CTI INDUSTRIES CORP (Form: 10-Q, Received: 08/14/2012 15:32:36)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
OR
¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________to_________

Commission File Number

000-23115

CTI INDUSTRIES CORPORATION

(Exact name of Registrant as specified in its charter)

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

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

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

The number of shares outstanding of the Registrant’s common stock as of August 1, 2012 was 3,213,146.

INDEX

Part I – Financial Information

Item No. 1	Financial Statements
	Condensed Consolidated Interim Balance Sheet at June 30, 2012
	(unaudited) and December 31, 2011	1
	Condensed Consolidated Interim Statements of Operations and
	Comprehensive Income (unaudited) for the three and six months ended
	June 30, 2012 and June 30, 2011	2
	Condensed Consolidated Interim Statements of Cash Flows (unaudited) for
	the three and six months ended June 30, 2012 and June 30, 2011	3
	Condensed Consolidated Interim Earnings per Share (unaudited)
	for the three and six months ended June 30, 2012
	and June 30, 2011	4
	Notes to Condensed Consolidated Financial Statements (unaudited)	5
Item No. 2	Management’s Discussion and Analysis of
	Financial Condition and Results of Operations	14
Item No. 3	Quantitative and Qualitative Disclosures Regarding Market Risk	20
Item No. 4	Controls and Procedures	20

Part II – Other Information

Item No. 1	Legal Proceedings	21
Item No. 1A	Risk Factors	21
Item No. 2	Unregistered Sales of Equity Securities and Use of Proceeds	21
Item No. 3	Defaults Upon Senior Securities	21
Item No. 4	Submission of Matters to a Vote of Security Holders	21
Item No. 5	Other Information	21
Item No. 6	Exhibits	22
	Signatures
	Exhibit 10.1
	Exhibit 10.2
	Exhibit 10.3
	Exhibit 10.4
	Exhibit 10.5
	Exhibit 31.1
	Exhibit 31.2
	Exhibit 32

PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

CTI Industries Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

	June 30, 2012			December 31, 2011
ASSETS		(unaudited)
Current assets:
Cash and cash equivalents (VIE $17,000 and $11,000, respectively)	$	261,148		$	338,523
Accounts receivable, (less allowance for doubtful accounts of $66,000		5,673,609			7,091,194
and $70,000, respectively)
Inventories, net		13,794,047			13,338,317
Net deferred income tax asset		806,906			760,241
Prepaid expenses (VIE $11,000 and $10,000)		1,173,206			1,345,223
Other current assets (VIE $87,000 and $83,000)		521,157			427,471

Total current assets		22,230,073			23,300,969

Property, plant and equipment:
Machinery and equipment		24,503,146			24,333,989
Building		3,329,174			3,329,174
Office furniture and equipment		3,040,536			3,022,719
Intellectual property		432,070			432,070
Land		250,000			250,000
Leasehold improvements		423,714			415,663
Fixtures and equipment at customer locations		2,784,419			2,629,902
Projects under construction		766,524			502,021
		35,529,583			34,915,538
Less : accumulated depreciation and amortization		(26,949,841	)		(26,071,629	)

Total property, plant and equipment, net		8,579,742			8,843,909

Other assets:
Deferred financing costs, net		27,579			42,986
Goodwill		1,033,077			1,033,077
Net deferred income tax asset		69,009			197,243
Other assets, due from related party $81,000 and $79,000, respectively		220,243			197,338

Total other assets		1,349,908			1,470,644

TOTAL ASSETS	$	32,159,723		$	33,615,522

LIABILITIES AND EQUITY
Current liabilities:
Checks written in excess of bank balance	$	1,236,430		$	154,501
Trade payables		4,990,632			6,359,757
Line of credit		6,390,584			7,298,363
Notes payable - current portion (VIE $94,000 and $91,000, respectively)		510,181			362,927
Notes payable - officers, current portion		1,127,614			1,424,923
Notes Payable Affiliates - current portion		7,389			6,718
Accrued liabilities		2,221,277			2,081,805

Total current liabilities		16,484,107			17,688,994

Long-term liabilities:
Notes Payable - Affiliates		130,496			134,919
Notes payable, net of current portion (VIE $638,000 and $687,000, respectively)		3,624,994			3,932,032
Capital Lease		-			426
Notes payable - officers, subordinated		105,033			103,656
Total long-term liabilities		3,860,523			4,171,033

Equity:
CTI Industries Corporation stockholders' equity:
Preferred Stock -- no par value 2,000,000 shares authorized
0 shares issued and outstanding		-			-
Common stock - no par value, 5,000,000 shares authorized,
3,285,273 and 3,276,633 shares issued and 3,213,146 and 3,137,348
outstanding, respectively		13,704,890			13,704,890
Paid-in-capital		996,612			950,968
Accumulated deficit		(57,040	)		(368,122	)
Accumulated other comprehensive loss		(2,584,872	)		(2,285,679	)
Less: Treasury stock, 72,127 shares		(141,289	)		(141,289	)

Total CTI Industries Corporation stockholders' equity		11,918,301			11,860,768

Noncontrolling interest		(103,208	)		(105,273	)

Total Equity		11,815,093			11,755,495

TOTAL LIABILITIES AND EQUITY	$	32,159,723		$	33,615,522

See accompanying notes to condensed consolidated unaudited financial statements

CTI Industries Corporation and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2012			2011			2012			2011

Net Sales	$	11,816,448		$	11,964,764		$	25,623,592		$	24,662,419

Cost of Sales		9,463,198			9,894,922			20,175,271			20,121,805

Gross profit		2,353,250			2,069,842			5,448,321			4,540,614

Operating expenses:
General and administrative		1,538,785			1,349,726			2,871,078			2,679,680
Selling		410,670			206,521			822,240			420,776
Advertising and marketing		391,052			363,883			899,497			692,016

Total operating expenses		2,340,507			1,920,130			4,592,815			3,792,472

Income from operations		12,743			149,712			855,506			748,142

Other (expense) income:
Interest expense		(172,538	)		(147,958	)		(359,061	)		(289,193	)
Interest income		5,536			3,923			11,071			5,952
Foreign currency gain		5,680			15,150			7,906			26,268

Total other expense, net		(161,322	)		(128,885	)		(340,084	)		(256,973	)

Net (Loss) Income before taxes		(148,579	)		20,827			515,422			491,169

Income tax (benefit) expense		(52,656	)		35,472			202,275			240,901

Net (loss) income		(95,923	)		(14,645	)		313,147			250,268

Less: Net (loss) gain attributable to noncontrolling interest		(18,375	)		(28,000	)		2,066			(60,195	)

Net (loss) income attributable to CTI Industries Corporation	$	(77,548	)	$	13,355		$	311,081		$	310,463

Other Comprehensive (loss) Income
Foreign currency adjustment		(457,369	)	$	(57,923	)	$	(299,193	)	$	394,708
Comprehensive (loss) income	$	(534,917	)	$	(44,568	)	$	11,888		$	705,171

Basic (loss) income per common share	$	(0.02	)	$	0.00		$	0.10		$	0.10

Diluted (loss) income per common share	$	(0.02	)	$	0.00		$	0.10		$	0.10

Weighted average number of shares and equivalent shares
of common stock outstanding:
Basic		3,207,244			3,137,848			3,205,875			3,137,842

Diluted		3,240,559			3,187,779			3,238,795			3,193,213

See accompanying notes to condensed consolidated unaudited financial statements

CTI Industries Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

	For the Six Months Ended June 30,
	2012			2011

Cash flows from operating activities:
Net income	$	313,147		$	250,268
Adjustment to reconcile net income to cash
provided by operating activities:
Depreciation and amortization		839,181			925,100
Amortization of debt discount		-			5,042
Change in value of swap agreement		158,090			-
Stock based compensation		43,884			70,006
Provision for losses on accounts receivable		(2,406	)		5,773
Provision for losses on inventories		177,441			54,577
Deferred income taxes		81,569			72,752
Change in assets and liabilities:
Accounts receivable		1,490,193			763,223
Inventories		(540,864	)		(1,209,154	)
Prepaid expenses and other assets		77,408			(373,611	)
Trade payables		(1,412,614	)		678,337
Accrued liabilities		(482,299	)		(167,919	)

Net cash provided by operating activities		742,730			1,074,394


Cash used in investing activities - purchases of property, plant and equipment		(526,511	)		(545,473	)

Cash flows from financing activities:
Change in checks written in excess of bank balance		1,081,776			364,703
Net change in revolving line of credit		(913,864	)		(1,433,108	)
Proceeds from issuance of long-term debt		-			679,734
Repayment of long-term debt (related parties $298,000 and $268,000)		(470,126	)		(438,457	)
Proceeds from exercise of stock options and warrants		1,760			2,335

Net cash used in financing activities		(300,454	)		(824,793	)

Effect of exchange rate changes on cash		6,860			27,557

Net increase in cash and cash equivalents		(77,375	)		(268,315	)

Cash and cash equivalents at beginning of period		338,523			761,874

Cash and cash equivalents at end of period	$	261,148		$	493,559


Supplemental disclosure of cash flow information:
Cash payments for interest	$	535,516		$	247,901

Cash payments for taxes	$	5,000		$	42,250


Supplemental Disclosure of non-cash investing and financing activity
Property, Plant & Equipment acquisitions funded by liabilities	$	34,054		$	82,591

Reclassification of line of credit to long-term debt	$	-		$	700,000

See accompanying notes to condensed consolidated unaudited financial statements

CTI Industries Corporation and Subsidiaries

Condensed Consolidated Earnings per Share (unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
	2012			2011		2012		2011
Basic
Average shares outstanding:
Weighted average number of common shares outstanding		3,207,244			3,137,848		3,205,875		3,137,842

Net income:
Net (loss) income attributable to CTI Industries Corporation	$	(77,548	)	$	13,355	$	311,081	$	310,463


Per share amount	$	(0.02	)	$	0.00	$	0.10	$	0.10


Diluted
Average shares outstanding:
Weighted average number of common shares outstanding		3,207,244			3,137,848		3,205,875		3,137,842


Effect of dilutive shares		33,315			49,931		32,920		55,371

Weighted average number of shares and
equivalent shares of common stock outstanding		3,240,559			3,187,779		3,238,795		3,193,213

Net income:
Net (loss) income attributable to CTI Industries Corporation	$	(77,548	)	$	13,355	$	311,081	$	310,463

Per share amount	$	(0.02	)	$	0.00	$	0.10	$	0.10

See accompanying notes to condensed consolidated unaudited financial statements

CTI Industries Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1 - Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited but in the opinion of management contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to present fairly the consolidated financial position and the consolidated results of operations and consolidated cash flows for the periods presented in conformity with generally accepted accounting principles for interim consolidated financial information and the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2012. It is suggested that these condensed financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2011.

Principles of consolidation and nature of operations:

The condensed consolidated financial statements include the accounts of CTI Industries Corporation and its wholly-owned subsidiaries, CTI Balloons Limited, CTI Helium, Inc. and CTF International S.A. de C.V., its majority-owned subsidiaries CTI Mexico S.A. de C.V., Flexo Universal, S.A. de C.V. and CTI Europe gmbH, as well as the accounts of Venture Leasing S. A. de R. L. and Venture Leasing L.L.C (the “Company”). The last two entities have been consolidated as variable interest entities. All significant intercompany transactions and accounts have been eliminated in consolidation. The Company (i) designs, manufactures and distributes 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.

Variable Interest Entities (“VIE’s”):

The determination of whether or not to consolidate a variable interest entity under U.S. GAAP requires a significant amount of judgment concerning the degree of control over an entity by its holders of variable interest. To make these judgments, management has conducted an analysis of the relationship of the holders of variable interest to each other, the design of the entity, the expected operations of the entity, which holder of variable interests is most “closely associated” to the entity and which holder of variable interests is the primary beneficiary required to consolidate the entity. Upon the occurrence of certain events, management reviews and reconsiders its previous conclusion regarding the status of an entity as a variable interest entity. Upon the adoption of amended accounting guidance applicable to variable interest entities on January 1, 2010, management continually reconsiders whether the Company is deemed to be a variable interest entity’s primary beneficiary who consolidates such entity. There are two entities that have been consolidated as variable interest entities.

Use of estimates:

In preparing condensed consolidated 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, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amount of revenue and expenses during the reporting period in the condensed consolidated financial statements and accompanying notes. Actual results may differ from those estimates. The Company’s significant estimates include reserves for doubtful accounts, reserves for the lower of cost or market of inventory, reserves for deferred tax assets and recovery value of goodwill.

Earnings per share:

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during each period.

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

As of June 30, 2012 and 2011, shares to be issued upon the exercise of options aggregated 148,000 and 206,000, respectively. The number of anti-dilutive shares (not included in the determination of earnings on a diluted basis) for the three and six months ended June 30, 2012 and 2011, were 83,000 and 81,500, respectively, all of which were represented by options.

New Accounting Pronouncements:

The Company’s significant accounting policies are summarized in Note 2 of the Company’s consolidated financial statements for the year ended December 31, 2011. There were no significant changes to these accounting policies during the three and six months ended June 30, 2012.

In June 2011, the Financial Accounting Standards Board (FASB) issued an amendment on the presentation of other comprehensive income. Under this amendment, entities will be required to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or two separate but consecutive statements. The current option to report other comprehensive income and its components in the statement of changes in equity has been eliminated. This amendment was effective for the Company for interim periods beginning after December 15, 2011, and retrospective application is required. The Company adopted this guidance in the first quarter of 2012 and has used a single continuous statement approach.

In May 2011, the FASB issued amended guidance on fair value measurement and related disclosures. The new guidance clarified the concepts applicable for fair value measurement of non-financial assets and requires the disclosure of quantitative information about the unobservable inputs used in a fair value measurement. This guidance was effective for the Company in the first quarter of 2012, and will be applied prospectively. This amendment did not have a material impact on the Company’s financial statements.

In September 2011, the FASB issued Accounting Standards Update No. 2011-08 (“ASU 2011-08”) Intangibles – Goodwill and Other (Topic 350). Under ASU 2011-08, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test. Under ASU 2011-08, an entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of ASU 2011-08 in the three and six months ended June 30, 2012 did not have a material impact on our financial statements or related disclosures.

Note 2 - Stock-Based Compensation; Changes in Equity

We have adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718 which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the condensed consolidated financial statements based on their grant-date fair values.

We have applied the Black-Scholes model to value stock-based awards. That model incorporates various assumptions in the valuation of stock-based awards relating to the risk-free rate of interest to be applied, the estimated dividend yield and expected volatility of our common stock. The risk-free rate of interest is the related U.S. Treasury yield curve for periods within the expected term of the option at the time of grant. The dividend yield on our common stock is estimated to be 1.14%. The expected volatility is based on historical volatility of the Company’s common stock.

The Company, at the discretion of the board, may issue options in excess of the total available, if options related to that stock plan are cancelled. In some cases, not all shares that are available to a stock plan are issued, as the Company is unable to issue options to a previous plan when a new plan is in place.

The Company’s net income for the three months ended June 30, 2012 and 2011 includes approximately $22,000 and $35,000, respectively of compensation costs related to share based payments. The Company’s net income for the six months ended June 30, 2012 and 2011 includes approximately $44,000 and $70,000, respectively of compensation costs related to share based payments. As of June 30, 2012 there is $153,000 of unrecognized compensation expense related to non-vested stock option grants and stock grants. We expect approximately $44,000 to be recognized over the remainder of 2012, $59,000 to be recognized during 2013, and $41,000 to be recognized during 2014, and $9,000 to be recognized during 2015.

As of June 30, 2012, the Company had four stock-based compensation plans pursuant to which stock options were, or may be, granted. The Plans provide for the award of options, which may either be incentive stock options (“ISOs”) within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended (the “Code”) or non-qualified options (“NQOs”) which are not subject to special tax treatment under the Code as well as for stock grants.

On April 12, 2001, the Board of Directors approved for adoption, effective December 27, 2001, the 2001 Stock Option Plan (“2001 Plan”). The 2001 Plan authorizes the grant of options to purchase up to an aggregate of 119,050, shares of the Company’s Common Stock. As of June 30, 2012 , 139,958 shares (including cancelled shares re-issued under the Plan) have been granted and were fully vested at the time of grant. Options to purchase 7,500 remain outstanding.

On April 24, 2002, the Board of Directors approved for adoption, effective October 12, 2002, the 2002 Stock Option Plan (“2002 Plan”). The 2002 Plan authorizes the grant of options to purchase up to an aggregate of 142,860 shares of the Company’s Common Stock . As of June 30, 2012, 123,430 shares have been granted and were fully vested at the time of grant and 27,500 remain outstanding.

On April 30, 2007, the Board of Directors approved for adoption, effective October 1, 2007, the 2007 Stock Option Plan (“2007 Plan”). The 2007 Plan authorizes the grant of options to purchase up to an aggregate of 150,000 shares of the Company’s Common Stock . As of June 30, 2012, 165,750 options (including cancelled shares re-issued under the Plan) had been granted and 32,500 remain outstanding.

On April 10, 2009, the Board of Directors approved for adoption, and on June 5, 2009, the shareholders of the Corporation approved, a 2009 Stock Incentive Plan (“2009 Plan”). The 2009 Plan authorizes the issuance of up to 250,000 shares of stock or options to purchase stock of the Company. As of June 30, 2012, 82,000 options had been granted and 80,500 remain outstanding. During the second quarter 2012, 1,000 options were cancelled.

A summary of the Company’s stock option activity and related information is as follows:

	Shares under Option		Weighted Average Exercise Price		Weighted Average Contractual Life		Aggregate Intrinsic Value
Balance at December 31, 2011		162,500	$	4.25
Granted		-		-
Cancelled		1,000		1.92
Exercised		13,500		5.97
Outstanding at June 30, 2012		148,000	$	4.45		2.80	$	167,446

Exercisable at June 30, 2012		72,875	$	2.73		2.10	$	167,446

A summary of the Company’s stock option activity by grant date as of June 30, 2012 is as follows:

	Options Outstanding				Options Vested
Options by Grant Date	Shares	Weighted Avg.	Remain. Life	Intrinsic Val	Shares	Weighted Avg.	Remain. Life	Intrinsic Val
Dec 2005	35,000	$ 2.88	3.5	$ 72,450	35,000	$ 2.88	3.8	$ 72,450
Oct 2008	2,500	4.97	0.3	-	2,500	4.97	0.3	-
Nov 2008	30,000	1.78	0.4	94,996	30,000	1.78	0.4	94,996
Dec 2010	72,500	6.14	3.5	-	5,375	5.97	3.5	-
Jan 2011	8,000	5.96	3.5	-	-	-	-	-
TOTAL	148,000	$ 4.45	2.8	$ 167,446	72,875	$ 2.73	2.1	$ 167,446

The aggregate intrinsic value in the tables above represents the total pre-tax intrinsic value (the difference between the closing price of the Company’s common stock on the last trading day of the quarter ended June 30, 2012 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all the holders exercised their options on June 30, 2012.

On July 8, 2011, the Company declared a dividend of five cents $0.05 per share on the Company’s outstanding common stock to shareholders of record on July 18, 2011. The total amount of the dividends paid on July 28, 2011 was $158,000. Under the terms of its current loan agreement, the amount of dividends the Company may pay is limited by the terms of the financial covenants of our Credit Agreement with Harris N.A.

Note 3 - Legal Proceedings

The Company is party to certain claims or actions arising in the normal course of business. The ultimate outcome of these matters is unknown but, in the opinion of management, the resolution of these matters is not expected to have a significant effect on the future financial position or results of operations of the Company.

Note 4 - Other Comprehensive Loss

In the three and six months ended June 30, 2012 the company had a comprehensive loss of $457,000 and $299,000, all from foreign currency translation adjustments.

The following table sets forth the accumulated balance of other comprehensive loss and each component.

	Foreign Currency Items			Accumulated Other Comprehensive (Loss)

Beginning balance as of January 1, 2012	$	(2,286,000	)	$	(2,286,000	)

Current period change, net of tax		(299,000	)		(299,000	)

Ending Balance as of June 30, 2012	$	(2,585,000	)	$	(2,585,000	)

For the three and six months ended June 30, 2012 no tax benefit for foreign currency translation adjustments has been recorded as such amounts would result in a deferred tax asset.

Note 5 - Inventories, Net

	June 30, 2012			December 31, 2011
Raw materials	$	2,749,000		$	3,027,000
Work in process		1,257,000			1,503,000
Finished goods		10,349,000			9,193,000
Allowance for excess quantities		(561,000	)		(384,000	)
Total inventories	$	13,794,000		$	13,339,000

Note 6 - Geographic Segment Data

The Company has determined that it operates primarily in one business segment which designs, manufactures and distributes film products for use in packaging, storage and novelty balloon products. The Company operates in foreign and domestic regions. Information about the Company's operations by geographic areas is as follows:

	Net Sales to Outside Customers				Net Sales to Outside Customers
	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011

United States		$ 8,556,000	$	8,715,000	$	18,546,000	$	18,149,000
Europe		194,000		134,000		315,000		202,000
Mexico		2,684,000		2,664,000		5,647,000		5,064,000
United Kingdom		382,000		452,000		1,116,000		1,247,000

		$ 11,816,000	$	11,965,000	$	25,624,000	$	24,662,000

	Total Assets at
	June 30,		December 31,
	2012		2011

United States	$	23,190,000	$	25,302,000
Europe		766,000		464,000
Mexico		7,317,000		7,116,000
United Kingdom		886,000		734,000

	$	32,159,000	$	33,616,000

Note 7 - Concentration of Credit Risk

Concentration of credit risk with respect to trade accounts receivable is generally limited due to the number of entities comprising the Company's customer base. The Company performs ongoing credit evaluations and provides an allowance for potential credit losses against the portion of accounts receivable which is estimated to be uncollectible. Such losses have historically been within management's expectations. During the three and six months ended June 30, 2012, there was one customer whose purchases represented more than 10% of the Company’s consolidated net sales. During the three and six months ended June 30, 2011, there were two customers whose purchases represented more than 10% of the Company’s consolidated net sales. Sales to the top customers for the three and six months ended June 30, 2012 and 2011 are as follows:

	Three Months Ended				Three Months Ended
	June 30, 2012				June 30, 2011
Customer	Net Sales		% of Net Sales		Net Sales		% of Net Sales
Customer A	$	3,581,000		30.3%	$	3,549,000		29.7%
Customer B		N/A		N/A	$	1,563,000		13.1%

	Six Months Ended				Six Months Ended
	June 30, 2012				June 30, 2011
Customer	Net Sales		% of Net Sales		Net Sales		% of Net Sales
Customer A	$	7,335,000		28.6%	$	7,433,000		30.1%
Customer B		N/A		N/A	$	3,196,000		13.0%

As of June 30, 2012, the total amount owed to the Company by our largest customer was $972,000 or 17.1% of the Company’s consolidated accounts receivables. The amounts owed at June 30, 2011 by our two largest customers were $1,717,000 or 21.7% and $1,113,000 or 14.1% of the Company’s consolidated net accounts receivables, respectively.

Note 8 - Related Party Transactions

Stephen M. Merrick, Executive Vice President, Secretary and a Director of the Company, is of counsel to the law firm of Vanasco Genelly and Miller PC which provides legal services to the Company. Legal fees paid by the Company with this firm for the three months ended June 30, 2012 and 2011, respectively, were $54,000 and $46,000. Legal fees paid by the Company with this firm for the six months ended June 30, 2012 and 2011, respectively, were $70,000 and $86,000.

