new warrants expire on November 9, 2002.

In July, 2001, certain members of company management were issued warrants to
purchase 100,000 shares of the Company's Common Stock at an exercise price of
$1.78 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. The
warrants have a term of five years.

The following is a summary of the activity in the Company's stock option plans
and other options issued for the years ended December 31, 2000 and December 31,
2001.



                                                        Dec. 31, 2000   Dec. 31, 2001
                                                                  
Outstanding, beginning of period                          610,729         743,229
Granted                                                   132,500         192,000
Exercised                                                      --              --
Cancelled                                                      --         (25,667)
                                                      --------------- ---------------

Outstanding at the end of period                          743,229         909,562
                                                      =============== ===============

Weighted average exercise price per share
                                                        $    2.72       $    2.43
                                                      =============== ===============

Exercisable at end of period                              743,229         909,562
                                                      =============== ===============


At December 31, 2001, available options to grant were 8,000.

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

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


                                     F - 17



CTI Industries Corporation and Subsidiaries

Notes to the Consolidated Financial Statements


price paid upon exercise are the same, thus no compensation charges is required
to be recognized.

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

If compensation cost based on fair value method of the options had been used,
the Company's net income and earnings per common share (EPS) would have been as
follows for the years ended December 31:

                                                              2000         2001
                                                              ----         ----
   Net income (loss)         As reported                 $    (877)   $     (32)
                             Pro Forma                   $  (1,025)   $    (104)
   EPS                       As reported                 $   (0.73)   $   (0.03)
                             Pro Forma                   $   (0.85)   $   (0.09)

The pro forma effect of compensation cost based on the fair value method of the
warrants issued in 2000 and 2001 was not significant.

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

                                                  2000               2001
                                                --------           --------
   Expected life (years)                          10.0               7.5
   Volatility                                       20%               20%
   Risk-free interest rate                         6.1%              4.5%
   Dividend yield                                   --                --


The weighted average fair value of options granted during the years ending
December 31, 2000 and December 31, 2001 was $1.12 and $0.61 per share,
respectively. Significant option and warrant groups outstanding at December 31,
2000 and related weighted average price and remaining life information are as
follows:



                                                                             Remaining Life
  Grant Date         Outstanding         Exercisable        Exercise Price       (Years)
                                                                       
December 2001            92,000             92,000               $1.75             10
July 2001               100,000            100,000               $1.78             4
March 2000              124,500            124,500               $2.32             9
September 1998           78,000             78,000               $7.80             8
September 1997            5,000              5,000               $7.71             7
September 1999           16,026             16,026               $1.69             4
November 1999           423,579            423,579               $1.69             1
December 1996            70,457             70,457               $2.73             2



16.  Stock Split

On November 4, 1999, a one-for-three reverse stock split became effective. As a
result of the reverse stock split, every three shares of the Company's Common


                                     F - 18



CTI Industries Corporation and Subsidiaries

Notes to the Consolidated Financial Statements


Stock were reclassified and changed into one share of the Company's Common Stock
with a new par value of $.195 per share, and every three shares of the Company's
Class B Common Stock were reclassified and changed into one share of the
Company's Class B Common Stock, with a new par value of $2.73 per share. The
information presented in these financial statements has been restated to reflect
the effect of the reverse split.

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.

Earnings per share for the years ended December 31, 2000, and December 31, 2001
was computed as follows:


                                            Year ended           Year Ended
                                         December 31, 2000    December 31, 2001

         BASIC
Average shares outstanding:
  Weighted average shares
   Outstanding during period                   1,207,944            1,207,944

Earnings:
  Net loss                                   $  (876,960)         $   (32,377)

Amount for per share
  Computation                                $  (876,960)         $   (32,377)
                                             ===========          ===========

Net loss applicable to
    Common shares                            $     (0.73)         $     (0.03)
                                             ===========          ===========

        DILUTED
Average shares outstanding:
  Weighted average shares
    Outstanding                                1,207,944            1,207,944
  Common stock equivalents
    (options/warrants)                                --                   --
                                             -----------          -----------
Weighted average shares
   Outstanding during period                   1,207,944            1,207,944

Earnings:
  Net loss                                   $  (876,960)         $   (32,377)

Amount for per share
  Computation                                $  (876,960)         $   (32,377)
                                             ===========          ===========

Net loss applicable to
    Common shares                            $     (0.73)         $     (0.03)
                                             ===========          ===========


                                     F - 19


18.  Geographic Segment Data

The Company's operations consist of a business segment which designs,
manufactures, and distributes balloon products. Transfers between geographic
areas were primarily at cost. The Company's subsidiaries have assets consisting
primarily of trade accounts receivable, inventory and machinery and equipment.
Sales and selected financial information by geographic area for the periods
ended December 31, 2000, and December 31, 2001 are as follows:



                                United States       United Kingdom        Mexico         Eliminations       Consolidated
                                                                                            
Year ended 12/31/00
Revenues                        $  19,132,267       $   2,030,685      $ 5,162,131      $ (3,346,966)      $  22,978,117
Operating income (loss)               326,986             177,340         (310,019)           18,687             212,994
Net income (loss)                    (546,192)            144,898         (380,170)          (95,496)           (876,960)
Total Assets                    $  18,881,026       $     723,178      $ 4,849,095      $ (2,234,509)      $  22,218,790

Year ended 12/31/01
Revenues                        $  24,706,305       $   1,672,672      $ 5,940,039      $ (4,872,522)      $  27,446,494
Operating income (loss)             1,323,067              66,594          128,002          (267,739)          1,249,924
Net income (loss)                      95,534              49,697           46,451          (224,056)            (32,377)
Total Assets                    $  20,354,875       $     620,228      $ 5,785,584      $ (2,096,462)      $  24,664,225



                                     F - 20