John H. Schwan, Chairman of the Company, is a principal of Shamrock Specialty Packaging and affiliated companies. The Company made payments for packaging materials, rent and temporary employees supplied by Shamrock of approximately $710,000 during the three months ended June 30, 2012 and $531,000 during the three months ended June 30, 2011. The Company made payments for packaging materials, rent and temporary employees supplied by Shamrock of approximately $1,560,000 during the six months ended June 30, 2012 and $1,050,000 during the six months ended June 30, 2011. At June 30, 2012 and 2011, outstanding accounts payable balances were $529,000 and $474,000, respectively.

Interest payments have been made to John H. Schwan and Stephen M. Merrick for loans made to the Company. During the three months ended June 30, 2012 these interest payments totaled $20,000. For the three months ended June 30, 2011 these interest payments totaled $27,000. During the six months ended June 30, 2012 these interest payments totaled $45,000. For the six months ended June 30, 2011 these interest payments totaled $59,000.

On July 1, 2011, Flexo Universal, S.A. de C.V. (“Flexo”) entered into a lease agreement with Venture Leasing S.A. de R.L. (“Venture Leasing Mexico”) for the lease of balloon production equipment financed and owned by Venture Leasing Mexico and used by Flexo for the production of latex balloons. Venture Leasing Mexico is wholly owned by entities owned by John H. Schwan, Chairman of the Company and Stephen M. Merrick, Chief Financial Officer of the Company. Venture Leasing Mexico and Venture Leasing L.L.C., also owned by entities owned by Mr. Schwan and Mr. Merrick, are deemed variable interest entities and are consolidated with the accounts of the Company. During the three and six months ended June 30, 2012, Flexo made lease payments to Venture Leasing Mexico totaling $39,000 and $78,000, respectively.

Note 9 - Derivative Instruments; Fair Value

The following table represents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2012, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

	Amount as of
Description	6/30/2012			Level 1		Level 2			Level 3

Interest Rate Swap 2011	$	(5,000	)	$	-	$	(5,000	)	$	-

	$	(5,000	)	$	-	$	(5,000	)	$	-

The Company is exposed to certain market risks including the effect of changes in interest rates. The Company uses derivative instruments to manage financial exposures that occur in the normal course of business. It does not hold or issue derivatives for speculative trading purposes. The Company is exposed to non-performance risk from the counterparties in its derivative instruments. This risk would be limited to any unrealized gains on current positions. To help mitigate this risk, the Company transacts only with counterparties that are rated as investment grade or higher and all counterparties are monitored on a continuous basis. The fair value of the Company’s derivatives reflects this credit risk.

On July 1, 2011, we entered into a swap agreement with BMO Capital Markets with respect to $6,780,000 of our loan balances with Harris. This swap agreement limits the Company’s exposure to interest rate fluctuations on the Company’s floating rate loans. The swap agreement has the effect of fixing the interest rate on the loan balances covered by the swap at 4.65% per annum. The swap agreement is a derivative financial instrument and we determine and record the fair market value of the swap agreement each quarter. The value is recorded on the balance sheet of the Company and the amount of the unrealized gain or loss for each period is recorded as interest income or expense.

Fair Values of Derivative Instruments in the Statement of Financial Position
		Liability Derivatives
As of	June 30	2012
	Derivatives not designated as hedging instruments under ASU 815	Balance Sheet Location	Fair Value
	Interest Rate Contracts	Accrued Liabilities	$ (5,000)

The Effect of Derivative Instruments on the Statement of Financial Performance
for the 3 month
period ending	June 30	2012
	Derivatives not Designated as Hedging Instruments under ASU 815	Location of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative
	Interest Rate Contracts	Interest Expense	$ * (16,000)
*Includes interest of $20,000 associated with variances between fixed and variable rates.

for the 6 month
period ending	June 30	2012
	Derivatives not Designated as Hedging Instruments under ASU 815	Location of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative
	Interest Rate Contracts	Interest Expense	$ * (51,000)
*Includes interest of $39,000 associated with variances between fixed and variable rates.

Note 10 - Subsequent Event

On July 17, 2012, the Company entered into Amendment Number 3 to the Credit Agreement among the Company and BMO Harris Bank N.A. (“BMO Harris”) pursuant to which (i) the amount of the loan commitment on the revolver loan of BMO Harris was increased from $9 million to $12 million, (ii) BMO Harris consented to a transaction among the Company and BMO Private Equity (U.S.), Inc. (“BMO Equity”) and (iii) the term of credit and loans to the Company provided in the Credit Agreement and BMO Harris was extended to July 17, 2017.

Also, on July 17, 2012, the Company entered into a Note and Warrant Purchase Agreement with BMO Equity pursuant to which (i) BMO Equity advanced to the Company the sum of $5 million and (ii) the Company issued to BMO Equity a warrant to purchase up to Four Percent (4%) of the outstanding shares of common stock of the Company on a fully-diluted basis (140,048 shares of common stock of the Company} at the price of One Cent ($0.01) per share. The term of the loan provided for in this Agreement is five and a half years. Interest is payable on the outstanding balance of the loan at the rate of 11.5% per annum.

The Note and Warrant Purchase Agreement includes provisions for:

(i)

a closing fee of $100,000

(ii)

payment of the principal amount in five and a half years with optional prepayment subject to certain prepayment premiums;

(iii)

security for the note obligations in all assets of the Company junior to the security interest of BMO Harris;

(iv)

various representations and warranties and covenants of the Company;

(v)

financial covenants including an applicable senior leverage ratio, fixed charge coverage ratio and tangible net worth amount.

Management believes that the funds provided by this new financing arrangement as well as internally generated funds will be sufficient for the Company to meet its working capital needs for at least the next 12 months.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

This quarterly report includes both historical and “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations and projections about future results. Words such as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or similar words are intended to identify forward-looking statements, although not all forward-looking statements contain these words. Although we believe that our opinions and expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements, and our actual results may differ substantially from the views and expectations set forth in this quarterly report on Form 10-Q. We disclaim any intent or obligation to update any forward-looking statements after the date of this quarterly report to conform such statements to actual results or to changes in our opinions or expectations.

Overview

We produce film products for novelty, packaging and container applications. These products include metalized balloons, latex balloons and related latex toy products, films for packaging and custom product applications, and flexible containers for packaging and consumer storage applications. We produce all of our film products for packaging and container applications at our plant in Lake Barrington, Illinois. We produce all of our latex balloons and latex products at our facility in Guadalajara, Mexico. Substantially all of our film products for packaging and custom product applications are sold to customers in the United States. We market and sell our novelty items and flexible containers for consumer use in the United States, Mexico, Latin America, and Europe.

Results of Operations

Net Sales . For the three months ended June 30, 2012, net sales were $11,816,000 compared to net sales of $11,965,000 for the same period of 2011, a decrease of 1.2%. For the quarters ended June 30, 2012 and 2011, net sales by product category were as follows:

	Three Months Ended
	June 30, 2012				June 30, 2011
	$		% of		$		% of
Product Category	(000) Omitted		Net Sales		(000) Omitted		Net Sales

Metalized Balloons		5,513		47%		5,578		47%

Pouches		1,682		14%		1,707		14%

Latex Balloons		2,837		24%		2,725		23%

Film Products		1,182		10%		1,606		13%

Other		602		5%		349		3%

Total		11,816		100%		11,965		100%

For the six months ended June 30, 2012, net sales were $25,624,000 compared to net sales of $24,662,000 for the same period of 2011, an increase of 3.9%. For the six months ended June 30, 2012 and 2011, net sales by product category were as follows:

	Six Months Ended
	June 30, 2012				June 30, 2011
	$		% of		$		% of
Product Category	(000) Omitted		Net Sales		(000) Omitted		Net Sales

Metalized Balloons		12,465		49%		11,977		48%

Pouches		3,612		14%		3,861		16%

Latex Balloons		5,591		22%		4,821		19%

Film Products		2,843		11%		3,350		14%

Other		1,113		4%		653		3%

Total		25,624		100%		24,662		100%

Metalized Balloons . During the three months ended June 30, 2012 revenues from the sale of metalized balloons decreased by 1.2% compared to the prior year period from $5,578,000 to $5,513,000. During the six months ended June 30, 2012 revenues from the sale of metalized balloons increased by 4.1% compared to the prior year period from $11,977,000 to $12,465,000. During the first half of 2012, sales of metalized balloons sales to our largest customer decreased slightly to $7,124,000 from $7,317,000, while sales of metalized balloons to other customers increased in this period. For the first half of this year, sales of metalized balloons to other customers were $5,341,000 compared to $4,660,000 for the same period last year. These included sales to customers in the United States, Mexico, the United Kingdom and Europe.

Pouches . During the three months ended June 30, 2012 revenues from the sale of pouches decreased by 1.5% compared to the prior year period from $1,707,000 to $1,682,000. During the six months ended June 30, 2012 revenues from the sale of pouches decreased by 6.4% compared to the prior year period from $3,861,000 to $3,612,000. Virtually all of our pouch sales in 2011 and 2012 have been of vacuumable pouches in two categories: (i) zippered pouches and (ii) open-top pouches or rolls. For the three and six months ended 2012 and 2011, sales of pouch products in these categories have been as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
Pouches	2012		2011		2012		2011

Zippered	$	941,000	$	974,000	$	1,834,000	$	2,471,000

Open-Top or Rolls		741,000		733,000		1,778,000		1,390,000

Total	$	1,682,000	$	1,707,000	$	3,612,000	$	3,861,000

Most of our sales of zippered pouches have been of branded products to a principal customer, although we have had limited sales of our ZipVac® pouch line as well.

During 2010, we introduced a line of open-top pouches and rolls for use with existing vacuum sealing machines which we have sold under the ZipVac® label as well as on a private label basis. In the first quarter 2012, we introduced and began to market and sell a branded line of vacuum sealing machines and associated open-top bags and rolls. We had limited initial sales of products in that line during the second quarter 2012 and those revenues are included in the revenues indicated for open-top bags or rolls. As indicated in the chart, we have experienced increasing levels of sales of this product line during the six months ended June 30, 2012.

Latex Balloons. During the three months ended June 30, 2012 revenues from the sale of latex balloons increased by 4.1% compared to the prior year period from $2,725,000 to $2,837,000. During the six months ended June 30, 2012 revenues from the sale of latex balloons increased by 16.0% compared to the prior year period from $4,821,000 to $5,591,000. The increase is attributable to increased sales in Mexico by Flexo Universal, our subsidiary there, as well as increased sales to various customers in the United States.

Films . During the three months ended June 30, 2012 revenues from the sale of laminated film products decreased by 26.4% compared to the prior year period from $1,606,000 to $1,182,000. During the six months ended June 30, 2012 revenues from the sale of laminated film products decreased by 15.1% compared to the prior year period from $3,350,000 to $2,843,000. The decrease is attributable to a decrease in sales to a principal customer. Approximately 86.3% of the sales of laminated film products during the six months ended June 30, 2012 were to a principal customer.

Sales to a limited number of customers continue to represent a large percentage of our net sales. The table below illustrates the impact on sales of our top three and ten customers for the three and six months ended June 30, 2012 and 2011.

	Three Months Ended June 30,				Six Months Ended June 30,
	% of Sales				% of Sales
	2012		2011		2012		2011

Top 3 Customers		44.8%		50.2%		45.0%		52.1%

Top 10 Customers		65.5%		70.9%		64.6%		72.3%

During the three and six months ended June 30, 2012, there was one customer whose purchases represented more than 10% of the Company’s consolidated net sales. Sales to this customer for the three months ended June 30, 2012 were $3,581,000 or 30.3% consolidated net sales. Sales to the top two customers in the same period of 2011 were $3,549,000 or 29.7%, and $1,563,000 or 13.1% of consolidated net sales, respectively. The sales to our largest customer for the six months ended June 30, 2012 were $7,335,000 or 28.6% of consolidated net sales. Sales to the top two customers in the same period of 2011 were $7,433,000 or 30.1%, and $3,196,000 or 13.0% of consolidated net sales, respectively. As of June 30, 2012, the total amount owed to the Company by our largest customer was $972,000 or 17.1% of the Company’s consolidated net accounts receivables. The amounts owed at June 30, 2011 by our two largest customers were $1,717,000 or 21.7%, and $1,113,000 or 14.1% of the Company’s consolidated net accounts receivables, respectively.

Cost of Sales . During the three months ended June 30, 2012, the cost of sales represented 80.1% of net sales compared to 82.7% for the three months ended June 30, 2011. During the six months ended June 30, 2012, the cost of sales represented 78.7% of net sales compared to 81.6% for the six months ended June 30, 2011. During the six months ended June 30, 2012, cost of sales declined compared to the same period last year as the result of several factors including: (i) moderation in the cost of certain raw materials, particularly latex, (ii) increases in the selling prices of certain of our products and (iii) a shift in the mix of products sold to products having higher margin.

General and Administrative . During the three months ended June 30, 2012, general and administrative expenses were $1,539,000 or 13.0% of net sales, compared to $1,350,000 or 11.3% of net sales for the same period in 2011. During the six months ended June 30, 2012, general and administrative expenses were $2,871,000 or 11.2% of net sales, compared to $2,680,000 or 10.9% of net sales for the same period in 2011. The increase in general and administrative expenses is attributable to (i) an increase in salary expense of $55,000 and (ii) an increase in legal expenses of $45,000. Also, our European subsidiary general and administrative expenses increased due to an increase in a number of accounts and geographic areas covered. These expenses include rent, travel, legal, and accounting, in aggregate these expenses increased by $90,000.

Selling . During the three months ended June 30, 2012, selling expenses were $411,000 or 3.5% of net sales, compared to $207,000 or 1.7% of net sales for the same period in 2011. During the six months ended June 30, 2012, selling expenses were $822,000 or 3.2% of net sales, compared to $421,000 or 1.7% of net sales for the same period in 2011. The increase in selling expenses is attributable principally to (i) an increase in salary expense of $93,000, (ii) an increase in travel expenses of $65,000, (iii) an increase in outside services of $141,000 (iv) an increase in engineering and testing services related to the vacuum sealer machines of $55,000 and (v) an increase in royalty expense of $59,000.

Advertising and Marketing . During the three months ended June 30, 2012, advertising and marketing expenses were $391,000 or 3.3% of net sales for the period, compared to $364,000 or 3.0% of net sales for the same period of 2011. During the six months ended June 30, 2012, advertising and marketing expenses were $899,000 or 3.5% of net sales for the period, compared to $692,000 or 2.8% of net sales for the same period of 2011. The increase in advertising and marketing expense is attributable to (i) an increase in commission expense of $119,000 and (ii) an increase in artwork & films for creative of $67,000.

Other Income (Expense) . During the three months ended June 30, 2012, the Company incurred net interest expense of $167,000, compared to net interest expense during the same period of 2011 in the amount of $144,000. During the six months ended June 30, 2012, the Company incurred net interest expense of $348,000, compared to net interest expense during the same period of 2011 in the amount of $283,000.

For the three months ended June 30, 2012, the Company had a foreign currency transaction gain of $6,000 compared to a foreign currency transaction gain of $15,000 during the same period of 2011. For the six months ended June 30, 2012, the Company had a foreign currency transaction gain of $8,000 compared to a foreign currency transaction gain of $26,000 during the same period of 2011.

Income Taxes . For the three months ended June 30, 2012, the Company reported a consolidated income tax benefit of $53,000, compared to a consolidated income tax expense of $35,000 for the same period of 2011. For the six months ended June 30, 2012, the Company reported a consolidated income tax expense of $197,000, compared to a consolidated income tax expense of $241,000 for the same period of 2011. For the three and six months ended June 30, 2012, this income tax provision was composed of provisions for United States income tax on the Company, income tax in Mexico of Flexo Universal, our Mexican subsidiary, income tax in the United Kingdom of CTI Balloons Limited, our United Kingdom subsidiary, and income tax in Germany of CTI Europe, our Germany subsidiary.

Net Income. For the three months ended June 30, 2012, the Company had net loss of $78,000 or ($0.02) per share (basic and diluted), compared to net income of $13,000 for the same period of 2011 or $0.00 per share (basic and diluted). For the six months ended June 30, 2012, the Company had net income of $311,000 or $0.10 per share (basic and diluted), compared to net income of $310,000 for the same period of 2011 or $0.10 per share (basic and diluted).

Financial Condition, Liquidity and Capital Resources

Cash Flow Items.

Operating Activities . During the six months ended June 30, 2012, net cash provided by operations was $743,000, compared to net cash used in operations during the six months ended June 30, 2011 of $1,074,000.

Significant changes in working capital items during the six months ended June 30, 2012 consisted of (i) a decrease in accounts receivable of $1,490,000, (ii) an increase in inventories of $541,000, (iii) depreciation and amortization in the amount of $839,000 and (iv) a decrease in trade payables of $1,413,000.

Investing Activity. During the six months ended June 30, 2012, cash used in investing activity for the purchase or improvement of equipment was $527,000, compared to $545,000 in the same period of 2011. Substantially all of this expense is related to equipment maintenance and upgrades, tooling and related expense.

Financing Activities . During the six months ended June 30, 2012, cash used in financing activities was $300,000 compared to cash provided by financing activities for the same period of 2011 in the amount of $825,000. During the six months ended June 30, 2012, financing activities included payment of $470,000 on long-term debt obligations and $914,000 on the revolving line of credit.

Liquidity and Capital Resources . At June 30, 2012, the Company had cash balances of $261,000 compared to cash balances of $494,000 for the same period in 2011 and there was $1,200,000 available to advance under the Company’s revolving line of credit.

At June 30, 2012, the Company had a working capital balance of $5,730,000 compared to a working capital balance of $5,746,000 at December 31, 2011.

The Company’s liquidity is dependent significantly on its bank financing and the Company relies on its revolving line of credit to maintain liquidity. On April 29, 2010, the Company entered into a Credit Agreement with Harris N.A. (“Harris”) replacing and paying off the Company’s credit line with RBS Citizens N.A. (formerly Charter One Bank). Under the Credit Agreement, Harris agreed to provide loans and credits to the Company in the aggregate maximum amount of $14,417,000. The arrangement includes:

A revolving credit up to a maximum amount of $9,000,000 based upon a borrowing base of 85% of eligible receivables and 60% of eligible inventory (up to a maximum of $5,000,000);

ii.

A mortgage loan in the principal amount of $2,333,350, amortized over 25 years, the principal balance due on April 29, 2013;

iii.

A term loan in the principal amount of $583,333 maturing in monthly principal installments of $58,333; and

iv.

An equipment loan commitment in the amount of up to $2,500,000 providing for loan advances from time to time until April 29, 2012 based upon 100% of the purchase price of equipment purchased, the loans to be amortized on a five year basis commencing April 29, 2012, the balance due on April 29, 2013.

The Credit Agreement includes various representations, warranties and covenants of the Company, including various financial covenants.

In connection with the Credit Agreement, the Company executed and delivered to Harris, a Term Loan Note, a Mortgage Loan Note, an Equipment Note and a Revolving Note, as well as a form of Mortgage, Security Agreement, Pledge Agreement (pursuant to which shares of capital stock of the Registrant’s Mexico subsidiary were pledged as security for the loans), Patent Security Agreement and Trademark Security Agreement. Two officers and principal shareholders of the Company, John H. Schwan and Stephen M. Merrick each executed Limited Guaranties of the loans and also executed Subordination Agreements with respect to obligations of the Company to them.

On April 29, 2010, Harris advanced a total of $11,963,518 under these loans on behalf of the Company for the pay-off of all outstanding loan and lease financing balances of the Company to RBS Citizens N.A. and RBS Asset Finance.

Under the terms of the Credit Agreement, in order to obtain advances under the revolving line of credit and the equipment loan, the Company is required to meet various financial covenants including a senior leverage ratio, fixed charge coverage ratio and tangible net worth. As of June 30, 2012, we were in compliance with these covenants.

The Credit Agreement provides that the outstanding balance of all loans under the agreement will bear interest with reference to a base rate or, at the option of the Company, with reference to an adjusted LIBOR. At June 30, 2012, the effective rate on the outstanding loan balances was 4.0%.

As of June 30, 2012, the outstanding balances on the loans with Harris were: (i) revolving line of credit, $6,243,000, (ii) mortgage loan, $2,131,000, and (iii) equipment loan, $1,272,000.

On July 1, 2011, we entered into a swap agreement with BMO Capital Markets with respect to $6,780,000 of our loan balances with Harris. This swap agreement is designated as a cash flow hedge to hedge the Company’s exposure to interest rate fluctuations on the Company’s floating rate loans. The swap agreement has the effect of fixing the interest rate on the loan balances covered by the swap at 4.65% per annum. The swap agreement is a derivative financial instrument and we will determine and record the fair market value of the swap agreement each quarter. This value will be recorded on the balance sheet of the Company and the amount of the unrealized gain or loss for each period will be recorded as interest income or expense.

Also, on July 17, 2012, the Company entered into a Note and Warrant Purchase Agreement with BMO Equity pursuant to which (i) BMO Equity advanced to the Company the sum of $5 million and (ii) the Company issued to BMO Equity a warrant to purchase up to Four Percent (4%) of the outstanding shares of common stock of the Company on a fully-diluted basis (140,048 shares of common stock of the Company) at the price of One Cent ($0.01) per share. The term of the loan provided for in this Agreement is five and a half years. Interest is payable on the outstanding balance of the loan at the rate of 11.5% per annum.

The Note and Warrant Purchase Agreement includes provisions for:

(i)

a closing fee of $100,000

(ii)

payment of the principal amount in five and a half years with optional prepayment subject to certain prepayment premiums;

(iii)

security for the note obligations in all assets of the Company junior to the security interest of BMO Harris;

(iv)

various representations and warranties and covenants of the Company;

(v)

financial covenants including an applicable senior leverage ratio, fixed charge coverage ratio and tangible net worth amount.

Seasonality

In recent years, sales in the metalized balloon product line have historically been seasonal with approximately 40% occurring in the period from December through March and 24% being generated in the period from July through October. The sales of latex balloons and laminated film products have not historically been seasonal.

Critical Accounting Policies

Please see pages 24-26 of our Annual Report on Form 10-K for the year ended December 31, 2011 for a description of policies that are critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. No material changes to such information have occurred during the three and six months ended June 30, 2012.

New Accounting Pronouncements

See “New Accounting Pronouncements” in Note 1 to the Notes to Unaudited Condensed Consolidated Financial Statements which is here incorporated by reference.

Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk

Not applicable.

Item 4. Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has reviewed and evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2012. Based on such review and evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of June 30, 2012, to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, (a) is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms and (b) is accumulated and communicated to our management, including the officers, as appropriate to allow timely decisions regarding required disclosure. There were no material changes in our internal control over financial reporting during the second quarter of 2012 that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

Not applicable.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

Reference made to Company’s Report on Form 8-K dated June 8, 2012.

Item 5. Other Information

The Certifications of the Chief Executive Officer and the Chief Financial Officer of Registrant Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are attached as Exhibits to this Report on Form 10-Q.

Item 6. Exhibits

The following are being filed as exhibits to this report:

Exhibit Number	Description

3.1	Third Restated Certificate of Incorporation of CTI Industries Corporation (incorporated by reference to Exhibit A contained in Registrant’s Schedule 14A Definitive Proxy Statement for solicitation of written consent of shareholders, as filed with Commission on October 25, 1999).
3.2	By-laws of CTI Industries Corporation (incorporated by reference to Exhibit 3.1 contained in Registrant’s Form SB-2 Registration Statement (File No. 333-31969) effective November 5, 1997).

10.1	Third Amendment to Loan Agreement between BMO Harris Bank, N.A. and the Company dated July 17, 2012.
10.2	Replacement Revolving Note between BMO Harris Bank, N.A. and the Company dated July 17, 2012.
10.3	Note and Warrant Purchase Agreement between BMO Private Equity (U.S.), Inc. and the Company dated July 17, 2012.
10.4	Warrant Agreement between BMO Private Equity (U.S.), Inc. and the Company dated July 17, 2012.
10.5	Senior Secured Subordinated Promissory Note between BMO Private Equity (U.S.), Inc. and the Company dated July 17, 2012.

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

101	Interactive Data Files, including the following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Cash Flows, and (iv) the Notes to Consolidated Financial Statements.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: August 14, 2012	CTI INDUSTRIES CORPORATION


	By:	/s/ Howard W. Schwan
		Howard W. Schwan, President and Chief Executive Officer



	By:	/s/ Stephen M. Merrick
		Stephen M. Merrick Executive Vice President and Chief Financial Officer



	By:	/s/ Timothy S. Patterson
		Timothy S. Patterson Vice President Finance / Controller

Exhibit Index

Exhibit Number	Description

3.1	Third Restated Certificate of Incorporation of CTI Industries Corporation (incorporated by reference to Exhibit A contained in Registrant’s Schedule 14A Definitive Proxy Statement for solicitation of written consent of shareholders, as filed with Commission on October 25, 1999).
3.2	By-laws of CTI Industries Corporation (incorporated by reference to Exhibit 3.1 contained in Registrant’s Form SB-2 Registration Statement (File No. 333-31969) effective November 5, 1997).

10.1	Third Amendment to Loan Agreement between BMO Harris Bank, N.A. and the Company dated July 17, 2012.
10.2	Replacement Revolving Note between BMO Harris Bank, N.A. and the Company dated July 17, 2012.
10.3	Note and Warrant Purchase Agreement between BMO Private Equity (U.S.), Inc. and the Company dated July 17, 2012.
10.4	Warrant Agreement between BMO Private Equity (U.S.), Inc. and the Company dated July 17, 2012.
10.5	Senior Secured Subordinated Promissory Note between BMO Private Equity (U.S.), Inc. and the Company dated July 17, 2012.

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

101	Interactive Data Files, including the following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Cash Flows, and (iv) the Notes to Consolidated Financial Statements.

exhibit 10.1

Amendment No. 3
to Credit Agreement

This Amendment No. 3 to Credit Agreement is dated as of July 17, 2012, and is between CTI Industries Corporation , an Illinois corporation (the “ Borrower ”); John H. Schwan , an individual resident of Illinois (“ Schwan ”); Stephen M. Merrick , an individual resident of Illinois (“ Merrick ”); CTI Helium, Inc. , an Illinois corporation and a Wholly-Owned Subsidiary of the Borrower, in its capacity as a guarantor (the “ Subsidiary Guarantor ”); and BMO Harris Bank N.A. , a national banking association, successor to Harris N.A. (the “ Bank ”).

The Borrower and the Bank entered into a Credit Agreement dated as of April 29, 2010 (the “ Credit Agreement ”), under which the Bank has extended certain credit facilities to the Borrower.

In connection with the Credit Agreement, Schwan and Merrick entered into a Guaranty dated as of April 29, 2010 (the “ Limited Guaranty ”), under which, among other things, each of them guarantees the prompt and complete payment and performance of the Obligations, subject to the limitations set forth in the Limited Guaranty.

In connection with the Credit Agreement, the Subsidiary Guarantor entered into a Guaranty dated as of April 29, 2010 (the “ Subsidiary Guaranty ”), under which, among other things, the Subsidiary Guarantor guarantees the prompt and complete payment and performance of the Obligations.

The parties now desire to amend the Credit Agreement in certain respects.

The parties therefore agree as follows:

1. Definitions . Defined terms used but not defined in this agreement are as defined in the Credit Agreement.

2. Limited Consent . (a) The Borrower desires to incur Indebtedness for Borrowed Money in an aggregate principal amount equal to $5,000,000 (the “ BMO Mezzanine Debt ”) and to issue certain warrants to purchase, in the aggregate, 4% of the Borrower’s common stock (the “ BMO Mezzanine Warrants ”), in each case pursuant to a Note and Warrant Purchase Agreement to be dated on or about the date of this agreement between the Borrower and BMO Private Equity (U.S.), Inc., a Delaware corporation and an Affiliate of the Bank (that agreement, the “ BMO Mezzanine NWPA ”). The Borrower has requested that the Bank consent to the Borrower’s entering into the BMO Mezzanine NWPA and to the Borrower’s consummating, in accordance with the BMO Mezzanine NWPA, the transactions contemplated by the BMO Mezzanine NWPA, including the Borrower’s incurring the BMO Mezzanine Debt and the Borrower’s issuing the BMO Mezzanine Warrant.

(b) The Bank hereby consents to the Borrower’s entering into the BMO Mezzanine NWPA and to the Borrower’s consummating, in accordance with the BMO Mezzanine NWPA, the transactions contemplated by the BMO Mezzanine NWPA, including the Borrower’s incurring the BMO Mezzanine Debt and the Borrower’s issuing the BMO Mezzanine Warrants. This consent i) is a one-time consent; ii) is limited strictly as written; iii) does not constitute, and is not to be deemed to constitute, the Bank’s consent to any other action that, in the absence of the consent of the Bank, would be a violation of or default under the Credit Agreement; and iv) will not prejudice any rights or remedies that the Bank might have or be entitled to with respect to any such other violation or default. This consent will be effective upon satisfaction of the conditions set forth in section 8

(c) Concurrently with the Borrower’s receipt of Net Proceeds from the incurrence of the BMO Mezzanine Debt, the Borrower shall make a prepayment of the outstanding principal amount of the Revolving Loans equal to the lesser of 100% of those Net Proceeds and the outstanding principal amount of the Revolving Loans.

3. Release under Limited Guaranty . As of the effective date of this agreement, the Bank hereby releases and discharges each of Schwan and Merrick from the Limited Guaranty except for any actual claim, demand, loss, or liability that arose or existed before the release and discharge of the Limited Guaranty.

4. Amendments to Credit Agreement . b) Section 1.4 of the Credit Agreement is hereby amended by replacing “(a) Nine Million and 00/100 Dollars ($9,000,000.00) (the “Revolving Credit Commitment” , as such amount may be reduced pursuant to the terms hereof)” with “(a) Twelve Million and 00/100 Dollars ($12,000,000.00) (the “Revolving Credit Commitment” , as such amount may be reduced pursuant to the terms hereof)”.

(b) Section 4.3 of the Credit Agreement is hereby amended to read in its entirety as follows:

“ Section 4.3 Guaranties . The payment and performance of the Obligations shall at all times be guaranteed by each direct and indirect domestic Subsidiary of the Borrower pursuant to one or more guaranty agreements in form and substance acceptable to the Bank (as the same may be amended, modified, or supplemented from time to time, individually a “Subsidiary Guaranty” and collectively the “Subsidiary Guaranties” ).”

(c) The definition of “Applicable Rate” in section 5.1 of the Credit Agreement is hereby amended to read in its entirety as follows:

“ “Applicable Rate” means the following amounts per annum set forth on Exhibit E opposite the level (the “Level” ) then in effect and based upon the Senior Leverage Ratio, it being understood that the Applicable Rate for (a) LIBOR Portions shall be the percentage set forth under the column “LIBOR Margin”; (b) the Base Rate Portion shall be the percentage set forth under the column “Base Rate Margin”; (c) the commitment fee described in Section 3.1(a) shall be the percentage set forth under the column “Commitment Fee”; and (d) the letter of credit fee described in Section 3.1(b) shall be the percentage set forth under the column “Letter of Credit Fee”. The Applicable Rate shall be adjusted quarterly, to the extent applicable, on the third (3rd) Business Day after the Borrower provides or is required to provide the compliance certificate pursuant to Section 8.5(j) for each fiscal quarter. Notwithstanding anything contained in this definition to the contrary, (i) if the Borrower fails to deliver the compliance certificate in accordance with the provisions of Section 8.5(j) , then the Applicable Rate shall be based upon the previously applicable Level until the date such compliance certificate is actually delivered, whereupon the Applicable Rate shall be determined by the then current Level (and if such compliance certificate indicates a higher Level than previously applicable, the Borrower shall forthwith pay to the Bank any additional amount if interest and fees that would have been payable on any prior date had such compliance certificate been delivered when required); (ii) no reduction to the Applicable Rate shall become effective at any time when a Default or an Event of Default has occurred and is continuing; and (iii) from the Third Amendment Date, until the date on which the compliance certificate is required to be delivered for the fiscal quarter ending June 30, 2012, the initial Applicable Rate on the date hereof shall be based upon Level II. This paragraph shall not limit the rights of the Bank with respect to Section 8.23(a) .”

(d) The definition of “Borrowing Base” in section 5.1 of the Credit Agreement is hereby amended to read in its entirety as follows:

“ “Borrowing Base” means, as of any time it is to be determined, the sum of: (a) 85% of the then outstanding unpaid amount of Eligible Receivables; plus (b) the lesser of (i) $6,500,000 and (ii) 60% of the value (computed at the lower of market or cost using the first-in/first-out method of inventory valuation applied by the Borrower in accordance with GAAP) of Eligible Inventory; provided that the Borrowing Base shall be computed only as against and on so much of the Collateral as is included on the certificates to be furnished from time to time by the Borrower pursuant to Section 8.5(a) hereof and, if required by the Bank pursuant to any of the terms hereof or any Collateral Document, as verified by such other evidence required to be furnished to the Bank pursuant hereto or pursuant to any such Collateral Document.”

(e) The definition of “Equipment Loan Final Maturity Date” in section 5.1 of the Credit Agreement is hereby amended to read in its entirety as follows:

“ “Equipment Loan Final Maturity Date” means July 18, 2017, or such earlier date on which the Equipment Loan is declared to be or becomes due pursuant to Section 9.2 or 9.3 hereof.”

(f) The definition of “Fixed Charge Coverage Ratio” in section 5.1 of the Credit Agreement is hereby amended to read in its entirety as follows:

“ “Fixed Charge Coverage Ratio” means, with reference to any period, the ratio of (a) the total for such period of (i) EBITDA, minus (ii) federal, state, and local income taxes paid by the Borrower during such period, minus (iii) the sum of all dividends declared by the Borrower during such period, minus (iv) the sum of all payments made in connection with the purchase, redemption, or other acquisition or retirement of any capital stock or other equity interests of the Borrower (or any warrants, options or similar instruments to acquire the same), minus (v) all Capital Expenditures which are not financed with Indebtedness for Borrowed Money, to (b) Fixed Charges for such period.”

(g) The definitions of “Limited Guaranty” and “Limited Guaranties” in section 5.1 of the Credit Agreement are hereby amended to read in their entirety as follows:

“ “Limited Guaranty” and “Limited Guaranties” are as defined in this Agreement as in effect immediately before giving effect to an Amendment No. 3 to Credit Agreement dated as of the Third Amendment Date, between the Borrower, John H. Schwan, Stephen M. Merrick, CTI Helium (as a Subsidiary Guarantor), and the Bank. Each Limited Guaranty was released in connection with that amendment to this Agreement.”

(h) The definition of “Loan Documents” in section 5.1 of the Credit Agreement is hereby amended to read in its entirety as follows to delete the reference to the Limited Guaranties:

“ “Loan Documents” means this Agreement, the Notes, the Applications, the Guaranties, the Collateral Documents, and each other instrument or document to be delivered hereunder or thereunder or otherwise in connection therewith.”

(i) The definition of “Mortgage Loan Final Maturity Date” in section 5.1 of the Credit Agreement is hereby amended to read in its entirety as follows:

“ “Mortgage Loan Final Maturity Date” means July 18, 2017, or such earlier date on which the Mortgage Loan is declared to be or becomes due pursuant to Section 9.2 or 9.3 hereof.”

(j) The definition of “Obligations” in section 5.1 of the Credit Agreement is hereby amended to read in its entirety as follows:

“ “Obligations” means (a) all obligations of the Borrower to pay principal and interest on the Loans, all reimbursement obligations owing under the Applications, all fees and charges payable hereunder, and all other payment obligations of the Borrower arising under or in relation to any Loan Document, in each case whether now existing or hereafter arising, due or to become due, direct or indirect, absolute or contingent, and howsoever evidenced, held, or acquired, and (b) without duplication of clause (a), all Credit Product Obligations.”

(k) The definition of “Revolving Credit Termination Date” in section 5.1 of the Credit Agreement is hereby amended to read in its entirety as follows:

“ “Revolving Credit Termination Date” means July 18, 2017, or such earlier date on which the Revolving Credit Commitment is terminated in whole pursuant to Section 3.4 , 9.2 , or 9.3 hereof.”

(l) Section 5.1 of the Credit Agreement is hereby further amended by inserting the following new definitions in appropriate alphabetical order:

“ “BMO Mezzanine Debt” means all Indebtedness for Borrowed Money owing from the Borrower to BMO Private Equity under and in accordance with the BMO Mezzanine NWPA.

“BMO Mezzanine NWPA” means a Note and Warrant Purchase Agreement dated as of the Third Amendment Date, between the Borrower and BMO Private Equity.

“BMO Private Equity” means BMO Private Equity (U.S.), Inc., a Delaware corporation and an Affiliate of the Bank.

“ Capital Expenditures ” means, as to any Person and for any period, all expenditures (whether paid in cash or other consideration) during such period, without duplication, that are or should be included in additions to property, plant, and equipment or similar items reflected in such Person’s consolidated statement of cash flows for such period; provided that Capital Expenditures do not include, for purposes of this Agreement, expenditures of proceeds of insurance settlements, condemnation awards, and other settlements in respect of lost, destroyed, damaged, or condemned assets to the extent such expenditures are made to replace or repair such assets or otherwise to acquire assets useful in the business of the Person.

“Credit Product Arrangements” means, collectively, Swap Contracts between the Borrower and the Bank or Affiliate of the Bank and Treasury Management and Other Services.

“Credit Product Obligations” means obligations of the Borrower arising under Credit Product Arrangements and owing to the Bank or any Affiliate of the Bank.

“Permitted Holder” means (a) each of John H. Schwan and Stephen M. Merrick; (b) in respect of John H. Schwan and subject to the qualifications set forth in clause (d), the John H. Schwan Grantor Retained Annuity Trust dated August 13, 2009; (c) in respect of Stephen M. Merrick and subject to the qualifications set forth in clause (d), The Merrick Company, LLC, an Illinois limited liability company; and (d) any other trust or other estate-planning vehicle established for the benefit of any individual identified in clause (a) or any other individual having a relationship by blood (to the second degree of consanguinity), marriage, or adoption to any individual identified in clause (a) and in respect of which the applicable individual identified in clause (a) serves as trustee or in a similar capacity.

“Swap Contract” means (a) any and all rate swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward bond or forward bond price or forward bond index transactions, interest rate options, forward foreign exchange transactions, cap transactions, floor transactions, collar transactions, currency swap transactions, cross-currency rate swap transactions, currency options, spot contracts, or any other similar transactions or any combination of any of the foregoing (including any options to enter into any of the foregoing), whether or not any such transaction is governed by or subject to any master agreement; and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement, including any such obligations or liabilities under any such master agreement.

“Third Amendment Date” means July 17, 2012.

“Total Funded Debt” means, at any time the same is to be determined, the aggregate of all Indebtedness for Borrowed Money of the Borrower and its Subsidiaries, on a consolidated basis, at such time, plus all Indebtedness for Borrowed Money of any other person or entity which is directly or indirectly guaranteed by the Borrower or any of its Subsidiaries or which the Borrower or any of its Subsidiaries has agreed (contingently or otherwise) to purchase or otherwise acquire or in respect of which the Borrower or any of its Subsidiaries has otherwise assured a creditor against loss. For purposes of this Agreement, “Total Funded Debt” does not include any Excluded Flexo VIE Debt.

“Total Leverage Ratio” means, as of any time it is to be determined, the ratio of Total Funded Debt at such time to EBITDA for the four fiscal quarters of the Borrower then most recently ended.

“Treasury Management and Other Services” means (a) all arrangements for the delivery of treasury management services; (b) all commercial credit card and merchant card services; and (c) all other banking products or services, other than Letters of Credit, in each case under clauses (a), (b), and (c) to or for the benefit of the Borrower which are entered into or maintained with the Bank or Affiliate of the Bank and which are not prohibited by the express terms of the Loan Documents.”

(m) Section 5.1 of the Credit Agreement is hereby further amended by deleting the definitions of “Individual Guarantors” and “Tangible Net Worth.”

(n) Section 6.6 of the Credit Agreement is hereby amended to read in its entirety as follows to replace “December 31, 2009” with “December 31, 2011”:

“ Section 6.6 No Material Adverse Change. Since December 31, 2011, there has been no change in the condition (financial or otherwise) or business prospects of the Borrower or any Subsidiary except those occurring in the ordinary course of business, none of which individually or in the aggregate have been materially adverse.”

(o) Clause (iv) of section 7.2(a) of the Credit Agreement is hereby amended to read in its entirety as follows to replace references to the Individual Guarantors with references to Schwan and Merrick:

“ (iv) a Subordination Agreement from John H. Schwan and Stephen M. Merrick in favor of the Bank, together with copies of the subordinated note and any other loan documents executed in connection therewith;”

(p) Clause (b) of section 8.7 of the Credit Agreement is hereby amended to read in its entirety as follows:

“ (b) [intentionally omitted];”

(q) Clause (e) of section 8.7 of the Credit Agreement is hereby amended to read in its entirety as follows:

“ (e) the BMO Mezzanine Debt, in an aggregate principal amount not to exceed $5,000,000 as of the Third Amendment Date, as reduced by permitted payments thereon, and provided that the BMO Mezzanine Debt shall be Subordinated Debt;”

(r) Clause (f) of section 8.7 of the Credit Agreement is hereby amended to read in its entirety as follows to replace references to the Individual Guarantors with references to Schwan and Merrick:

“ (f) indebtedness of the Borrower and Flexo to John H. Schwan and Stephen M. Merrick existing on the date hereof in an aggregate principal amount not to exceed $3,035,000 on the date hereof, as reduced by payments thereon, and provided that any indebtedness of the Borrower to John H. Schwan and Stephen M. Merrick shall be Subordinated Debt;”

(s) Clause (d) of section 8.8 of the Credit Agreement is hereby amended to read in its entirety as follows:

“ (d) [intentionally omitted];”

(t) Clause (g) of section 8.8 of the Credit Agreement is hereby amended to read in its entirety as follows:

“ (g) Liens securing the indebtedness described in Section 8.7(e) , and provided that those Liens are subordinated to the Bank’s Liens pursuant to written subordination provisions approved in writing by the Bank; and”

(u) Section 8.23 of the Credit Agreement is hereby amended to read in its entirety as follows:

“ Section 8.23 Financial Covenants .

(a) Senior Leverage Ratio. As of the last day of each fiscal quarter of the Borrower (commencing June 30, 2010), the Borrower shall not permit the Senior Leverage Ratio for the four fiscal quarters of the Borrower then ended to be more than the amount set forth below for such fiscal quarter:

Fiscal Quarter Ending	Level
March 31, 2010, June 30, 2010, September 30, 2010, and December 31, 2010	3.50 to 1.00
March 31, 2011, and June 30, 2011	3.25 to 1.00
September 30, 2011	3.00 to 1.00
December 31, 2011, March 31, 2012, June 30, 2012, and September 30, 2012	3.25 to 1.00
December 31, 2012, and March 31, 2013	3.00 to 1.00
June 30, 2013, and September 30, 2013	2.75 to 1.00
December 31, 2013, and each fiscal quarter thereafter	2.50 to 1.00

(b) Total Leverage Ratio. As of the last day of each fiscal quarter of the Borrower (commencing June 30, 2012), the Borrower shall not permit the Total Leverage Ratio for the four fiscal quarters of the Borrower then ended to be more than the amount set forth below for such fiscal quarter:

Fiscal Quarter Ending	Level
June 30, 2012	5.25 to 1.00
September 30, 2012	4.85 to 1.00
December 31, 2012, and March 31, 2013	4.60 to 1.00
June 30, 2013, and September 30, 2013	4.35 to 1.00
December 31, 2013, and each fiscal quarter thereafter	4.10 to 1.00

(c) Fixed Charge Coverage Ratio. As of the last day of each fiscal quarter of the Borrower (commencing with the fiscal quarter ending June 30, 2012), the Borrower shall not permit the Fixed Charge Coverage Ratio for the four fiscal quarters of the Borrower then ended to be less than 1.15 to 1.00.

(d) Capital Expenditures . Subject to the other terms of this Section 8.23(d) , the Borrower shall not, and shall not permit any of its Subsidiaries to, make or commit to make, directly or indirectly, any Capital Expenditure if, after giving effect thereto, the aggregate amount of all Capital Expenditures made by the Borrower and its Subsidiaries would exceed (i) $4,000,000 in the fiscal year of the Borrower ending on December 31, 2012, or (ii) $700,000 in any subsequent fiscal year of the Borrower. If the amount of Capital Expenditures permitted to be made by the Borrower and its Subsidiaries pursuant to the immediately preceding sentence in any fiscal year of the Borrower is greater than the amount of Capital Expenditures actually made by the Borrower and its Subsidiaries during that fiscal year (without giving effect to any carry-forward permitted by this sentence), then 50% of that excess amount (for that fiscal year, the “Carried-Forward Amount” ) may be carried forward and utilized by the Borrower and its Subsidiaries to make Capital Expenditures solely in the immediately succeeding fiscal year of the Borrower. If any portion of the Carried-Forward Amount for any fiscal year of the Borrower is not used in the immediately succeeding fiscal year of the Borrower to make Capital Expenditures, that portion will not be included in any subsequent Carried-Forward Amount for, or carried forward to, any subsequent fiscal year of the Borrower. In determining any Carried-Forward Amount, the amount expended in any fiscal year of the Borrower will first be deemed to be from the amount allocated to that fiscal year (before giving effect to any Carried-Forward Amount). If in the fiscal year of the Borrower ending December 31, 2012, the ERP system is not completed and any portion of the $500,000 of budgeted Capital Expenditures for the ERP system is not actually made, then the unspent portion may be carried forward to any subsequent fiscal year of the Borrower (in addition to any Carried-Forward Amount in respect of any such subsequent fiscal year) to complete that project. If in the fiscal year of the Borrower ending December 31, 2012, the latex-processing plant is not completed and any portion of the $1,500,000 of budgeted Capital Expenditures for the latex-processing plant is not actually made, then the unspent portion may be carried forward to any subsequent fiscal year of the Borrower (in addition to any Carried-Forward Amount in respect of any such subsequent fiscal year) to complete that project.”

(v) Section 9.1(l) of the Credit Agreement is hereby amended to read in its entirety as follows:

“ (l) the occurrence of any of the following: (i) the Permitted Holders shall cease to collectively own and control, directly and free and clear of all Liens (other than (A) Liens existing as of the Third Amendment Date that have been disclosed to the Bank and (B) Liens consented to in writing by the Bank), at least thirty-seven percent (37%) of the issued and outstanding voting shares of the capital stock or other equity interests of the Borrower at any time or the voting power to elect a majority of the Borrower’s board of directors, including, without limitation, as the result of the exercise by one or more secured parties of one or more security interests in respect of any ownership interest in the Borrower; (ii) the granting by any Permitted Holder, directly or indirectly, after the Third Amendment Date and without the prior written consent of the Bank, of a security interest in its ownership interest in the Borrower, if the secured party’s exercise of remedies in respect of that security interest could reasonably be expected to result in the occurrence of one or more events of the kind described in clause (i); (iii) John H. Schwan and Stephen M. Merrick shall cease to hold the titles of Chairman and Chief Financial Officer or equivalent positions, respectively, of the Borrower; (iv) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended) (other than the Individual Guarantors) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 10% or more of either (x) the then outstanding shares of common stock of the Borrower or (y) the combined voting power of the then outstanding voting securities of the Borrower entitled to vote generally in the election of Directors; or (v) the Borrower ceases to directly own free and clear of all Liens (other than Liens permitted pursuant to Section 8.8 ) 100% of the issued and outstanding shares of the capital stock or other equity interests of its Subsidiaries, except as a result of intercompany mergers or liquidations otherwise expressly permitted under this Agreement;”

(w) Exhibit D to the Credit Agreement is hereby amended to read in its entirety as set forth in Exhibit D to this agreement.

(x) Exhibit E to the Credit Agreement is hereby amended to read in its entirety as set forth in Exhibit E to this agreement.

(y) Exhibit F to the Credit Agreement is hereby amended to read in its entirety as set forth in Exhibit F to this agreement.

5. Post-Closing Matters . 2) The Borrower shall complete each of the following tasks and other items set forth below no later than any applicable time specified below or any later date to which the Bank agrees in writing:

(1)

the Borrower shall i) diligently pursue a release of liens or assignments of intellectual property of the Borrower in favor of Cole Taylor Bank reflected on records of the United States Patent and Trademark Office, and ii) deliver to the Bank, promptly following any request from the Bank, evidence satisfactory to the Bank that the Borrower is diligently pursuing that release;

(2)

within 15 days after the date of this agreement, the Borrower shall deliver to the Bank stock certificates evidencing 65% of the voting equity interests of Flexo, together with undated executed blank stock powers therefor.

(b) The Borrower hereby acknowledges b) that default in the observance or performance of any covenant set forth in section 5(a) will constitute an Event of Default under the Credit Agreement; and c) that no grace or cure period will apply in respect of any such default in the observance or performance of any such covenant.

6. Reaffirmation of Subsidiary Guaranty . The Subsidiary Guarantor hereby expressly does each of the following:

(1)

consents to the execution by the Borrower and the Bank of this agreement;

(2)

acknowledges that the “Indebtedness” (as defined in the Subsidiary Guaranty) includes all of the “Obligations” under and as defined in the Credit Agreement, as amended from time to time (including as amended by this agreement);

(3)

acknowledges that the Subsidiary Guarantor does not have any set-off, defense, or counterclaim to the payment or performance of any of the obligations of the Borrower under the Credit Agreement or the Subsidiary Guarantor under the Subsidiary Guaranty;

(4)

reaffirms, assumes, and binds itself in all respects to all of the obligations, liabilities, duties, covenants, terms, and conditions contained in the Subsidiary Guaranty;

(5)

agrees that all such obligations and liabilities under the Subsidiary Guaranty continue in full force and that the execution and delivery of this agreement to, and its acceptance by, the Bank will not in any manner whatsoever do any of the following:

(A)

impair or affect the liability of the Subsidiary Guarantor to the Bank under the Subsidiary Guaranty;

(B)

prejudice, waive, or be construed to impair, affect, prejudice, or waive the rights and abilities of the Bank at law, in equity, or by statute against the Subsidiary Guarantor pursuant to the Subsidiary Guaranty; or

(C)

release or discharge, or be construed to release or discharge, any of the obligations and liabilities owing to the Bank by the Subsidiary Guarantor under the Subsidiary Guaranty; and

(6)

represents and warrants that each of the representations and warranties made by the Subsidiary Guarantor in any of the documents executed in connection with the Loans remain true and correct as of the date of this agreement.

7. Representations and Warranties . To induce the Bank to enter into this agreement, the Borrower hereby represents to the Bank as follows:

(1)

that the Borrower is duly authorized to execute and deliver this agreement and is and will continue to be duly authorized to borrow monies under the Credit Agreement, as amended by this agreement, and to perform its obligations under the Credit Agreement, as amended by this agreement;

(2)

that the execution and delivery of this agreement and the performance by the Borrower of its obligations under the Credit Agreement, as amended by this agreement, do not and will not conflict with any provision of law or of the articles of organization or operating agreement of the Borrower or of any agreement binding upon the Borrower;

(3)

that the Credit Agreement, as amended by this agreement, is a legal, valid, and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, except as enforceability might be limited by bankruptcy, insolvency, or other similar laws of general application affecting the enforcement of creditors’ rights or by general principles of equity limiting the availability of equitable remedies;

(4)

that the representation and warranties set forth in section 6 of the Credit Agreement, as amended by this agreement, are true and correct with the same effect as if those representations and warranties had been made on the date hereof, except that all references to the financial statements mean the financial statements most recently delivered to the Bank and except for changes specifically permitted under the Credit Agreement, as amended by this agreement;

(5)

that the Borrower has complied with and is in compliance with all of the covenants set forth in the Credit Agreement, as amended by this agreement, including the covenants stated in section 8 of the Credit Agreement; and

(6)

that as of the date of this agreement no Default and no Event of Default under section 10 of the Credit Agreement, as amended by this agreement, has occurred or is continuing.

8. Conditions . The effectiveness of this agreement is subject to satisfaction of the following conditions:

(1)

that the Bank has received i) a copy of this agreement, duly executed by the parties; ii) a Replacement Revolving Note in the form of Exhibit D attached hereto, duly executed by the Borrower; iii) a copy of the BMO Mezzanine NWPA and each of the other documents required to be delivered in accordance with section 7.2 of the BMO Mezzanine NWPA, each duly executed by all applicable Persons; iv) a subordination and intercreditor agreement in respect of the BMO Mezzanine Debt, in form and substance satisfactory to the Bank, duly executed by all applicable Persons; v) a favorable written opinion of counsel for the Borrower in form and substance satisfactory to the Bank and its counsel; vi) an amendment to the Pledge Agreement to reflect the certificate numbers and other information relating to stock certificates evidencing 65% of the voting equity interests of Flexo; vii) file-stamped UCC-3s terminating each of the following UCC financing statements: (i) financing statement number 013124779, filed on April 7, 2008, naming the Borrower as debtor and RBS Asset Finance, Inc., as the secured party; (ii) financing statement number 013025754, filed on March 7, 2008, naming the Borrower as debtor and RBS Asset Finance, Inc., as the secured party; (iii) financing statement number 012408080, filed on August 17, 2007, naming the Borrower as debtor and RBS Asset Finance, Inc., as the secured party; and (iv) financing statement number 012408072, filed on August 17, 2007, naming the Borrower as debtor and RBS Asset Finance, Inc., as the secured party; and viii) all other documents, certificates, resolutions, and opinions of counsel as the Bank requests; and

(2)

that all legal matters incident to the execution and delivery of this agreement are satisfactory to the Bank and its counsel.

9. General . (a) This agreement and the rights and duties of the parties hereto are governed by, and are to be construed in accordance with, the internal laws of State of Illinois without regard to principles of conflicts of laws. Wherever possible each provision of the Credit Agreement and this agreement is to be interpreted in such manner as to be effective and valid under applicable law, but if any provision of the Credit Agreement and this agreement is prohibited by or invalid under any such law, that provision will be deemed ineffective to the extent of that prohibition or invalidity, without invalidating the remainder of that provision or the remaining provisions of the Credit Agreement and this agreement.

(b) This agreement is a Loan Document.

(c) This agreement binds each party and their respective successors and assigns, and this agreement inures to the benefit of each party and the successors and assigns of the Bank.

(d) Except as specifically modified or amended by the terms of this agreement , the terms and provisions of the Credit Agreement, the Subsidiary Guaranty, and the other Loan Documents are incorporated by reference herein and in all respects continue in full force and effect. The Borrower, by execution of this agreement, hereby reaffirms, assumes, and binds itself to all of the obligations, duties, rights, covenants, terms, and conditions contained in the Credit Agreement and the other Loan Documents to which it is a party.

(e) Each reference in the Credit Agreement to “this Agreement,” “hereunder,” “hereof,” or words of like import, and each reference to the Credit Agreement in any and all instruments or documents delivered in connection therewith, are deemed to refer to the Credit Agreement, as amended by this agreement.

(f) The Borrower shall pay all costs and expenses in connection with the preparation of this agreement and other related loan documents, including, without limitation, reasonable attorneys’ fees and time charges of attorneys who are employees of the Bank or any affiliate or parent of the Bank. The Borrower shall pay any and all stamp and other taxes, UCC search fees, filing fees, and other costs and expenses in connection with the execution and delivery of this agreement and the other instruments and documents to be delivered hereunder, and agrees to save the Bank harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such costs and expenses.

(g) The Borrower hereby waives and releases any and all current existing claims, counterclaims, defenses, or set-offs of every kind and nature which it has or might have against the Bank arising out of, pursuant to, or pertaining in any way to the Credit Agreement, any and all documents and instruments in connection with or relating to the foregoing, or this agreement. The Borrower hereby further covenants and agrees not to sue the Bank or assert any claims, defenses, demands, actions, or liabilities against the Bank arising out of, pursuant to, or pertaining in any way to the Credit Agreement, any and all documents and instruments in connection with or relating to the foregoing, or this agreement.

(h) The parties may sign this agreement in several counterparts, each of which will be deemed an original but all of which together will constitute one instrument.

[ Signature pages follow ]

The parties are signing this Amendment No. 3 to Credit Agreement as of the date stated in the introductory clause.

	CTI Industries Corporation

	By:	/s/ Stephen M. Merrick
	Name:	Stephen M. Merrick
	Title:	Executive Vice President and
		Chief Financial Officer

	/s/ John H. Schwan
	John H. Schwan

	/s/ Stephen M. Merrick
	Stephen M. Merrick


	CTI Helium, Inc.

	By:	/s/ Stephen M. Merrick
	Name:	Stephen M. Merrick
	Title:	Executive Vice President and Chief Financial Officer


	BMO Harris BANK N.A.

	By:	/s/ Timothy J. Moran
	Name:	Timothy J. Moran
	Title:	Senior Vice President Commercial Middle Market

Signature page to
Amendment No. 3 to Credit Agreement

Exhibit D

Replacement Revolving Note

	Chicago, Illinois
$12,000,000.00	July 17, 2012

On the Revolving Credit Termination Date, for value received, the undersigned, CTI Industries Corporation , an Illinois corporation (the “Borrower” ), hereby promises to pay to the order of BMO Harris Bank N.A. , a national banking association, successor to Harris N.A. (the “Bank” ), at its office at 111 West Monroe Street, Chicago, Illinois, the principal sum of (i) Twelve Million and no/100 Dollars ($12,000,000.00), or (ii) such lesser amount as may at the time of the maturity hereof, whether by acceleration or otherwise, be the aggregate unpaid principal amount of all Revolving Loans owing from the Borrower to the Bank under the Revolving Credit provided for in the Credit Agreement hereinafter mentioned.

This Replacement Revolving Note (this “Note” ) evidences Revolving Loans made and to be made to the Borrower by the Bank under the Revolving Credit provided for under that certain Credit Agreement dated as of April 29, 2010, between the Borrower and the Bank (said Credit Agreement, as the same may be amended, modified or restated from time to time, being referred to herein as the “Credit Agreement” ), and the Borrower hereby promises to pay interest at the office described above on such Revolving Loans evidenced hereby at the rates and at the times and in the manner specified therefor in the Credit Agreement.

This Note is issued by the Borrower under the terms and provisions of the Credit Agreement and is secured by, among other things, the Collateral Documents, and this Note and the holder hereof are entitled to all of the benefits and security provided for thereby or referred to therein, to which reference is hereby made for a statement thereof. This Note may be declared to be, or be and become, due prior to its expressed maturity, voluntary prepayments may be made hereon, and certain prepayments are required to be made hereon, all in the events, on the terms and with the effects provided in the Credit Agreement. All capitalized terms used herein without definition shall have the same meanings herein as such terms are defined in the Credit Agreement.

The Borrower hereby promises to pay all costs and expenses (including attorneys’ fees) suffered or incurred by the holder hereof in collecting this Note or enforcing any rights in any collateral therefor. The Borrower hereby waives presentment for payment and demand. This Note shall be construed in accordance with, and governed by, the internal laws of the State of Illinois without regard to principles of conflicts of laws.

This Note constitutes a renewal and restatement of, and replacement and substitution for, but is not a repayment of, that certain Revolving Note dated April 29, 2010, in the maximum principal amount of Nine Million and 00/100 Dollars ($9,000,000.00), executed by the Borrower and made payable to the order of the Bank (the “Original Note” ), as referred to in the Credit Agreement. The indebtedness evidenced by the Original Note is continuing indebtedness evidenced hereby. Except as specifically provided by the terms hereof, the terms of the Original Note are hereby merged into the terms hereof such that all security interests, mortgages and assignments previously granted to secure the Original Note are continuing and secure this Note. Nothing herein constitutes a payment, settlement or novation of the Original Note, or releases or otherwise adversely affects any lien, mortgage or security interest securing such indebtedness or any rights of the Bank against any guarantor, surety or other party primarily or secondarily liable for such indebtedness.

	CTI I ndustries C orporation

	By:	/s/ Stephen M. Merrick
	Name:	Stephen M. Merrick
	Title:	Executive Vice President and
		Chief Financial Officer

Exhibit E

Applicable Rate

Level	Senior Leverage Ratio	LIBOR Margin	Base Rate Margin	Commitment Fee	Letter of Credit Fee
I	Greater than or equal to 3.00 to 1.00	3.00%	0.50%	0.25%	2.50%
II	Less than 3.00 to 1.00 but greater than 2.00 to 1.00	2.75%	0.25%	0.25%	2.25%
III	Less than or equal to 2.00 to 1.00	2.50%	0.00%	0.25%	2.00%

Exhibit F

Borrowing Base Certificate

To: BMO Harris Bank N.A.

Pursuant to the terms of the Credit Agreement dated as of April 29, 2010, between CTI Industries Corporation, an Illinois corporation, and you (the “Credit Agreement” ), we submit this Borrowing Base Certificate to you and certify that the information set forth below and on any attachments to this certificate is true, correct and complete as of the date of this certificate.

I.	Borrowing Base

A.	Accounts in Borrowing Base

1. Gross Accounts
2. Less
(a) Owed by an account debtor who is not located within the U.S.)
(b) Owed by an account debtor who is a Subsidiary, Affiliate, shareholder, director, officer, or employee
(c) Owed by an account debtor who is in an insolvency or reorganization proceeding
(d) Unpaid more than ninety (90) days after the original invoice date
(e) Ineligible because of 25% taint factor
(f) Otherwise ineligible
Total Deductions (sum of lines I.A.2(a) through I.A.2(f))
3. Eligible Accounts (line I.A.1 minus I.A.2)
4. Accounts in Borrowing Base (line I.A.3 x 0.85)

B.	Inventory in Borrowing Base

1. Gross inventory of Finished Goods and Raw Materials
2. Less
(a) Finished Goods and Raw Materials not located at approved locations
(b) Obsolete, slow moving, or not merchantable
(c) Otherwise ineligible
Total Deductions (sum of lines I.B.2(a) through I.B.2(c))
3. Eligible Inventory (line I.B.1 minus line I.B.2)
4. Eligible Inventory included in Borrowing Base determination (line I.B.3 x 0.60)

C.	Inventory in Borrowing Base

1. Inventory Cap $6,500,000
2. Eligible Inventory Line I.B.4
3. Eligible Inventory in Borrowing Base (Lesser of lines I.C.1 and I.C.2)

D.	Total Borrowing Base

(sum of lines I.A.4 and I.C.3)

Revolving Credit Advances

1. Revolving Loans
2. Letters of Credit
Total Revolving Credit Outstanding (line I.E.1 plus line I.E.2)

Unused Availability

(line I.D minus I.E)

II.

Accounts Receivable Aging

General Ledger Activity		Accounts Receivable Aging
A/R at	$	Current
Add Sales	$	30-60 Days
Less Cash	( )	60-90 Days
Less Cm’s	( )	Over 90 Days	__________
A/R at	$	Total	$

III.

Accounts Payable Aging

Current
30-60 Days
60-90 Days
T otal

Withholding taxes have been paid through ______________________________________(date)

Dated as of this ____ day of __________________, ____.

	CTI I ndustries C orporation

	By:	/s/ Stephen M. Merrick
	Name:	Stephen M. Merrick
	Title:	Executive Vice President and
		Chief Financial Officer

Exhibit 10.2

Replacement Revolving Note

	Chicago, Illinois
$12,000,000.00	July 17, 2012

[ Signature page follows ]

	CTI I ndustries C orporation

	By:	/s/ Stephen M. Merrick
	Name:	Stephen M. Merrick
	Title:	Executive Vice President and
		Chief Financial Officer

Signature page to

Replacement Revolving Note (Amendment No. 3)

EXHIBIT 10.3

NOTE AND WARRANT PURCHASE AGREEMENT

DATED AS OF
July 17, 2012,

BETWEEN

CTI INDUSTRIES CORPORATION

AND

bmo pRIVATE eQUITY (u.S.), iNC.

TABLE OF CONTENTS

			Page

Section 1 Purchase and sale of the note and warrant			1

	Section 1.1	Note and Warrant	1
	Section 1.2	The Closing	1

Section 2 interest			1

	Section 2.1	Interest Rate; Computation	1
	Section 2.2	Default Rate	1

Section 3 fees, prepayments, terminations and applications			2

	Section 3.1	Fees	2
	Section 3.2	Voluntary Prepayments of the Note	2
	Section 3.3	Place and Application of Payments	3

Section 4 Collateral and Guaranties			3

	Section 4.1	Collateral	3
	Section 4.2	Liens on Real Property	4
	Section 4.3	Guaranties	4
	Section 4.4	Further Assurances	4

Section 5 Definitions; Interpretation			4

	Section 5.1	Definitions	4
	Section 5.2	Interpretation	13

Section 6 Representations and Warranties			13

	Section 6.1	Organization and Qualification	13
	Section 6.2	Subsidiaries	13
	Section 6.3	Authority and Validity of Obligations	14
	Section 6.4	Use of Proceeds; Margin Stock	14
	Section 6.5	Financial Reports	15
	Section 6.6	No Material Adverse Change	15
	Section 6.7	Full Disclosure	15
	Section 6.8	Trademarks, Franchises and Licenses	15
	Section 6.9	Governmental Authority and Licensing	15
	Section 6.10	Good Title	15
	Section 6.11	Litigation and Other Controversies	15
	Section 6.12	Taxes	16
	Section 6.13	Approvals	16
	Section 6.14	Affiliate Transactions	16
	Section 6.15	Investment Company	16
	Section 6.16	ERISA	16
	Section 6.17	Compliance with Laws	16

TABLE OF CONTENTS

(continued)

			Page

	Section 6.18	Other Agreements	17
	Section 6.19	Solvency	17
	Section 6.20	Broker Fees	17
	Section 6.21	No Default	17
	Section 6.22	Anti-Terrorism Laws	17
	Section 6.23	SEC Disclosure	18
	Section 6.24	Capital Structure	19

Section 7 Conditions Precedent			19

	Section 7.1	Conditions	19
	Section 7.2	Documents	20

Section 8 Covenants			23

	Section 8.1	Maintenance of Business	23
	Section 8.2	Maintenance of Properties	23
	Section 8.3	Taxes and Assessments	23
	Section 8.4	Insurance	23
	Section 8.5	Financial Reports	23
	Section 8.6	Inspection	26
	Section 8.7	Borrowings and Guaranties	26
	Section 8.8	Liens	27
	Section 8.9	Investments, Acquisitions, Loans and Advances	28
	Section 8.10	Mergers, Consolidations and Asset Sales	29
	Section 8.11	Maintenance of Subsidiaries	29
	Section 8.12	ERISA	29
	Section 8.13	Compliance with Laws	29
	Section 8.14	Intellectual Property	30
	Section 8.15	Burdensome Contracts with Affiliates	30
	Section 8.16	No Changes in Fiscal Year	30
	Section 8.17	Formation of Subsidiaries	30
	Section 8.18	Change in the Nature of Business	30
	Section 8.19	Use of Proceeds	30
	Section 8.20	No Restrictions	30
	Section 8.21	Other Debt	30
	Section 8.22	Bank Accounts	31
	Section 8.23	Financial Covenants	31
	Section 8.24	Board Matters	33
	Section 8.25	Investor Protection	33
	Section 8.26	Equity Restriction	33
	Section 8.27	Post-Closing	34

TABLE OF CONTENTS

(continued)

			Page

Section 9 representations and warranties of the purchaser			34

	Section 9.1	Organization and Good Standing	34
	Section 9.2	Authorization; Power	34
	Section 9.3	Validity	34
	Section 9.4	Accredited Investor	34
	Section 9.5	Purchase for Own Account; Acknowledgment of Risk	34

Section 10 Events of Default and Remedies			35

	Section 10.1	Events of Default	35
	Section 10.2	Consequences of Events of Default	37

Section 11 Miscellaneous			38

	Section 11.1	Non-Business Day	38
	Section 11.2	No Waiver, Cumulative Remedies	38
	Section 11.3	Amendments, Etc	38
	Section 11.4	Costs and Expenses; Indemnification	39
	Section 11.5	Documentary Taxes	40
	Section 11.6	Survival of Representations	40
	Section 11.7	Survival of Indemnities	40
	Section 11.8	Notices	40
	Section 11.9	Construction	41
	Section 11.10	Headings	41
	Section 11.11	Severability of Provisions	41
	Section 11.12	Counterparts	42
	Section 11.13	Binding Nature, Governing Law, Etc	42
	Section 11.14	Submission to Jurisdiction; Waiver of Jury Trial	42
	Section 11.15	USA Patriot Act	42

iii

Exhibit A	—	Form of Note
Exhibit B	—	Form of Warrant
Exhibit C	—	Compliance Certificate
Schedule 6.2 Schedule 8.7 Schedule 8.27	— — —	Subsidiaries Existing Intercompany Debt Post-Closing

note and warrant purchase Agreement

This NOTE AND WARRANT PURCHASE AGREEMENT is entered into as of July 17, 2012, by and between CTI INDUSTRIES CORPORATION, an Illinois corporation (the “Company” ), and BMO PRIVATE EQUITY (U.S.), INC., a Delaware corporation (the “Purchaser” ). All capitalized terms used herein without definition shall have the same meanings herein as such terms are defined in Section 5.1 hereof.

Preliminary Statement

The Company has requested, and the Purchaser has agreed to extend, a loan to the Company on the terms and conditions of this Agreement.

Now, Therefore, in consideration of the mutual agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

Section 1 Purchase and sale of the note and warrant.

Section 1.1 Note and Warrant . Subject to the terms and conditions hereof, at the Closing the Company shall sell to the Purchaser and the Purchaser shall purchase from the Company (a) the Note in the aggregate principal amount of $5,000,000 (the “ Note Amount ”), and (b) the Warrant to purchase, in the aggregate, four percent (4%) of the Company’s Common Stock on a fully-diluted basis. The Purchaser and the Company acknowledge and agree that the Note Amount shall be allocated as follows: (i) $4,390,085 of the Note Amount to the Note and (ii) $609,915 of the Note Amount to the Warrant.

Section 1.2 The Closing . The closing of the purchase and sale of the Securities (the “ Closing ”) shall take place on July 17, 2012, or on such other date as may be mutually agreeable to the Company and the Purchaser. At the Closing, the Company shall deliver to the Purchaser instruments evidencing the Note and the Warrant to be purchased by the Purchaser, payable to the order of the Purchaser or its nominee or registered in the Purchaser’s or its nominee’s name, respectively, upon payment by the Purchaser of the Note Amount, by wire transfer of immediately available funds to an account specified in writing by the Company to the Purchaser at least two (2) Business Days prior to the Closing.

Section 2 interest.

Section 2.1 Interest Rate; Computation . The Note shall bear interest on the unpaid principal balance thereof at the Current Interest Rate. All interest shall be computed on the basis of a year of 360 days for the actual number of days elapsed.

Section 2.2 Default Rate . Notwithstanding anything to the contrary contained herein, while any Event of Default exists or after acceleration, the Company shall pay interest (after as well as before entry of judgment thereon to the extent permitted by law) on the principal amount of the Note at the Default Rate.

Section 3 fees, prepayments, terminations and applications.

Section 3.1 Fees .

(a) Closing Fee. Concurrently with the Closing, the Company shall pay to the Purchaser, a closing fee of $100,000.00 which closing fee shall be fully earned on the Closing Date.

(b) Audit and Appraisal Fees. The Company shall pay to the Purchaser for its own use and benefit reasonable charges for audits of the Collateral by the Purchaser or its agents or representatives in such amounts as the Purchaser may from time to time reasonably request (the Purchaser acknowledging and agreeing that such charges shall be computed in the same manner as it at the time customarily uses for the assessment of charges for similar collateral audits actually performed by it). The Purchaser shall be entitled to conduct one (1) such audit (a “ Scheduled Field Audit ”) during each calendar year (unless any Default or Event of Default has occurred, in which case there shall be no limit on the number of such audits). In the absence of any Default or Event of Default, the Company shall not be required to reimburse the Purchaser for more than one (1) Scheduled Field Audit per calendar year.

Section 3.2 Voluntary Prepayments of the Note .

(a) Optional Prepayments of the Note . At any time and from time to time, the Company may, at its option, upon notice as provided in Section 3.2(b) , prepay all or any portion of the principal balance of the Note, on any quarterly payment date, in minimum increments of $500,000.00, plus a prepayment premium equal to the product obtained by multiplying (i) the amount being prepaid by (ii) the percentage set forth below opposite the time period in which such prepayment shall occur (the “ Prepayment Premium ”):

Time Period	Percentage

Closing Date to July 17, 2013	3%
July 18, 2013 to July 18, 2014	2%
July 19, 2014 to July 19, 2015	1%
July 20, 2015 to maturity	No Prepayment Premium

Except as provided in Section 3.2(a) and 3.2(c) hereof, the Note may not be voluntarily prepaid by the Company.

(b) Notice of Optional Prepayments; Officer’s Certificate . The Company will give the holder of the Note written notice of such optional prepayment under Section 3.2(a) not less than two (2) Business Days prior to the date fixed for such prepayment. Such notice shall be accompanied by an officer’s certificate (i) stating the principal amount thereof to be prepaid, (ii) stating the proposed date of prepayment and any conditions relating thereto and (iii) stating the Prepayment Premium required under Section 3.2(a) (calculated as of the date of such prepayment).

(i) In the event of a Change of Control, the Company will, at least thirty (30) days and not more than sixty (60) days prior to such Change of Control, give written notice thereof to the holder of the Securities, which shall contain a written irrevocable notice that the Company will prepay (a “ Prepayment Notice ”), by a date (the “ Prepayment Date ”) specified in such notice (which date shall be on or prior to the effective date of the Change of Control), all of the Obligations under the Note held by the holder in full (and not in part) in cash. Such notice may state that the Company’s prepayment is conditioned upon the consummation of such Change of Control. The Company shall pay to the holder the outstanding principal amount of the Note, together with all accrued and unpaid interest thereon.

(ii) Any notice by the Company to prepay the Note, and any subsequent prepayment thereof pursuant to this Section 3.2(c) , shall be accompanied by an officer’s certificate (A) stating the principal amount of the Note to be prepaid, (B) stating the Prepayment Date, (C) stating the accrued interest on the Note to the Prepayment Date to be prepaid, (D) stating the Prepayment Premium payable in connection with such proposed prepayment (calculated as of the date of such notice or prepayment, as the case may be), (E) certifying that the conditions of this Section 3.2(c) have been fulfilled, and (F) specifying the nature of the Change of Control, the transactions or proposed transactions resulting in such Change of Control and the date or proposed date of the occurrence of such Change of Control.

Section 3.3 Place and Application of Payments . All payments of principal, interest, fees, and all other Obligations payable hereunder shall be made to the Purchaser at its office at 111 West Monroe Street, Chicago, Illinois (or at such other place as the Purchaser may specify) no later than 1:00 p.m. (Chicago time) on the date any such payment is due and payable. Payments received by the Purchaser after 1:00 p.m. (Chicago time) shall be deemed received as of the opening of business on the next Business Day. All such payments shall be made in lawful money of the United States of America, in immediately available funds at the place of payment, without set-off or counterclaim and without reduction for, and free from, any and all present or future taxes, levies, imposts, duties, fees, charges, deductions, withholdings, restrictions, and conditions of any nature imposed by any government or any political subdivision or taxing authority thereof (but excluding any taxes imposed on or measured by the net income of the Purchaser). No amount paid or prepaid on the Note may be reborrowed.

Section 4 Collateral and Guaranties.

Section 4.1 Collateral . The Obligations shall be secured by valid, perfected, and enforceable Liens on all right, title, and interest of the Company in all accounts, instruments, documents, chattel paper, general intangibles (including, without limitation, patents, trademarks, tradenames, copyrights, and other intellectual property rights), investment property, deposit accounts, inventory, equipment, fixtures, and real estate, whether now owned or hereafter acquired or arising, and all proceeds thereof. The Company acknowledges and agrees that the Liens on the Collateral shall be valid and perfected second priority Liens (subject to Liens permitted by this Agreement), in each case pursuant to one or more Collateral Documents in form and substance satisfactory to the Purchaser.

Section 4.2 Liens on Real Property . The Obligations shall be further secured by a valid and enforceable first priority lien on the Mortgaged Premises pursuant to the Mortgage. In the event that the Company owns or hereafter acquires any other real property, the Company shall execute and deliver to the Purchaser (or a security trustee therefor) a mortgage or deed of trust acceptable in form and substance to the Purchaser for the purpose of granting to the Purchaser a Lien on such real property to secure the Obligations, shall pay all taxes, costs, and expenses incurred by the Purchaser in recording such mortgage or deed of trust, and shall supply to the Purchaser at the Company’s cost and expense a survey, environmental report, hazard insurance policy, and mortgagee’s policy of title insurance from a title insurer acceptable to the Purchaser insuring the validity of such mortgage or deed of trust and its status as a first Lien (subject to Liens permitted by this Agreement) on the real property encumbered thereby, and such other instrument, documents, certificates, and opinions reasonably required by the Purchaser in connection therewith.

Section 4.3 Guaranties . The payment and performance of the Obligations shall at all times be guaranteed by each direct and indirect domestic Subsidiary of the Company pursuant to one or more guaranty agreements in form and substance acceptable to the Purchaser (as the same may be amended, modified, or supplemented from time to time, individually a “Subsidiary Guaranty” and collectively the “Subsidiary Guaranties” ).

Section 4.4 Further Assurances . The Company agrees that it shall execute and deliver such documents and do such acts and things as the Purchaser may from time to time request in order to provide for or perfect or protect the Purchaser’s Lien on the Collateral.

Section 5 Definitions; Interpretation.

Section 5.1 Definitions . The following terms when used herein shall have the following meanings:

“Affiliate” means any Person directly or indirectly controlling or controlled by, or under direct or indirect common control with, another Person. A Person shall be deemed to control another Person for purposes of this definition if such Person possesses, directly or indirectly, the power to direct, or cause the direction of, the management and policies of the other Person, whether through the ownership of voting securities, common directors, trustees or officers, by contract or otherwise; provided that, in any event for purposes of this definition, any Person that owns, directly or indirectly, 5% or more of the securities having the ordinary voting power for the election of directors or governing body of a corporation or 5% or more of the partnership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to control such corporation or other Person. Notwithstanding anything to the contrary contained herein or in the Warrant, the Purchaser shall under no circumstances be deemed an “Affiliate” of the Company.

“Agreement” means this Note and Warrant Purchase Agreement, as the same may be amended, modified, or restated from time to time in accordance with the terms hereof.

“Anti-Terrorism Laws” is defined in Section 6.22 hereof.

“Asset Sale” means any sale, lease, conveyance, transfer, or other disposition of assets by the Company or any of its Subsidiaries (including by way of merger or consolidation or sale-leaseback transaction, but not including (a) any asset which is to be replaced, and is in fact replaced, within sixty (60) days with another asset performing the same or a similar function, and (b) sales of inventory in the ordinary course of business), whether in one transaction or a series or group of transactions.

“Authorized Representative” means those persons shown on the list of officers provided by the Company pursuant to Section 7.2 hereof or on any update of any such list provided by the Company to the Purchaser, or any further or different officer of the Company so named by any Authorized Representative of the Company in a written notice to the Purchaser.

“Borrowing Base” shall have the meaning given such term in the Senior Credit Agreement as in effect on the date hereof.

“Business Day” means any day other than a Saturday or Sunday on which banks are not authorized or required to close in Chicago, Illinois.

“Capital Lease” means any lease of Property which in accordance with GAAP is required to be capitalized on the balance sheet of the lessee.

“Capitalized Lease Obligation” means the amount of the liability shown on the balance sheet of any Person in respect of a Capital Lease determined in accordance with GAAP.

“Capital Stock” shall mean (i) in the case of a corporation, voting capital stock, (ii) in the case of an association or business entity, any and all Shares, interests, participations, rights or other equivalents (however designated) of voting capital stock, (iii) in the case of a partnership, voting partnership interests (whether general or limited), (iv) in the case of a limited liability company, voting membership or similar interests and (v) any other interest or participation that confers on a Person the right to vote and to receive a Share of the profits and losses of, or distributions of assets of, the issuing Person.

“ Change of Control ” is defined in Section 10.1(l) hereof.

“Closing” is defined in Section 1.2 hereof.

“ Closing Date ” means the date on which the Purchaser has received signed counterpart signature pages of this Agreement from each of the signatories and the conditions in Section 7.1 and 7.2 hereof have been fulfilled.

“Code” means the Internal Revenue Code of 1986, as amended, and any successor statute thereto.

“Collateral” means all properties, rights, interests, and privileges from time to time subject to the Liens granted to the Purchaser by the Collateral Documents.

“Collateral Documents” means the Mortgage, Security Agreement, Pledge Agreement, Patent Security Agreement, Trademark Security Agreement, Copyright Security Agreement, and all other mortgages, deeds of trust, security agreements, assignments, financing statements and other documents as shall from time to time secure the Obligations or any part thereof.

“ Common Stock ” means the common stock, no par value per share, of the Company.

“Company” is defined in the introductory paragraph hereof.

“Controlled Group” means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Company or any of its Subsidiaries, are treated as a single employer under Section 414 of the Code.

“Copyright Security Agreement” means that certain Copyright Security Agreement dated as of the date hereof, between the Company and the Purchaser, as the same may be amended, modified, supplemented, or restated from time to time.

“CTI Balloons” means CTI Balloons, Ltd., a private limited company incorporated under the laws of England and Wales and a Wholly-Owned Subsidiary.

“CTI Helium” means CTI Helium, Inc., an Illinois corporation and a Wholly-Owned Subsidiary.

“Current Interest Rate” means the rate of eleven and one-half percent (11.50%) per annum (computed on the basis of a 360-day year and the actual number of days elapsed in any year) on the unpaid principal amount of the Note outstanding from time to time from and including the date of issuance thereof until the date paid, or if less, at the highest rate then permitted under applicable law.

“Default” means any event or condition the occurrence of which would, with the passage of time or the giving of notice, or both, constitute an Event of Default.

“ Default Rate ” is defined in Section 10.2(a) hereof.

“Designee” is defined in Section 8.24 hereof.

“EBITDA” means, with reference to any period, (a) Net Income of the Company and its Subsidiaries, on a consolidated basis, for such period plus (b) all amounts deducted in arriving at such Net Income for such period in respect of (i) Interest Expense for such period, (ii) federal, state, and local income taxes for such period, and (iii) all amounts properly charged for depreciation of fixed assets and amortization of intangible assets during such period.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute thereto.

“Event of Default” means any event or condition identified as such in Section 10.1 hereof.

“ Excluded Flexo VIE Debt ” means all Indebtedness for Borrowed Money of Flexo owed to VLM or VLUS, subject to satisfaction of the following conditions: (a) such indebtedness was incurred under the leasing arrangement described in footnote 15 to the consolidated financial statements attached to the Company’s Form 10-K filed on March 31, 2011; (b) the aggregate amount of Flexo’s liability for such indebtedness does not exceed $1,000,000 at any time; (c) none of the Company and its other Subsidiaries has done any of the following: (i) directly or indirectly guaranteed such indebtedness; (ii) agreed (contingently or otherwise) to purchase or otherwise acquire such indebtedness; or (iii) otherwise assured VLM or VLUS against loss in respect of such indebtedness; and (d) no creditor of VLM or VLUS has recourse to the general credit of the Company or any of its other Subsidiaries as a result of including VLM and VLUS in the consolidated financial statements of the Company and its Subsidiaries.

“Executive Order” is defined in Section 6.22 hereof.

“Fixed Charges” means, with reference to any period, the sum of (a) the aggregate amount of payments required to be made by the Company and its Subsidiaries, on a consolidated basis, during such period in respect of principal on all Indebtedness for Borrowed Money (whether at maturity, as a result of mandatory sinking fund redemption, scheduled payments or otherwise) other than (i) Revolving Loans (as defined in the Senior Credit Agreement), (ii) Intercompany Debt, and (iii) in the case of Subordinated Debt, principal reductions caused by the exercise of warrants by the holders of such debt and principal reductions made prior to the date of this Agreement, plus (b) total interest expense (including interest on Subordinated Debt but excluding interest on Intercompany Debt) for such period.

“Fixed Charge Coverage Ratio” means, with reference to any period, the ratio of (a) the total for such period of (i) EBITDA, minus (ii) federal, state, and local income taxes paid by the Company during such period, minus (iii) the sum of all dividends declared by the Company during such period, minus (iv) the sum of all payments made in connection with the purchase, redemption, or other acquisition or retirement of any Capital Stock or other equity interests of the Company (or any warrants, options or similar instruments to acquire the same), minus (v) all Capital Expenditures which are not financed with Indebtedness for Borrowed Money, to (b) Fixed Charges for such period.

“Flexo” means Flexo Universal, S.A. de C.V., a Mexican sociedad anonima de capital variable and a 98.5%-owned Subsidiary of the Company.

“GAAP” means generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U.S. accounting profession), which are applicable to the circumstances as of the date of determination.

“Indebtedness for Borrowed Money” means for any Person (without duplication) (a) all indebtedness created, assumed or incurred in any manner by such Person representing money borrowed (including by the issuance of debt securities), (b) all indebtedness for the deferred purchase price of property or services (other than trade accounts payable arising in the ordinary course of business which are not more than thirty (30) days past due), (c) all indebtedness secured by any Lien upon Property of such Person, whether or not such Person has assumed or become liable for the payment of such indebtedness, (d) all Capitalized Lease Obligations of such Person, and (e) all obligations of such Person on or with respect to letters of credit, bankers’ acceptances, hedging obligations, synthetic leases, and other extensions of credit whether or not representing obligations for borrowed money. For the avoidance of doubt, “Indebtedness for Borrowed Money” shall not include obligations in respect of operating leases (as opposed to Capital Leases).

“Intercompany Debt” means Indebtedness for Borrowed Money owing (i) from the Company to any future additional borrower under the Note or a Wholly-Owned Subsidiary, or (ii) from a Wholly-Owned Subsidiary to a Company or any future additional borrower under the Note or another Wholly-Owned Subsidiary.

“ Junior Subordination Agreement ” means a subordination agreement between the Purchaser and any holder of Subordinated Debt, in form and substance acceptable to the Purchaser.

“Lien” means any mortgage, lien, security interest, pledge, charge, or encumbrance of any kind in respect of any Property, including the interests of a vendor or lessor under any conditional sale, Capital Lease or other title retention arrangement.

“Material Adverse Effect” means (a) a material adverse change in, or material adverse effect upon, the operations, business, Property, or condition (financial or otherwise) of the Company or of the Company and its Subsidiaries taken as a whole, (b) a material impairment of the ability of the Company or any Subsidiary to perform its obligations under any Operative Document, or (c) a material adverse effect upon (i) the legality, validity, binding effect or enforceability against the Company or any Subsidiary of any Operative Document or the rights and remedies of the Purchaser thereunder or (ii) the perfection or priority of any Lien granted under any Collateral Document.

“Maturity Date” means (x) January 18, 2018, or (y) if earlier, such earlier date on which the Note is accelerated pursuant to Sections 10.1 or 10.2 hereof.

“Merrick” means Stephen M. Merrick, an individual resident of the State of Illinois.

“Moody’s” means Moody’s Investors Service, Inc.

“Mortgage” means that certain Mortgage and Security Agreement with Assignment of Rents dated as of the date hereof, between the Company and the Purchaser, as the same may be amended, modified, supplemented, or restated from time to time.

“Mortgaged Premises” means the real property of the Company commonly known as 22160 North Pepper Road, Barrington, Illinois, and all buildings and improvements thereon, and all rents, issues, and profits therefrom.

“Net Income” means, for any Person, with reference to any period, the net income (or net loss) of such Person for such period computed in accordance with GAAP.

“Note” means that certain Senior Subordinated Promissory Note in the aggregate principal amount of Five Million and 00/100 Dollars ($5,000,000.00), issued to the Purchaser by the Company pursuant to this Agreement, in substantially the form attached hereto as Exhibit A , with the blanks appropriately filled in, as may be amended, restated, replaced, substituted or otherwise modified from time to time.

“Note Amount” is defined in Section 1.1 hereof.

“Obligations” means all obligations of the Company to pay principal and interest on the Note, all fees and charges payable hereunder, and all other payment obligations of the Company arising under or in relation to any Operative Document, including without limitation, any and all payment obligations under the Warrant, in each case whether now existing or hereafter arising, due or to become due, direct or indirect, absolute or contingent, and howsoever evidenced, held, or acquired.

“OFAC” is defined in Section 6.22 hereof.

“Operative Documents” means this Agreement, the Note, the Warrant, the Subsidiary Guaranties, the Collateral Documents and all other documents, instruments and agreements executed by or on behalf of the Company and delivered concurrently herewith or at any time hereafter to or for the Purchaser or any Affiliate of Purchaser, all as amended, restated or supplemented from time to time.

“Parent Board” is defined in Section 8.24 hereof.

“Patent Security Agreement” means that certain Patent Security Agreement dated as of the date hereof, between the Company and the Purchaser, as the same may be amended, modified, supplemented, or restated from time to time.

“PBGC” means the Pension Benefit Guaranty Corporation or any Person succeeding to any or all of its functions under ERISA.

“Permitted Holder” means (a) each of Schwan and Merrick; (b) in respect of Schwan and subject to the qualifications set forth in clause (d) of this definition, the John H. Schwan Grantor Retained Annuity Trust dated August 13, 2009; (c) in respect of Merrick and subject to the qualifications set forth in clause (d) of this definition, The Merrick Company, LLC, an Illinois limited liability company; and (d) any other trust or other estate-planning vehicle established for the benefit of any individual identified in clause (a) or any other individual having a relationship by blood (to the second degree of consanguinity), marriage, or adoption to any individual identified in clause (a) and in respect of which the applicable individual identified in clause (a) serves as trustee or in a similar capacity.

“Person” means an individual, partnership, corporation, limited liability company, association, trust, unincorporated organization, or any other entity or organization, including a government or agency or political subdivision thereof.

“Plan” means any employee pension benefit plan covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code that either (a) is maintained by a member of the Controlled Group for employees of a member of the Controlled Group or (b) is maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which a member of the Controlled Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions.

“Pledge Agreement” means that certain Pledge Agreement dated as of the date hereof, between the Company and the Purchaser, as the same may be amended, modified, supplemented, or restated from time to time.

“Prepayment Date” is defined in Section 3.2 hereof.

“Prepayment Notice” is defined in Section 3.2 hereof.

“Prepayment Premium” is defined in Section 3.2 hereof.

“Property” means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible.

“Purchaser” is defined in the introductory paragraph hereof.

“Schwan” means John H. Schwan, an individual resident of the State of Illinois.

“Scheduled Field Audit” is defined in Section 3.1 hereof.

“SEC Reports” is defined in Section 6.23 hereof.

“Securities” means, collectively, the Note and the Warrant.

“Securities Act” means the Securities Act of 1933, as amended, or any similar federal law then in force.

“Security Agreement” means that certain Security Agreement dated as of the date hereof, between the Company and the Purchaser, as the same may be amended, modified, supplemented, or restated from time to time.

“Securities Exchange Act” means the Securities Exchange Act of 1934, as amended, or any similar federal law then in force.

“Senior Credit Agreement” means that certain Credit Agreement, dated as of April 29, 2010, by and between the Company and the Senior Lender, as amended, supplemented or modified from time to time on or prior to the Closing Date or, after the Closing Date, in the manner permitted under the Senior Subordination Agreement.

“Senior Credit Documents” means the Senior Credit Agreement and the related agreements, documents and instruments, as amended, modified or supplemented in accordance with the Senior Subordination Agreement.

“Senior Debt” means the Indebtedness of the Company and extension of credit by the Senior Lender under the Senior Credit Agreement, together with extensions of credit pursuant to any modifications of the Senior Credit Agreement, to the extent permitted under the Senior Subordination Agreement, as the same may be amended, modified, supplemented or restated from time to time in accordance with the provisions of this Agreement.

“Senior Funded Debt” means, at any time the same is to be determined, the aggregate of all Indebtedness for Borrowed Money of the Company and its Subsidiaries, on a consolidated basis, at such time, plus all Indebtedness for Borrowed Money of any other person or entity which is directly or indirectly guaranteed by the Company or any of its Subsidiaries or which the Company or any of its Subsidiaries has agreed (contingently or otherwise) to purchase or otherwise acquire or in respect of which the Company or any of its Subsidiaries has otherwise assured a creditor against loss, minus , without duplication, the Obligations under the Note, the Subordinated Debt and Intercompany Debt. For purposes of this Agreement, “Senior Funded Debt” does not include any Excluded Flexo VIE Debt.

“Senior Lender” means BMO Harris Bank N.A. (formerly known as Harris N.A.) and its successors and assigns.

“Senior Leverage Ratio” means, as of any time it is to be determined, the ratio of Senior Funded Debt at such time to EBITDA for the four fiscal quarters of the Company then most recently ended.

“Senior Subordination Agreement” means that certain Subordination and Intercreditor Agreement dated as of July 17, 2012, by and between the Purchaser and the Senior Lender, as the same may be amended, modified, supplemented or restated from time to time in accordance with the terms hereof.

“Shares” shall mean certificated or uncertificated instruments or denominations that represent the ownership of the Capital Stock of any Person.

“Subordinated Debt” means Indebtedness for Borrowed Money owing to any Person on terms and conditions, and in such amounts, acceptable to the Purchaser and which is subordinated in right of payment to the prior payment in full of the Obligations pursuant to a Junior Subordination Agreement, or written subordination provisions, in each case approved in writing by the Purchaser.

“Subordinated Debt Documents” means any documents, guaranties, agreements and instruments evidencing, securing or otherwise pertaining to the Subordinated Debt.

“Subsidiary” means any corporation or other Person more than 50% of the outstanding ordinary voting Shares or other equity interests of which is at the time directly or indirectly owned by the Company, by one or more of its Subsidiaries, or by the Company and one or more of its Subsidiaries.

“Subsidiary Guaranty” and “Subsidiary Guaranties” each is defined in Section 4.3 hereof.

“Total Funded Debt” means, at any time the same is to be determined, the aggregate of all Indebtedness for Borrowed Money of the Company and its Subsidiaries, on a consolidated basis, at such time, plus all Indebtedness for Borrowed Money of any other person or entity which is directly or indirectly guaranteed by the Company or any of its Subsidiaries or which the Company or any of its Subsidiaries has agreed (contingently or otherwise) to purchase or otherwise acquire or in respect of which the Company or any of its Subsidiaries has otherwise assured a creditor against loss. For purposes of this Agreement, “Total Funded Debt” does not include any Excluded Flexo VIE Debt.

“Total Leverage Ratio” means, as of any time it is to be determined, the ratio of Total Funded Debt at such time to EBITDA for the four fiscal quarters of the Company then most recently ended.

“Trademark Security Agreement” means that certain Trademark Security Agreement dated as of the date hereof, between the Company and the Purchaser, as the same may be amended, modified, supplemented, or restated from time to time.

“Unfunded Vested Liabilities” means, for any Plan at any time, the amount (if any) by which the present value of all vested nonforfeitable accrued benefits under such Plan exceeds the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the Controlled Group to the PBGC or the Plan under Title IV of ERISA.

“USA Patriot Act” is defined in Section 6.22 hereof.

“VLM” means Venture Leasing Mexico S.A. de R.L., a Mexican sociedad anonima de responsabilidad limitada and an Affiliate of the Company.

“VLUS” means Venture Leasing L.L.C., an Illinois limited liability company and an Affiliate of the Company.

“Warrant” means and includes that certain Warrant Agreement dated the date hereof, issued by the Company in favor of the Purchaser to acquire an aggregate of four percent (4%) of the Common Stock of the Company, on a fully-diluted basis, in substantially the form attached hereto as Exhibit B , with the blanks appropriately filled in, as may be amended, restated or supplemented from time to time.

“Welfare Plan” means a “welfare plan” as defined in Section 3(1) of ERISA.

“Wholly-Owned Subsidiary” means a Subsidiary of which all of the issued and outstanding Shares of Capital Stock (other than directors’ qualifying Shares as required by law) or other equity interests are owned by the Company and/or one or more Wholly-Owned Subsidiaries within the meaning of this definition.

Section 5.2 Interpretation . The foregoing definitions are equally applicable to both the singular and plural forms of the terms defined. The words “hereof” , “herein” , and “hereunder” and words of like import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. All references to time of day herein are references to Chicago, Illinois time unless otherwise specifically provided. Where the character or amount of any asset or liability or item of income or expense is required to be determined or any consolidation or other accounting computation is required to be made for the purposes of this Agreement, it shall be done in accordance with GAAP except where such principles are inconsistent with the specific provisions of this Agreement.

Section 6 Representations and Warranties.

The Company represents and warrants to the Purchaser as follows:

Section 6.1 Organization and Qualification . The Company is duly organized, validly existing, and in good standing as a corporation under the laws of the State of Illinois, has full and adequate power to own its Property and conduct its business as now conducted, and is duly licensed or qualified and in good standing in each jurisdiction in which the nature of the business conducted by it or the nature of the Property owned or leased by it requires such licensing or qualifying where the failure to do so could reasonably be expected to have a Material Adverse Effect.

Section 6.2 Subsidiaries . Each Subsidiary is duly organized, validly existing, and in good standing under the laws of the jurisdiction in which it is incorporated or organized, as the case may be, has full and adequate power to own its Property and conduct its business as now conducted, and is duly licensed or qualified and in good standing in each jurisdiction in which the nature of the business conducted by it or the nature of the Property owned or leased by it requires such licensing or qualifying where the failure to do so could reasonably be expected to have a Material Adverse Effect. Schedule 6.2 hereto identifies each Subsidiary, the jurisdiction of its incorporation or organization, as the case may be, the percentage of issued and outstanding Shares of each class of its Capital Stock or other equity interests owned by the Company and the Subsidiaries and, if such percentage is not 100% (excluding directors’ qualifying Shares as required by law), a description of each class of its authorized Capital Stock and other equity interests and the number of Shares of each class issued and outstanding. All of the outstanding Shares of Capital Stock and other equity interests of each Subsidiary are validly issued and outstanding and fully paid and nonassessable and all such Shares and other equity interests indicated on Schedule 6.2 as owned by the Company or a Subsidiary are owned, beneficially and of record, by the Company or such Subsidiary free and clear of all Liens other than Liens granted to the Purchaser. There are no outstanding commitments or other obligations of any Subsidiary to issue, and no options, warrants or other rights of any Person to acquire, any Shares of any class of Capital Stock or other equity interests of any Subsidiary.

Section 6.3 Authority and Validity of Obligations . The Company has full right and authority to enter into this Agreement and the other Operative Documents, to issue the Note and the Warrant in evidence thereof, to grant to the Purchaser the Liens described in the Collateral Documents, and to perform all of its obligations hereunder and under the other Operative Documents. Each Subsidiary has full right and authority to enter into the Operative Documents executed by it, to guarantee the Obligations, to grant to the Purchaser the Liens described in the Collateral Documents executed by it, and to perform all of its obligations under the Operative Documents executed by it. The Operative Documents delivered by the Company and its Subsidiaries have been duly authorized, executed, and delivered by such Persons and constitute valid and binding obligations of the Company and its Subsidiaries enforceable against them in accordance with their terms except as enforceability may be limited by bankruptcy, insolvency, fraudulent conveyance, or similar laws affecting creditors’ rights generally and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law); and this Agreement and the other Operative Documents do not, nor does the performance or observance by the Company or any Subsidiary of any of the matters and things herein or therein provided for, (a) contravene or constitute a default under any provision of law or any judgment, injunction, order or decree binding upon the Company or any Subsidiary or any provision of the organizational documents ( e.g. , charter, certificate or articles of incorporation and by-laws, certificate or articles of association and operating agreement, partnership agreement, or other similar organizational documents) of the Company or any Subsidiary or any covenant, indenture or agreement of or affecting the Company or any Subsidiary or any of their Property, or (b) result in the creation or imposition of any Lien on any Property of the Company or any Subsidiary other than the Liens granted in favor of the Purchaser and the Senior Lender.

Section 6.4 Use of Proceeds; Margin Stock . The Company shall use the proceeds of the issuance of the Note to repay certain existing Indebtedness for Borrowed Money to the Senior Lender under the Senior Credit Agreement and for its general working capital purposes and for such other legal and proper purposes as are consistent with all applicable laws. Neither the Company nor any Subsidiary is engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System), and no part of the proceeds of the Note hereunder will be used to purchase or carry any such margin stock or to extend credit to others for the purpose of purchasing or carrying any such margin stock.

Section 6.5 Financial Reports . The consolidated balance sheet of the Company and its Subsidiaries as at December 31, 2011, and the related consolidated statements of income, retained earnings, and cash flows of the Company and its Subsidiaries for the fiscal year then ended, and accompanying notes thereto, which financial statements are accompanied by the audit report of Blackman Kallick, LLP, independent public accountants, and the unaudited interim consolidated balance sheet of the Company and its Subsidiaries as at May 31, 2012, and the related consolidated statements of income, retained earnings, and cash flows of the Company and its Subsidiaries for the three months then ended, heretofore furnished to the Purchaser, fairly present the consolidated financial condition of the Company and its Subsidiaries as at said dates and the consolidated results of their operations and cash flows for the periods then ended in conformity with GAAP applied on a consistent basis. Neither the Company nor any Subsidiary has contingent liabilities which are material to it other than as indicated on such financial statements or, with respect to future periods, on the financial statements furnished pursuant to Section 8.5 hereof.

Section 6.6 No Material Adverse Change. Since December 31, 2011, there has been no change in the condition (financial or otherwise) or business prospects of the Company or any Subsidiary except those occurring in the ordinary course of business, none of which individually or in the aggregate have been materially adverse.

Section 6.7 Full Disclosure . The statements and information furnished to the Purchaser in connection with the negotiation of this Agreement and the other Operative Documents and the commitment by the Purchaser to provide all or part of the financing contemplated hereby do not contain any untrue statements of a material fact or omit a material fact necessary to make the material statements contained herein or therein not misleading, the Purchaser acknowledging that, as to any projections furnished to the Purchaser, the Company only represents that the same were prepared on the basis of information and estimates the Company believed to be reasonable.

Section 6.8 Trademarks, Franchises and Licenses . The Company and its Subsidiaries own, possess or have the right to use all necessary patents, licenses, franchises, trademarks, trade names, trade styles, copyrights, trade secrets, know how, and confidential commercial and proprietary information to conduct their businesses as now conducted, without known conflict with any patent, license, franchise, trademark, trade name, trade style, copyright, or other proprietary right of any other Person.

Section 6.9 Governmental Authority and Licensing . The Company and its Subsidiaries have received all licenses, permits, and approvals of all federal, state, local, and foreign governmental authorities, if any, necessary to conduct their businesses, in each case where the failure to obtain or maintain the same could reasonably be expected to have a Material Adverse Effect. No investigation or proceeding which, if adversely determined, could reasonably be expected to result in revocation or denial of any material license, permit or approval is pending or, to the knowledge of the Company, threatened.

Section 6.10 Good Title . The Company and its Subsidiaries have good and defensible title (or valid leasehold interests) to their assets as reflected on the most recent consolidated balance sheet of the Company and its Subsidiaries furnished to the Purchaser (except for sales of assets by the Company and its Subsidiaries in the ordinary course of business), subject to no Liens other than such thereof as are permitted by Section 8.8 hereof.

Section 6.11 Litigation and Other Controversies. There is no litigation or governmental or arbitration proceeding or labor controversy pending, nor to the knowledge of the Company threatened, against the Company or any Subsidiary or any of their Property which if adversely determined could reasonably be expected to have a Material Adverse Effect.

Section 6.12 Taxes . All tax returns required to be filed by the Company or any Subsidiary in any jurisdiction have, in fact, been filed, and all taxes, assessments, fees, and other governmental charges upon the Company or any Subsidiary or upon any of their Property, income or franchises, which are shown to be due and payable in such returns, have been paid except such taxes, assessments, fees, and governmental charges, if any, as are being contested in good faith and by appropriate proceedings which prevent enforcement of the matter under contest and as to which adequate reserves established in accordance with GAAP have been provided. The Company does not know of any proposed additional tax assessment against it or its Subsidiaries for which adequate provisions in accordance with GAAP have not been made on their accounts. Adequate provisions in accordance with GAAP for taxes on the books of the Company and its Subsidiaries have been made for all open years, and for the current fiscal period.

Section 6.13 Approval s. No authorization, consent, license, or exemption from, or filing or registration with, any court or governmental department, agency, or instrumentality, nor any approval or consent of any other Person, is or will be necessary to the valid execution, delivery, or performance by the Company or any Subsidiary of any Operative Document, except for such approvals which have been obtained prior to the date of this Agreement and remain in full force and effect.

Section 6.14 Affiliate Transactions. Neither the Company nor any Subsidiary is a party to any contracts or agreements with any of its Affiliates on terms and conditions which are less favorable to the Company or such Subsidiary than would be usual and customary in similar contracts or agreements between Persons not affiliated with each other.

Section 6.15 Investment Company. Neither the Company nor any Subsidiary is an “investment company” or a company “controlled” by an “investment company” within the meaning of the Investment Company Act of 1940, as amended.

Section 6.16 ERISA . The Company and each other member of its Controlled Group has fulfilled its obligations under the minimum funding standards of, and is in compliance in all material respects with, ERISA and the Code to the extent applicable to it and has not incurred any liability to the PBGC or a Plan under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA. Neither the Company nor any Subsidiary has any contingent liabilities with respect to any post-retirement benefits under a Welfare Plan, other than liability for continuation coverage described in article 6 of Title I of ERISA.

Section 6.17 Compliance with Laws . The Company and its Subsidiaries are in compliance with the requirements of all federal, state and local laws, rules and regulations applicable to or pertaining to their Property or business operations (including, without limitation, the Occupational Safety and Health Act of 1970, the Americans with Disabilities Act of 1990, and laws and regulations establishing quality criteria and standards for air, water, land and toxic or hazardous wastes and substances), non-compliance with which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. Neither the Company nor any Subsidiary has received notice to the effect that its operations are not in compliance with any of the requirements of applicable federal, state or local environmental, health and safety statutes and regulations or are the subject of any governmental investigation evaluating whether any remedial action is needed to respond to a release of any toxic or hazardous waste or substance into the environment, which non-compliance or remedial action, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.

Section 6.18 Other Agreements . Neither the Company nor any Subsidiary is in default under the terms of any covenant, indenture or agreement of or affecting the Company, any Subsidiary or any of their Property, which default if uncured could reasonably be expected to have a Material Adverse Effect.

Section 6.19 Solvency . The Company and its Subsidiaries are solvent, able to pay their debts as they become due, and have sufficient capital to carry on their business and all businesses in which they are about to engage.

Section 6.20 Broker Fees . No broker’s or finder’s fee or commission will be payable with respect hereto or any of the transactions contemplated hereby; and the Company hereby indemnifies the Purchaser against, and agrees that it will hold the Purchaser harmless from, any claim, demand, or liability for any such broker’s or finder’s fees alleged to have been incurred in connection herewith or therewith and any expenses (including reasonable attorneys’ fees) arising in connection with any such claim, demand, or liability.

Section 6.21 No Default. No Default or Event of Default has occurred and is continuing and no default or event of default has occurred and is continuing under the Senior Credit Documents.

Section 6.22 Anti-Terrorism Laws .

(a) Neither the Company nor, to the Company’s knowledge, any Affiliates of the Company, is in violation of any laws relating to terrorism or money laundering (“ Anti-Terrorism Laws ”), including Executive Order No. 13224 on Terrorist Financing, effective September 24, 2001 (the “ Executive Order ”), and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Public Law 107-56, signed into law October 26, 2001 (the “ USA Patriot Act ”).

(b) Neither the Company nor, to the Company’s knowledge, any Affiliates of the Company, or brokers or other agents of such Person acting or benefiting in any capacity in connection with the Note hereunder, is any of the following:

(i) a Person that is listed in the annex to, or is otherwise subject to the provisions of, the Executive Order;

(ii) a Person owned or controlled by, or acting for or on behalf of, any Person that is listed in the annex to, or is otherwise subject to the provisions of, the Executive Order;

(iii) a Person with whom the Purchaser is prohibited from dealing or otherwise engaging in any transaction by any Anti-Terrorism Law;

(iv) a Person that commits, threatens or conspires to commit or supports “terrorism” as defined in the Executive Order; or

(v) a Person that is named as a “specially designated national and blocked person” on the most current list published by the USA Treasury Department Office of Foreign Assets Control (“ OFAC ”) at its official website or any replacement website or other replacement official publication of such list.

(c) Neither the Company nor, to the Company’s knowledge, any Affiliates of the Company, or brokers or other agents of such Person acting or benefiting in any capacity in connection with the Note hereunder, (i) conducts any business or engages in making or receiving any contribution of funds, goods or services to or for the benefit of any Person described in clause (b) above, (ii) deals in, or otherwise engages in any transaction relating to, any property or interests in property blocked pursuant to the Executive Order, or (iii) engages in or conspires to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any of the prohibitions set forth in any Anti-Terrorism Law.

Section 6.23 SEC Disclosure . The Common Stock of the Company is registered pursuant to Section 12(b) or 12(g) of the Securities Exchange Act, and the Company has timely filed all proxy statements, reports, schedules, forms, statements and other documents required to be filed by it under the Securities Exchange Act. The Company has filed (a) its Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and (b) its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2012 (collectively, the “ SEC Reports ”). Each SEC Report was, at the time of its filing, in substantial compliance with the requirements of its respective form and none of the SEC Reports, nor the financial statements (and the notes thereto) included in the SEC Reports, as of their respective filing dates, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Reports comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the United States Securities and Exchange Commission or other applicable rules and regulations with respect thereto. Such financial statements have been prepared in accordance with GAAP applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed) and fairly present in all material respects the financial condition, the results of operations and the cash flows of the Company and its Subsidiaries, on a consolidated basis, as of, and for, the periods presented in each such SEC Report.

Section 6.24 Capital Structure.

(a) Generally . The authorized capital stock of the Company consists of (i) five million (5,000,000) shares of Common Stock, of which there are three million two hundred thirteen thousand one hundred forty-six (3,213,146) shares issued and outstanding as of the Closing Date and no shares held in the treasury of the Company; (ii) five hundred thousand (500,000) shares of Class B Common Stock, no par value per share (the “ Class B Common Stock ”), of which there are zero (0) shares issued and outstanding as of the Closing Date and no shares held in the treasury of the Company; and (iii) two million (2,000,000) shares of Preferred Stock, no par value, of which zero (0) shares are issued and outstanding as of the Closing Date and no shares held in the treasury of the Company. All outstanding shares of the Company’s Common Stock, Class B Common Stock and Preferred Stock are duly authorized, validly issued, fully paid and nonassessable and are not subject to preemptive rights created by statute, the Articles of Incorporation or Bylaws of the Company or any agreement or document to which the Company is a party or by which it is bound. Shares of the Company’s Class B Common Stock are convertible into shares of the Common Stock, and shares of the Company’s Preferred Stock are not convertible into any Capital Stock of the Company.

(b) Obligations With Respect to Capital Stock . Except as set forth on Schedule 6.24(b) , and except for the Warrant, as of the Closing Date, there are no options, warrants, equity securities, partnership interests or similar ownership interests of any class of the Company, or any securities exchangeable or convertible into or exercisable for such equity securities, partnership interests or similar ownership interests, issued, reserved for issuance or outstanding. As of the Closing Date, except as described on Schedule 6.24(b) , and except for the Warrant, there are no options, warrants, equity securities, partnership interests or similar ownership interests, calls, rights (including preemptive rights), commitments or agreements of any character to which the Company or any of its Subsidiaries is a party or by which it is bound obligating the Company or any of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, or repurchase, redeem or otherwise acquire, or cause the repurchase, redemption or acquisition, of any shares of Capital Stock, partnership interests or similar ownership interests of the Company or any of its Subsidiaries or obligating the Company or any of its Subsidiaries to grant, extend, accelerate the vesting of or enter into any such option, warrant, equity security, call, right, commitment or agreement.

Section 7 Conditions Precedent.

The obligation of the Purchaser to purchase and pay for the Securities is subject to fulfillment on or prior to the Closing Date of the following conditions precedent to the satisfaction of the Purchaser in its sole discretion:

Section 7.1 Conditions. As of the time of the purchase of the Securities by the Purchaser:

(a) each of the representations and warranties set forth in Section 6 hereof and in the other Operative Documents shall be true and correct as of such time, except to the extent the same expressly relate to an earlier date;

(b) no Default or Event of Default shall have occurred and be continuing or would occur as a result of the purchase of the Securities by the Purchaser;

(c) the Company shall have simultaneously sold to the Purchaser the Securities to be purchased by the Purchaser hereunder at the Closing;

(d) the Company shall have made all filings under all applicable federal and state securities laws necessary to consummate the issuance of the Securities pursuant to this Agreement in compliance with such laws;

(e) the purchase and sale of the Securities shall not violate any order, judgment or decree of any court or other authority or any provision of law or regulation applicable to the Purchaser (including, without limitation, Regulation U of the Board of Governors of the Federal Reserve System, the Securities Act and the Securities Exchange Act) as then in effect;

(f) the Company and the Senior Lender shall have entered into an amendment to the Senior Credit Agreement, all conditions to its effectiveness shall have been satisfied, no default or event of default shall have occurred and be continuing under the Senior Credit Agreement and the Company shall have sufficient availability of funds under the Senior Credit Agreement for working capital purposes on the Closing Date;

(g) since December 31, 2011 there shall have been no change in the financial condition, operating results, assets, operations, business prospects, results, assets, operations, business prospects, employee relations or customer or supplier relations of the Company or any of its Subsidiaries which would have a Material Adverse Effect;

(h) the Purchaser shall have received evidence satisfactory to it that the Company’s pro forma fixed charges are covered by projected cash flow by at least 1.2 times;

(i) no default of event of default shall have occurred and be continuing under any contract, agreement or arrangement for Indebtedness for Borrowed Money of the Company and its Subsidiaries which would reasonably be expected to have a Material Adverse Effect;

(j) the Purchaser shall have completed a due diligence review of the Company and its Subsidiaries and their respective records, financial condition and operations, which due diligence review shall be satisfactory to the Purchaser in its sole discretion; and

(k) the conditions to closing under the Senior Credit Agreement shall have been satisfied.

Section 7.2 Documents. At or prior to the purchase of the Securities, the Purchaser shall have received the following (each to be properly executed and completed) in form and substance satisfactory to the Purchaser:

(a) this Agreement, the Note and the Warrant, duly executed by the Company and the Purchaser, as applicable;

(b) the Mortgage, the Security Agreement, the Pledge Agreement, the Patent Security Agreement, the Trademark Security Agreement, and the Copyright Security Agreement from the Company, together with any financing statements requested by the Purchaser;

(d) a Junior Subordination Agreement from each of Merrick, Schwan and the Company in favor of the Purchaser, together with copies of the subordinated note and any other loan documents executed in connection therewith;

(e) evidence of the maintenance of insurance by the Company as required hereby or by the Collateral Documents;

(f) copies (executed or certified as may be appropriate) of resolutions of the Board of Directors or other governing body of the Company authorizing the execution, delivery, and performance of the Operative Documents;

(g) articles of incorporation (or equivalent organizational document) of the Company certified by the appropriate governmental office of the state of its organization;

(h) by-laws (or equivalent organizational document) for the Company certified by an appropriate officer of the Company acceptable to the Purchaser;

(i) an incumbency certificate containing the name, title and genuine signature of the Company’s Authorized Representatives;

(j) good standing certificates for the Company, dated as of a date no earlier than 30 days prior to the date hereof, from the appropriate governmental offices in the state of its incorporation or organization and in each state in which it is qualified to do business as a foreign organization;

(k) reserved;

(l) reserved;

(m) an ALTA survey prepared by a state-licensed surveyor on the Mortgaged Premises certified to the Purchaser and the title insurance company issuing the title policy referred to below;

(n) a flood determination report prepared for the Purchaser by a flood determination company selected by the Purchaser stating whether or not any portion of the Mortgaged Premises and the improvements thereon are in a federally designated flood hazard area;

(o) a mortgagee’s title insurance policy (or a prepaid binding commitment therefor) in the aggregate amount of not less than $4,000,000 insuring the Lien of the Purchaser on the premises subject to the Lien of the Mortgage to be a valid, first mortgage lien subject to no defects or objections except those permitted by Section 8.8 hereof, together with such endorsements as the Purchaser may reasonably require;

(p) evidence satisfactory to the Purchaser that an aggregate principal amount of $5,000,000 of the Senior Debt has been paid to the Senior Lender;

(q) except to the extent waived in writing by the Purchaser, landlords’ lien waivers in connection with the Property of the Company located in leased premises;

(r) the Purchaser shall have received payment of the closing fee called for hereby, together with all fees, costs and expenses incurred by the Purchaser in connection with the negotiation and documentation of this Agreement and the other Operative Documents and the transactions contemplated hereby and thereby;

(s) the Purchaser shall have received such field examination reports, valuations and certifications as it may require in order to satisfy itself as to the value of the Collateral, the financial condition of the Company and its Subsidiaries, and the lack of material contingent liabilities of the Company and its Subsidiaries;

(t) legal matters incident to the execution and delivery of the Operative Documents and to the transactions contemplated hereby shall be satisfactory to the Purchaser and its counsel; and the Purchaser shall have received the favorable written opinion of counsel for the Company in form and substance satisfactory to the Purchaser and its counsel;

(u) the Purchaser shall have received a copy of the Borrowing Base certificate in the form attached as Exhibit F to the Senior Credit Agreement showing the computation of the Borrowing Base in reasonable detail as of the close of business one Business Day prior to the Closing Date;

(v) the Purchaser shall have received financing statement, tax and judgment lien search results against the Property of the Company and its Subsidiaries evidencing the absence of Liens on their Property except as permitted by Section 8.8 hereof;

(w) the Liens granted to the Purchaser under the Collateral Documents shall have been perfected in a manner satisfactory to the Purchaser and its counsel;

(x) the Purchaser shall have received the Company’s audited financial statements for the twelve-month period ending December 31, 2011 and the Company’s monthly financial statements for the twelve-month period ending May 31, 2012;

(y) the Purchaser shall have received evidence satisfactory to it that the 2011 adjusted EBITDA of the Company is equal to or greater than $3,500,000.00, and any adjustments to the Company’s EBITDA shall be acceptable to the Purchaser in its sole discretion; and

(z) the Purchaser shall have received such other agreements, instruments, documents, certificates and opinions as the Purchaser may reasonably request.

Section 8 Covenants.

The Company agrees that, so long as any portion of the Note remains outstanding (and except to the extent otherwise provided in the Warrant), except to the extent compliance in any case or cases is waived in writing by the Purchaser:

Section 8.1 Maintenance of Business. The Company shall, and shall cause each Subsidiary to, preserve and maintain its existence. The Company shall, and shall cause each Subsidiary to, preserve and keep in force and effect all licenses, permits and franchises necessary to the proper conduct of its business.

Section 8.2 Maintenance of Properties. The Company shall maintain, preserve, and keep its property, plant, and equipment in good repair, working order and condition (ordinary wear and tear excepted) and shall from time to time make all needful and proper repairs, renewals, replacements, additions, and betterments thereto so that at all times the efficiency thereof shall be fully preserved and maintained, and shall cause each Subsidiary to do so in respect of Property owned or used by it.

Section 8.3 Taxes and Assessment s. The Company shall duly pay and discharge, and shall cause each Subsidiary to duly pay and discharge, all taxes, rates, assessments, fees, and governmental charges upon or against it or its Property, in each case before the same become delinquent and before penalties accrue thereon, unless and to the extent that the same are being contested in good faith and by appropriate proceedings which prevent enforcement of the matter under contest and adequate reserves are provided therefor.

Section 8.4 Insurance. The Company shall insure and keep insured, and shall cause each Subsidiary to insure and keep insured, with good and responsible insurance companies, all insurable Property owned by it which is of a character usually insured by Persons similarly situated and operating like Properties against loss or damage from such hazards and risks, and in such amounts, as are insured by Persons similarly situated and operating like Properties; and the Company shall insure, and shall cause each Subsidiary to insure, such other hazards and risks (including employers’ and public liability risks) with good and responsible insurance companies, as and to the extent usually insured by Persons similarly situated and conducting similar businesses. The Company shall in any event maintain insurance on the Collateral to the extent required by the Collateral Documents. The Purchaser shall be listed as “Lender’s Loss Payee” and “Mortgagee” with respect to all property insurance and as an “Additional Insured” with respect to all liability insurance. Company shall upon request furnish to the Purchaser a certificate setting forth in summary form the nature and extent of the insurance maintained pursuant to this Section.

Section 8.5 Financial Reports. The Company shall, and shall cause each Subsidiary to, maintain a standard system of accounting in accordance with GAAP and shall furnish to the Purchaser and its duly authorized representatives such information respecting the business and financial condition of the Company and its Subsidiaries as the Purchaser may reasonably request; and without any request, shall furnish to the Purchaser:

(a) concurrently with delivery to the Senior Lender, and in any event within fifteen (15) days after the last day of each calendar month, a copy of the Borrowing Base certificate in the form attached as Exhibit F to the Senior Credit Agreement showing the computation of the Borrowing Base in reasonable detail as of the close of business on the last day of such month, together with an accounts receivable and accounts payable aging and an inventory report supporting the computation of the Borrowing Base, prepared by the Company and certified to by its chief financial officer or such other officer acceptable to the Purchaser;

(b) as soon as available, and in any event within forty-five (45) days after the last day of each calendar month, a copy of the consolidated and consolidating balance sheet of the Company and its Subsidiaries as of the last day of such period and the consolidated and consolidating statements of income, retained earnings, and cash flows of the Company and its Subsidiaries for the calendar month and the fiscal year-to-date period then ended, each in reasonable detail showing in comparative form the figures for the corresponding date and period in the previous fiscal year and a comparison to the business plan, prepared by the Company in accordance with GAAP and certified to by its chief financial officer or such other officer acceptable to the Purchaser;

(c) as soon as available, and in any event within forty-five (45) days after the last day of each fiscal quarter of the Company, a copy of the consolidated and consolidating balance sheet of the Company and its Subsidiaries as of the last day of such period and the consolidated and consolidating statements of income, retained earnings, and cash flows of the Company and its Subsidiaries for the fiscal quarter and the fiscal year-to-date period then ended, each in reasonable detail showing in comparative form the figures for the corresponding date and period in the previous fiscal year and a comparison to the business plan, prepared by the Company in accordance with GAAP and certified to by its chief financial officer or such other officer acceptable to the Purchaser;

(d) as soon as available, and in any event within one hundred twenty (120) days after the last day of each fiscal year of the Company, a copy of the audited consolidated and consolidating balance sheet of the Company and its Subsidiaries as of the close of such period and the audited consolidated and consolidating statements of income, retained earnings, and cash flows of the Company and its Subsidiaries for such period, and accompanying notes thereto, each in reasonable detail showing in comparative form the figures for the previous fiscal year, accompanied by an unqualified opinion thereon of Blackman Kallick, LLP, or another firm of independent public accountants of recognized standing, selected by the Company and reasonably satisfactory to the Purchaser, to the effect that the financial statements have been prepared in accordance with GAAP and present fairly in accordance with GAAP the consolidated financial condition of the Company and its Subsidiaries as of the close of such fiscal year and the results of their operations and cash flows for the fiscal year then ended and that an examination of such accounts in connection with such financial statements has been made in accordance with generally accepted auditing standards and, accordingly, such examination included such tests of the accounting records and such other auditing procedures as were considered necessary in the circumstances;

(e) within the period provided in subsection (d) above, the written statement of the accountants who certified the audit report thereby required that in the course of their audit they have obtained no knowledge of any Default or Event of Default, or, if such accountants have obtained knowledge of any such Default or Event of Default, they shall disclose in such statement the nature and period of the existence thereof;

(f) promptly after receipt thereof, any additional written reports, management letters or other detailed information contained in writing concerning significant aspects of the Company’s or any Subsidiary’s operations and financial affairs given to it by its independent public accountants;

(g) as soon as available, and in any event no later than thirty (30) days after the end of each fiscal year of the Company, a copy of the Company’s consolidated and consolidating business plan for the following fiscal year, such business plan to show the Company’s projected consolidated and consolidating revenues, expenses, and balance sheet on a month-by-month basis, such business plan to be in reasonable detail prepared by the Company and in form reasonably satisfactory to the Purchaser;

(h) promptly after knowledge thereof shall have come to the attention of any responsible officer of the Company, written notice of (i) any threatened or pending litigation or governmental or arbitration proceeding or labor controversy against the Company or any Subsidiary or any of their Property which, if adversely determined, could reasonably be expected to have a Material Adverse Effect or (ii) the occurrence of any Default or Event of Default hereunder;

(i) promptly after the sending or filing thereof, copies of any proxy statements, financial statements or reports that the Company has made generally available to its Shareholders; copies of any regular, periodic and special reports or registration statements or prospectuses that the Company files with the Securities and Exchange Commission or any other Governmental Authority, or any securities exchange; and copies of any press releases or other statements made available by the Company to the public concerning material changes to or developments in the business of the Company;

(j) as soon as available, and in any event within forty-five (45) days after the last day of each fiscal quarter of the Company, a written certificate in the form attached hereto as Exhibit C signed by the chief financial officer of the Company, or such other officer of the Company satisfactory to the Purchaser, to the effect that to the best of such officer’s knowledge and belief no Default or Event of Default has occurred during the period covered by such statements or, if any such Default or Event of Default has occurred during such period, setting forth a description of such Default or Event of Default and specifying the action, if any, taken by the Company to remedy the same, together with calculations supporting such statements in respect of Section 8.23 of this Agreement; and

(k) concurrently with delivery thereof to the Senior Lender, copies of all statements, reports certificates and other documents which the Company or any of its Subsidiaries or other Persons delivers to the Senior Lender by or on behalf of the Company or such Subsidiary.

Section 8.6 Inspection . The Company shall, and shall cause each Subsidiary to, permit the Purchaser and its duly authorized representatives and agents to visit and inspect any of the Properties, books and financial records of the Company and each Subsidiary, to examine and make copies of the books of accounts and other financial records of the Company and each Subsidiary, to perform audits of the Collateral, and to discuss the affairs, finances and accounts of the Company and each Subsidiary with, and to be advised as to the same by, its officers, employees, and independent public accountants (and by this provision the Company hereby authorizes such accountants to discuss with the Purchaser the finances and affairs of the Company and of each Subsidiary) at such reasonable times and reasonable intervals as the Purchaser may designate.

Section 8.7 Borrowings and Guaranties. The Company shall not, nor shall it permit any Subsidiary to, issue, incur, assume, create, or have outstanding any Indebtedness for Borrowed Money, or be or become liable as endorser, guarantor, surety, or otherwise for any debt, obligation, or undertaking of any other Person, or otherwise agree to provide funds for payment of the obligations of another, or supply funds thereto or invest therein or otherwise assure a creditor of another against loss, or apply for or become liable to the issuer of a letter of credit which supports an obligation of another, or subordinate any claim or demand it may have to the claim or demand of any other Person; provided, however, that the foregoing shall not restrict nor operate to prevent:

(a) the Obligations of the Company owing to the Purchaser under the Operative Documents and other indebtedness and obligations of the Company owing to the Purchaser;

(b) reserved;

(c) obligations of the Company and its Subsidiaries arising out of interest rate and foreign currency hedging agreements entered into with financial institutions in the ordinary course of business and not for speculation;

(d) endorsement of items for deposit or collection of commercial paper received in the ordinary course of business;

(e) reserved;

(f) indebtedness of the Company and Flexo to Merrick and Schwan existing on the date hereof in an aggregate principal amount not to exceed $1,500,000 on the date hereof, as reduced by payments thereon, and provided that any indebtedness of the Company to Merrick and Schwan shall be Subordinated Debt;

(g) unsecured Intercompany Debt existing on the date hereof and identified on Schedule 8.7 ;

(h) unsecured Intercompany Debt incurred after the date hereof in an amount not to exceed $575,000 in the aggregate at any one time outstanding;

(i) unsecured indebtedness of the Company and its Subsidiaries not otherwise permitted by this Section in an amount not to exceed $115,000 in the aggregate at any one time outstanding; and

(j) indebtedness of the Company constituting the Senior Debt.

Section 8.8 Liens. The Company shall not, nor shall it permit any Subsidiary to, create, incur or permit to exist any Lien of any kind on any Property owned by any such Person; provided, however, that the foregoing shall not apply to nor operate to prevent:

(a) Liens arising by statute in connection with worker’s compensation, unemployment insurance, old age benefits, social security obligations, taxes, assessments, statutory obligations, or other similar charges (other than Liens arising under ERISA), good faith cash deposits in connection with tenders, contracts, or leases to which the Company or any Subsidiary is a party or other cash deposits required to be made in the ordinary course of business, provided in each case that the obligation is not for borrowed money and that the obligation secured is not overdue or, if overdue, is being contested in good faith by appropriate proceedings which prevent enforcement of the matter under contest and adequate reserves have been established therefor;

(b) mechanics’, workmen’s, materialmen’s, landlords’, carriers’, or other similar Liens arising in the ordinary course of business with respect to obligations which are not due or which are being contested in good faith by appropriate proceedings which prevent enforcement of the matter under contest;

(c) the pledge of assets for the purpose of securing an appeal, stay or discharge in the course of any legal proceeding, provided that the aggregate amount of liabilities of the Company and its Subsidiaries secured by a pledge of assets permitted under this subsection, including interest and penalties thereon, if any, shall not be in excess of $287,500 at any one time outstanding;

(d) reserved;

(e) any interest or title of a lessor under any operating lease;

(f) easements, rights-of-way, restrictions, and other similar encumbrances against real property incurred in the ordinary course of business which, in the aggregate, are not substantial in amount and which do not materially detract from the value of the Property subject thereto or materially interfere with the ordinary conduct of the business of the Company or any Subsidiary;

(g) reserved;

(h) Liens granted in favor of the Purchaser pursuant to the Collateral Documents; and

(i) Liens granted in favor of the Senior Lender in connection with the Senior Debt.

Section 8.9 Investments, Acquisitions, Loans and Advances . The Company shall not, nor shall it permit any Subsidiary to, directly or indirectly, make, retain, or have outstanding any investments (whether through purchase of stock or obligations or otherwise) in, or loans or advances to, any other Person, or acquire all or any substantial part of the assets or business of any other Person or division thereof; provided, however, that the foregoing shall not apply to nor operate to prevent:

(a) investments in direct obligations of the United States of America or of any agency or instrumentality thereof whose obligations constitute full faith and credit obligations of the United States of America, provided that any such obligations shall mature within one year of the date of issuance thereof;

(b) investments in commercial paper rated at least P-1 by Moody’s and at least A-1 by S&P maturing within one year of the date of issuance thereof;

(c) investments in certificates of deposit issued by the Senior Lender or by any United States commercial bank having capital and surplus of not less than $100,000,000 which have a maturity of one year or less;

(d) investments in repurchase obligations with a term of not more than 7 days for underlying securities of the types described in subsection (a) above entered into with any bank meeting the qualifications specified in subsection (c) above, provided all such agreements require physical delivery of the securities securing such repurchase agreement, except those delivered through the Federal Reserve Book Entry System;

(e) investments in money market funds that invest solely, and which are restricted by their respective charters to invest solely, in investments of the type described in the immediately preceding subsections (a) , (b) , (c) , and (d) above;

(f) the Company’s ownership interest existing on the date of this Agreement in its Subsidiaries;

(g) investments constituting Intercompany Debt permitted under Section 8.7 ; and

(h) other investments, loans and advances in addition to those otherwise permitted by this Section in an amount not to exceed $115,000 in the aggregate at any one time outstanding.

In determining the amount of investments, acquisitions, loans, and advances permitted under this Section, investments and acquisitions shall always be taken at the original cost thereof (regardless of any subsequent appreciation or depreciation therein), and loans and advances shall be taken at the principal amount thereof then remaining unpaid.

Section 8.10 Mergers, Consolidations and Asset Sales. The Company shall not, nor shall it permit any Subsidiary to, be a party to any merger or consolidation, or engage in any Asset Sale, including as part of a sale and leaseback transaction, or in any event sell or discount (with or without recourse) any of its notes or accounts receivable; provided, however, that this Section shall not apply to nor operate to prevent:

(a) the sale, transfer, or other disposition of any tangible personal property that, in the reasonable business judgment of the Company or its Subsidiary, has become uneconomical, obsolete, or worn out, and which is disposed of in the ordinary course of business; and

(b) the sale, transfer, lease, or other disposition of Property of the Company or any Subsidiary (including any disposition of Property as part of a sale and leaseback transaction) aggregating for the Company and its Subsidiaries not more than $100,000 during any fiscal year of the Company.

Section 8.11 Maintenance of Subsidiaries. The Company shall not assign, sell or transfer, nor shall it permit any Subsidiary to issue, assign, sell or transfer, any Shares of Capital Stock of a Subsidiary; provided, however, that the foregoing shall not operate to prevent (a) the issuance, sale and transfer to any person of any Shares of Capital Stock of a Subsidiary solely for the purpose of qualifying, and to the extent legally necessary to qualify, such person as a director of such Subsidiary, (b) Liens on the Capital Stock of Subsidiaries granted to the Purchaser pursuant to the Collateral Documents and (c) Liens on the Capital Stock of Subsidiaries granted to the Senior Lender pursuant to the Senior Credit Documents.

Section 8.12 ERISA. The Company shall, and shall cause each Subsidiary to, promptly pay and discharge all obligations and liabilities arising under ERISA of a character which if unpaid or unperformed could reasonably be expected to result in the imposition of a Lien against any of its Property. The Company shall, and shall cause each Subsidiary to, promptly notify the holder of the Note of: (a) the occurrence of any reportable event (as defined in ERISA) with respect to a Plan, (b) receipt of any notice from the PBGC of its intention to seek termination of any Plan or appointment of a trustee therefor, (c) its intention to terminate or withdraw from any Plan, and (d) the occurrence of any event with respect to any Plan which would result in the incurrence by the Company or any Subsidiary of any material liability, fine or penalty, or any material increase in the contingent liability of the Company or any Subsidiary with respect to any post-retirement Welfare Plan benefit.

Section 8.13 Compliance with Laws. The Company shall, and shall cause each Subsidiary to, comply in all respects with the requirements of all federal, state, local, and foreign laws, rules, regulations, ordinances and orders applicable to or pertaining to its Property or business operations, where any such non-compliance, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect or result in a Lien upon any of its Property.

Section 8.14 Intellectual Property. The Company shall, and shall cause each Subsidiary to, possess and maintain all Intellectual Property necessary to the conduct of their respective businesses and own all right, title and interest in and to, or have a valid license for, all such Intellectual Property, except to the extent the failure to so possess, maintain, own or have does not, and reasonably could not be expected to, result in, either individually or in the aggregate, a Material Adverse Effect. The Company shall not, nor shall it permit any Subsidiary to, take any action, or fail to take any action, which would result in the invalidity, abandonment, misuse or unenforceability of any of its Intellectual Property or which would infringe upon or misappropriate any rights of other Persons, except to the extent such invalidity, abandonment, misuse, unenforceability, infringement, or misappropriation does not, and reasonably could not be expected to, result in, individually or in the aggregate, a Material Adverse Effect.

Section 8.15 Burdensome Contracts with Affiliates. The Company shall not, nor shall it permit any Subsidiary to, enter into any contract, agreement or business arrangement with any of its Affiliates on terms and conditions which are less favorable to the Company or such Subsidiary than would be usual and customary in similar contracts, agreements or business arrangements between Persons not affiliated with each other.

Section 8.16 No Changes in Fiscal Year. The fiscal year of the Company and its Subsidiaries ends on December 31 of each year; and the Company shall not, nor shall it permit any Subsidiary to, change its fiscal year from its present basis.

Section 8.17 Formation of Subsidiaries. The Company shall not, nor shall it permit any Subsidiary to, form or acquire any other Subsidiary.

Section 8.18 Change in the Nature of Business. The Company shall not, nor shall it permit any Subsidiary to, engage in any business or activity if as a result the general nature of the business of the Company or any Subsidiary would be changed in any material respect from the general nature of the business engaged in by it as of the date hereof.

Section 8.19 Use of Proceeds . The Company shall use the proceeds of the Note solely for the purposes set forth in, or otherwise permitted by, Section 6.4 hereof.

Section 8.20 No Restrictions . Except as provided herein, the Company shall not, nor shall it permit any Subsidiary to, directly or indirectly create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of the Company or any Subsidiary to: (a) pay dividends or make any other distribution on any Subsidiary’s Capital Stock or other equity interests owned by the Company or any other Subsidiary, (b) pay any indebtedness owed to the Company or any other Subsidiary, (c) make loans or advances to the Company or any other Subsidiary, (d) transfer any of its Property to the Company or any other Subsidiary, (e) guarantee the Obligations and/or grant Liens on its assets to the Purchaser as required by the Operative Documents, or (f) guarantee the Senior Debt and/or grant Liens on its assets to the Senior Lender as required by the Senior Credit Documents.

Section 8.21 Other Debt. The Company shall not, nor shall it permit any Subsidiary to, a) amend or modify any of the terms or conditions relating to Subordinated Debt, b) make any voluntary prepayment of Subordinated Debt or effect any voluntary redemption thereof, c) make any payment on account of Subordinated Debt which is prohibited under the terms of any Junior Subordination Agreement or other instrument or agreement subordinating the same to the Obligations, or (d) amend or modify any of the terms or conditions of the Senior Credit Documents or relating to the Senior Debt owing to the Senior Lender in violation of the terms of the Senior Subordination Agreement.

Section 8.22 Bank Accounts . The Company shall not establish any new deposit accounts or other bank accounts, other than deposit accounts or other bank accounts established at or with the Senior Lender, without the prior written consent of the Purchaser.

Section 8.23 Financial Covenants .

(a) Senior Leverage Ratio. As of the last day of each fiscal quarter of the Company, the Company shall not permit the Senior Leverage Ratio for the four fiscal quarters of the Company then ended to be more than the amount set forth below for such fiscal quarter:

Fiscal Quarter Ending	Level
June 30, 2012 and September 30, 2012	3.65 to 1.00
December 31, 2012 and March 31, 2013	3.40 to 1.00
June 30, 2013 and September 30, 2013	3.10 to 1.00
December 31, 2013, and each fiscal quarter thereafter	2.75 to 1.00

(b) Total Leverage Ratio . As of the last day of each fiscal quarter of the Company, the Company shall not permit the Total Leverage Ratio for the four fiscal quarters of the Company then ended to be more than the amount set forth below for such fiscal quarter:

Fiscal Quarter Ending	Level
June 30, 2012	5.80 to 1.00
September 30, 2012	5.45 to 1.00
December 31, 2012 and March 31, 2013	5.10 to 1.00
June 30, 2013 and September 30, 2013	4.85 to 1.00
December 31, 2013, and each fiscal quarter thereafter	4.60 to 1.00

(c) Fixed Charge Coverage Ratio. As of the last day of each fiscal quarter of the Company, the Company shall not permit the Fixed Charge Coverage Ratio for the four fiscal quarters of the Company then ended to be less than 1.00 to 1.00.

(d) Capital Expenditures . The Company shall not, and shall not permit any of its Subsidiaries to, make or commit to make, directly or indirectly, any Capital Expenditure if, after giving effect thereto, the aggregate amount of all Capital Expenditures by the Company and its Subsidiaries would exceed the amount set forth below for such fiscal year:

Fiscal Year Ending	Amount
December 31, 2012	$4,500,000
December 31, 2013 and each fiscal year thereafter	$775,000

Notwithstanding anything to the contrary in this Section 8.23(d), if the amount of Capital Expenditures permitted to be made by the Company and its Subsidiaries pursuant hereto in any fiscal year is greater than the amount of Capital Expenditures actually made by the Company and its Subsidiaries during such fiscal year (without giving effect to any carry forward permitted by this clause), fifty percent (50%) of such excess (the “ Carried-Forward Amount ”) may be carried forward and utilized by the Company and its Subsidiaries to make Capital Expenditures solely in the immediately succeeding fiscal year. For the avoidance of doubt, (i) if any portion of the Carried-Forward Amount for any fiscal year is not used in the immediately succeeding fiscal year to make Capital Expenditures, such portion will not be included in any subsequent Carried-Forward Amount for, or carried forward to, any subsequent fiscal year and (ii) in determining any Carried-Forward Amount, the amount expended in any fiscal year shall first be deemed to be from the amount allocated to such fiscal year (before giving effect to any Carried-Forward Amount). Additionally, if in fiscal year 2012 the ERP system is not completed and any portion of the $500,000 of the Company’s budgeted Capital Expenditures for the ERP system is not actually made, then any unspent portion may be Carried Forward to any subsequent fiscal year to complete the ERP system. If in fiscal year 2012 the latex processing plant is not completed and any portion of the $1,500,000 of the Company’s budgeted Capital Expenditures for the latex processing plant is not actually made, then any unspent portion may be Carried Forward to any subsequent fiscal year to complete the latex processing plant.

Section 8.24 Board Matters . The Company shall hold meetings of its Board of Directors (the “ Parent Board ”) at least once every quarter. The Parent Board shall have an audit committee and a compensation committee. Members of the audit committee and the compensation committee shall be members of the Parent Board that are not employees of the Company or any of its Subsidiaries. The Purchaser shall have the right to designate one individual (the “ Designee ”) who shall have observation rights with respect to all meetings of the Parent Board and the Board of Directors of any Subsidiary of the Company (each, a “Subsidiary Board”). The Designee shall have the right to attend each meeting of the Parent Board and each Subsidiary Board and all committees, respectively, thereof. The Parent Board and each Subsidiary Board shall give the Designee and the Purchaser notice of each meeting of the Parent Board and each Subsidiary Board and each committee thereof at the same time and in the same manner as notices given to the members of the Parent Board and each Subsidiary Board. The Designee and the Purchaser shall be entitled to receive all written materials and other information given to members of the Parent Board and each Subsidiary Board and each Subsidiary Board and each committee thereof in connection with such meetings at the same time such materials and information are given to all other members of the Parent Board and each Subsidiary Board and such committees. The Company shall reimburse the Designee for reasonable out-of-pocket expenses in connection with attending the Parent Board and each Subsidiary Board and committee meetings. The Company agrees to take any and all actions necessary to effectuate the intent of the foregoing provisions of this Section 8.24 .

Section 8.25 Investor Protection . In connection with any Change of Control or similar transaction under circumstances where the Purchaser or the holder thereof continues to hold the Warrant, the Company shall make, or cause to be made, available to the Purchaser and/or the holder all economic benefits in a manner that treats the Purchaser and/or the holder equitably with respect to all other equity holders of the Company. In this regard, the Company agrees to structure any Change of Control or similar transaction, under circumstances where the Purchaser or the holder thereof continues to hold the Warrant, in order to treat all equity holders, including the Purchaser and/or the holder, in a fair and equitable manner and such transaction structure shall not include disguised purchase price components in the form of payments allocated to covenants not to compete, consulting payments and the like, except for employment agreements or similar agreements providing for reasonable “arms length” levels of compensation to such equity holder in return for future services to be rendered to the acquirer subsequent to a Change of Control.

Section 8.26 Equity Restriction . The Company shall not:

(a) directly or indirectly make, or permit any of its Subsidiaries to make, any purchase of any Capital Stock, or directly or indirectly redeem, purchase or make, or permit any of its Subsidiaries to redeem, purchase or make, any payments with respect to any stock appreciation rights, phantom stock plans or similar rights or plans; provided, however, that the Company may redeem shares of its Capital Stock from Merrick and Schwan so long as such redemptions do not reduce the number of shares of Capital Stock held by the Permitted Holders below thirty-seven percent (37%) of the issued and outstanding voting Shares of the Capital Stock or other equity interests of the Company at any time or the voting power to elect a majority of the Company’s board of directors, including, without limitation, as the result of the exercise by one or more secured parties of one or more security interests in respect of any ownership interest in the Company; and

(b) authorize, issue or enter into any agreement providing for the issuance (contingent or otherwise) of any notes or debt securities containing equity features (including, without limitation, any notes or debt securities convertible into or exchangeable for Capital Stock or other equity securities issued in connection with the issuance of Capital Stock, or other equity securities or containing profit participation features) at a price at issuance which is lower than the then current market price of the Company’s Capital Stock except as otherwise expressly contemplated by this Agreement.

Section 8.27 Post-Closing . The Company shall satisfy the requirements and/or provide to the Purchaser each of the documents, instruments, agreements and information set forth on Schedule 8.27 , in form and substance acceptable to the Purchaser, on or before the date specified for such requirement in Schedule 8.27 or such later date to be determined by the Purchaser, in its sole discretion, each of which shall be completed or provided in form and substance satisfactory to the Purchaser.

Section 9 representations and warranties of the purchaser.

As a material inducement to the Company entering into this Agreement and selling the Securities hereunder, the Purchaser hereby represents and warrants to the Company as follows:

Section 9.1 Organization and Good Standing . It is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite power and authority to carry on its business as now conducted.

Section 9.2 Authorization; Power . The execution and delivery by it of, and the performance by it under, the Operative Documents to which it is a party and the purchase of the Note and the Warrant issued in favor of it have been duly authorized by all requisite action, and it has the full right, power and authority to enter into, and perform its obligations under, this Agreement.

Section 9.3 Validity . This Agreement has been duly executed and delivered by it and constitutes its valid and binding obligation, enforceable in accordance with its terms, except as the same may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors’ rights generally or by general equitable principles, regardless of whether such enforceability is considered in a proceeding in equity or at law. The execution, delivery and performance of this Agreement and the purchase of the Securities will not conflict with, or result in a material breach of any of the terms of, or constitute a material default under, its charter documents.

Section 9.4 Accredited Investor . It is an “accredited investor” as such term is defined in Rule 501 of Regulation D under the Securities Act.

Section 9.5 Purchase for Own Account; Acknowledgment of Risk . It is acquiring the Securities purchased hereunder by it or acquired pursuant hereto by it for its own account without the present intention of resale or distribution. It acknowledges that it may not resell or otherwise transfer such Securities without an effective registration statement or exemption therefrom under federal and applicable state securities laws, and that it may have to hold its investment for an indefinite amount of time. It further acknowledges that the purchase of the Securities is a risky investment and that it may lose its entire investment hereby.

Section 10 Events of Default and Remedies.

Section 10.1 Events of Default . Any one or more of the following shall constitute an “Event of Default” hereunder:

(a) default in the payment when due of all or any part of any principal or interest due under the Note or any other Obligation payable by the Company hereunder or under any other Operative Document (whether at the stated maturity thereof or at any other time provided for in this Agreement), or default shall occur in the payment when due of any other indebtedness or obligation (whether direct, contingent or otherwise) of the Company owing to the Purchaser; or

(b) default in the observance or performance of any covenant set forth in Section 8.1, 8.4, 8.7, 8.8, 8.9, 8.10, 8.11, 8.16, 8.17, 8.18, 8.20, 8.21, 8.23 , or 8.26 hereof or of any provision of any Operative Document requiring the maintenance of insurance on the Collateral subject thereto or dealing with the use or remittance of proceeds of Collateral; or

(c) default in the observance or performance of any other provision hereof or of any other Operative Document which is not remedied within thirty (30) days after the earlier of (i) the date on which such failure shall first become known to any officer of the Company or (ii) written notice thereof is given to the Company by the Purchaser; or

(d) any representation or warranty made by the Company or any Subsidiary herein or in any other Operative Document, or in any statement or certificate furnished by it pursuant hereto or thereto, or in connection with the purchase and sale of the Securities, proves untrue in any material respect as of the date of the issuance or making thereof; or

(e) any event occurs or condition exists (other than those described in subsections (a) through (d) above) which is specified as an event of default under any of the other Operative Documents, or any of the Operative Documents shall for any reason not be or shall cease to be in full force and effect, or any of the Operative Documents is declared to be null and void, or any of the Collateral Documents shall for any reason fail to create a valid and perfected second priority Lien in favor of the Purchaser in any Collateral purported to be covered thereby except as expressly permitted by the terms thereof, or the Company or any Subsidiary takes any action for the purpose of terminating, repudiating or rescinding any Operative Document executed by it or any of its obligations thereunder; or

(f) default shall occur under the Subordinated Debt Documents, or default shall occur under any Indebtedness for Borrowed Money issued, assumed or guaranteed by the Company or any Subsidiary (excluding the Senior Credit Documents) aggregating more than $316,250, or under any indenture, agreement or other instrument under which the same may be issued, and such default shall continue for a period of time sufficient to permit the acceleration of the maturity of any such Indebtedness for Borrowed Money (whether or not such maturity is in fact accelerated), or any such Indebtedness for Borrowed Money shall not be paid when due (whether by lapse of time, acceleration or otherwise); or

(g) any judgment or judgments, writ or writs, or warrant or warrants of attachment, or any similar process or processes in an aggregate amount in excess of $316,250 shall be entered or filed against the Company or any Subsidiary or against any of their Property and which remains unvacated, unbonded, unstayed or unsatisfied for a period of 30 days; or

(h) the Company or any member of its Controlled Group shall fail to pay when due an amount or amounts aggregating in excess $316,250 which it shall have become liable to pay to the PBGC or to a Plan under Title IV of ERISA; or notice of intent to terminate a Plan or Plans having aggregate Unfunded Vested Liabilities in excess of $316,250 (collectively, a “Material Plan” ) shall be filed under Title IV of ERISA by the Company or any other member of its Controlled Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any Material Plan or a proceeding shall be instituted by a fiduciary of any Material Plan against the Company or any member of its Controlled Group to enforce Section 515 or 4219(c)(5) of ERISA and such proceeding shall not have been dismissed within 30 days thereafter; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; or

(i) dissolution or termination of the existence of the Company or any Subsidiary; or

(j) the Company or any Subsidiary shall (i) have entered involuntarily against it an order for relief under the United States Bankruptcy Code, as amended, (ii) not pay, or admit in writing its inability to pay, its debts generally as they become due, (iii) make an assignment for the benefit of creditors, (iv) apply for, seek, consent to, or acquiesce in, the appointment of a receiver, custodian, trustee, examiner, liquidator or similar official for it or any substantial part of its Property, (v) institute any proceeding seeking to have entered against it an order for relief under the United States Bankruptcy Code, as amended, to adjudicate it insolvent, or seeking dissolution, winding up, liquidation, reorganization, arrangement, adjustment or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors or fail to file an answer or other pleading denying the material allegations of any such proceeding filed against it, (vi) take any action in furtherance of any matter described in parts (i) through (v) above, or (vii) fail to contest in good faith any appointment or proceeding described in Section 10.1(k) hereof; or

(k) a custodian, receiver, trustee, examiner, liquidator or similar official shall be appointed for the Company or any Subsidiary or any substantial part of any of their Property, or a proceeding described in Section 10.1(j)(v) shall be instituted against the Company or any Subsidiary, and such appointment continues undischarged or such proceeding continues undismissed or unstayed for a period of 60 days; or

(l) the occurrence of any of the following (each, a “ Change of Control ”): (i) the Permitted Holders shall cease to collectively own and control, directly and free and clear of all Liens (other than (A) Liens existing as of the Closing Date that have been disclosed to the Purchaser and (B) Liens consented to in writing by the Purchaser), at least thirty-seven percent (37%) of the issued and outstanding voting Shares of the Capital Stock or other equity interests of the Company at any time or the voting power to elect a majority of the Company’s board of directors, including, without limitation, as the result of the exercise by one or more secured parties of one or more security interests in respect of any ownership interest in the Company; (ii) the granting by any Permitted Holder, directly or indirectly, after the Closing Date and without the prior written consent of the Purchaser, of a security interest in its ownership interest in the Company if the secured party’s exercise of remedies in respect of that security interest could reasonably be expected to result in the occurrence of one or more events of the kind described in clause (i); (iii) Schwan and Merrick shall cease to hold the titles of Chairman and Chief Financial Officer or equivalent positions, respectively, of the Company; (iv) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act, as amended) (other than Merrick or Schwan) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 10% or more of either (x) the then outstanding Shares of common stock of the Company or (y) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of Directors; or (v) the Company ceases to directly own free and clear of all Liens (other than Liens permitted pursuant to Section 8.8 ) 100% of the issued and outstanding Shares of the Capital Stock or other equity interests of its Subsidiaries, except as a result of intercompany mergers or liquidations otherwise expressly permitted under this Agreement; or

(m) the subordination provisions of any Subordinated Debt or any Junior Subordination Agreement relating thereto shall for any reason be revoked or invalid or otherwise cease to be in full force and effect in any material respect, or the Obligations shall for any reason not have the priority contemplated by the subordination provisions of the Subordinated Debt or Junior Subordination Agreement relating thereto; or

(n) the occurrence of a Material Adverse Effect; or

(o) the Senior Lender shall accelerate the Senior Debt; or

(p) the Purchaser exercises its put rights under the Warrant; or

(q) the Company shall have defaulted in any of its obligations under the Warrant.

Section 10.2 Consequences of Events of Default .

(a) If any Event of Default has occurred, the total interest rate on the Note shall increase immediately by two (2) percentage points (the “ Default Rate ”), and such two percent (2%) shall be deemed to be and treated as a part of the Current Interest Rate. Any increase of the Current Interest Rate resulting from the operation of this subsection shall terminate as of the close of business on the date on which no Event of Default exists (subject to subsequent increases pursuant to this subparagraph).

(b) If any Event of Default described in Section 10.1 (other than in subsection (j) or (k) of Section 10.1 ) has occurred and is continuing, the Purchaser may, by notice to the Company, take one or more of the following actions: (i) declare the principal of and the accrued interest on the Note to be forthwith due and payable and thereupon the Note, including both principal and interest and all fees, charges and other Obligations payable hereunder and under the other Operative Documents, shall be and become immediately due and payable without further demand, presentment, protest or notice of any kind; and (ii) enforce any and all rights and remedies available to it under the Operative Documents or applicable law

(c) If any Event of Default described in subsection (j) or (k) of Section 10.1 has occurred and is continuing, then the Note, including both principal and interest, and all fees, charges and other Obligations payable hereunder and under the other Operative Documents, shall immediately become due and payable without presentment, demand, protest or notice of any kind. In addition, the Purchaser may exercise any and all remedies available to it under the Operative Documents or applicable law..

(d) If any Event of Default described in Section 10.1 has occurred and is continuing, the Purchaser may, subject to the terms of the Senior Subordination Agreement, commence enforcement actions under the Collateral Documents, and may also exercise any and all rights it has under the Warrant.

Section 11 Miscellaneous.

Section 11.1 Non-Business Day. If any payment hereunder becomes due and payable on a day which is not a Business Day, the due date of such payment shall be extended to the next succeeding Business Day on which date such payment shall be due and payable. In the case of any payment of principal falling due on a day which is not a Business Day, interest on such principal amount shall continue to accrue during such extension at the rate per annum then in effect, which accrued amount shall be due and payable on the next scheduled date for the payment of interest.

Section 11.2 No Waiver, Cumulative Remedies. No delay or failure on the part of the Purchaser or on the part of the holder of the Note in the exercise of any power or right shall operate as a waiver thereof or as an acquiescence in any default, nor shall any single or partial exercise of any power or right preclude any other or further exercise thereof or the exercise of any other power or right. The rights and remedies hereunder of the Purchaser and of the holder of the Note are cumulative to, and not exclusive of, any rights or remedies which any of them would otherwise have.

Section 11.3 Amendments, Etc. No amendment, modification, termination or waiver of any provision of this Agreement or of any other Operative Document, nor consent to any departure by the Company therefrom, shall in any event be effective unless the same shall be in writing and signed by the Purchaser. No notice to or demand on the Company in any case shall entitle the Company to any other or further notice or demand in similar or other circumstances.

Section 11.4 Costs and Expenses; Indemnification .

(a) The Company agrees to pay on demand the costs and expenses of the Purchaser in connection with the negotiation, preparation, execution and delivery of this Agreement, the other Operative Documents and the other instruments and documents to be delivered hereunder or thereunder, and in connection with the recording or filing of any of the foregoing, and in connection with the transactions contemplated hereby or thereby, and in connection with any consents hereunder or waivers or amendments hereto or thereto, including the reasonable fees and expenses of counsel for the Purchaser with respect to all of the foregoing (whether or not the transactions contemplated hereby are consummated). The Company further agrees to pay to the Purchaser or any other holder of the Note all costs and expenses (including court costs and attorneys’ fees), if any, incurred or paid by the Purchaser or any other holder of the Note in connection with any Default or Event of Default or in connection with the enforcement of this Agreement or any of the other Operative Documents or any other instrument or document delivered hereunder or thereunder (including, without limitation, all such costs and expenses incurred in connection with any proceeding under the United States Bankruptcy Code involving the Company or any guarantor). The Company further agrees to indemnify the Purchaser, and any security trustee, and their respective directors, officers and employees, against all losses, claims, damages, penalties, judgments, liabilities and expenses (including, without limitation, all expenses of litigation or preparation therefor, whether or not the indemnified Person is a party thereto) which any of them may pay or incur arising out of or relating to any Operative Document or any of the transactions contemplated thereby or the direct or indirect application or proposed application of the proceeds of any extension of credit made available hereunder, other than those which arise from the gross negligence or willful misconduct of the party claiming indemnification. The Company, upon demand by the Purchaser at any time, shall reimburse the Purchaser for any legal or other expenses incurred in connection with investigating or defending against any of the foregoing except if the same is directly due to the gross negligence or willful misconduct of the party to be indemnified. The obligations of the Company under this Section shall survive the termination of this Agreement.

(b) The Company unconditionally agrees to forever indemnify, defend and hold harmless, and covenants not to sue for any claim for contribution against, the Purchaser for any damages, costs, loss or expense, including without limitation, response, remedial or removal costs, arising out of any of the following: (i) any presence, release, threatened release or disposal of any hazardous or toxic substance or petroleum by the Company or any Subsidiary or otherwise occurring on or with respect to their Property, (ii) the operation or violation of any environmental law, whether federal, state, or local, and any regulations promulgated thereunder, by the Company or any Subsidiary or otherwise occurring on or with respect to their Property, (iii) any claim for personal injury or property damage in connection with the Company or any Subsidiary or otherwise occurring on or with respect to their Property, and (iv) the inaccuracy or breach of any environmental representation, warranty or covenant by the Company or any Subsidiary made herein or in any mortgage, deed of trust, security agreement or any other instrument or document evidencing or securing any indebtedness, obligations, or liabilities of the Company or any Subsidiary owing to the Purchaser or setting forth terms and conditions applicable thereto or otherwise relating thereto, except for damages arising from the Purchaser’s willful misconduct or gross negligence. This indemnification shall survive the payment and satisfaction of all Obligations owing to the Purchaser and the termination of this Agreement, and shall remain in force beyond the expiration of any applicable statute of limitations and payment or satisfaction in full of any single claim under this indemnification. This indemnification shall be binding upon the successors and assigns of the Company and shall inure to the benefit of Purchaser and its directors, officers, employees, agents, and collateral trustees, and their successors and assigns.

Section 11.5 Documentary Taxes. The Company agrees to pay on demand any documentary, stamp or similar taxes payable in respect of this Agreement or any other Operative Document, including interest and penalties, in the event any such taxes are assessed, irrespective of when such assessment is made and whether or not any credit is then in use or available hereunder.

Section 11.6 Survival of Representations. All representations and warranties made herein or in any of the other Operative Documents or in certificates given pursuant hereto or thereto shall survive the execution and delivery of this Agreement and the other Operative Documents, and shall continue in full force and effect with respect to the date as of which they were made as long as any credit is in use or available hereunder.

Section 11.7 Survival of Indemnities . All indemnities and other provisions relative to reimbursement to the holder of the Note of amounts sufficient to protect the yield of the holder of the Note with respect to the Note shall survive the termination of this Agreement and the payment of the Note.

Section 11.8 Notices. Except as otherwise specified herein, all notices hereunder shall be in writing (including, without limitation, notice by telecopy) and shall be given to the relevant party at its address or telecopier number set forth below, or such other address or telecopier number as such party may hereafter specify by notice to the other given by courier, by United States certified or registered mail, by telecopy or by other telecommunication device capable of creating a written record of such notice and its receipt. Notices hereunder shall be addressed:

To the Company:

CTI Industries Corporation
22160 N. Pepper Road
Lake Barrington, Illinois 60010
Attention: Stephen M. Merrick
Telephone: (847) 382-1000
Facsimile: (847) 382-1219

With a copy to:	Vanasco, Genelly & Miller 33 North LaSalle Street Suite 2200 Chicago, Illinois 60602 Attention: Gerald Miller, Esq. Telephone: (312) 786-5100 Facsimile: (312) 786-5111

To the Lender:	BMO Private Equity (U.S.), Inc. c/o BMO Mezzanine Fund 115 S. LaSalle Street 18th Floor - West Chicago, Illinois 60603 Attention: Douglas Sutton Telephone: (312) 461-5469 Facsimile: (312) 293-1394

With copy to:	Vedder Price P.C. 222 North LaSalle Street Suite 2400 Chicago, Illinois 60601 Attention: Guy E. Snyder and Dana S. Armagno Telephone: (312) 609-7500 Facsimile: (312) 609-5005

Each such notice, request or other communication shall be effective (a) if given by telecopier, when such telecopy is transmitted to the telecopier number specified in this Section and a confirmation of such telecopy has been received by the sender, (b) if given by mail, five (5) days after such communication is deposited in the mail, certified or registered with return receipt requested, addressed as aforesaid or (c) if given by any other means, when delivered at the addresses specified in this Section.

Section 11.9 Construction. The provisions of this Agreement relating to Subsidiaries (other than restrictions on the creation, formation, or acquisition thereof) shall only apply during such times as the Company has one or more Subsidiaries. Nothing contained herein shall be deemed or construed to permit any act or omission which is prohibited by the terms of any of the other Operative Documents, the covenants and agreements contained herein being in addition to and not in substitution for the covenants and agreements contained in the other Operative Documents .

Section 11.10 Headings. Section headings used in this Agreement are for convenience of reference only and are not a part of this Agreement for any other purpose.

Section 11.11 Severability of Provisions. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction.

Section 11.12 Counterparts . This Agreement may be executed in any number of counterparts, and by different parties hereto on separate counterpart signature pages, and all such counterparts taken together shall be deemed to constitute one and the same instrument.

Section 11.13 Binding Nature, Governing Law, Etc. This Agreement shall be binding upon the Company and its successors and assigns, and shall inure to the benefit of the Purchaser and the benefit of its successors and assigns, including any subsequent holder of the Note. The Company may not assign its rights hereunder without the written consent of the Purchaser. This Agreement constitutes the entire understanding of the parties with respect to the subject matter hereof and any prior agreements, whether written or oral, with respect thereto are superseded hereby. This Agreement and the rights and duties of the parties hereto shall be governed by, and construed in accordance with, the internal laws of the State of Illinois without regard to principles of conflicts of laws.

Section 11.14 Submission to Jurisdiction; Waiver of Jury Trial . The Company hereby submits to the nonexclusive jurisdiction of the United States District Court for the Northern District of Illinois and of any Illinois State court sitting in the City of Chicago for purposes of all legal proceedings arising out of or relating to this Agreement, the other Operative Documents or the transactions contemplated hereby or thereby. The Company irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. The Company and the Purchaser each hereby irrevocably waive any and all right to trial by jury in any legal proceeding arising out of or relating to any Operative Document or the transactions contemplated thereby.

Section 11.15 USA Patriot Act . The Purchaser hereby notifies the Company that pursuant to the requirements of the USA Patriot Act, it is required to obtain, verify, and record information that identifies the Company, which information includes the name and address of the Company and other information that will allow the Purchaser to identify the Company in accordance with the Act.

[Signature Page to Follow]

Signature Page to Note and Warrant Purchase Agreement

This Note and Warrant Purchase Agreement is entered into between us for the uses and purposes hereinabove set forth as of the date first above written.

	“COMPANY”

	CTI INDUSTRIES CORPORATION

	By:	/s/ Stephen M. Merrick
	Name:	Stephen M. Merrick
	Title:	Executive Vice President and Chief
		Financial Officer

	“PURCHASER”

	BMO PRIVATE EQUITY (U.S.), INC.

	By:	/s/ Douglas Sutton
		Douglas Sutton, Managing Director

Exhibit A

Form of Note

[SEE ATTACHED]

Exhibit B

Form of warrant

[SEE ATTACHED]

Exhibit C

Compliance Certificate

To:

BMO Private Equity (U.S.), Inc.

This Compliance Certificate is furnished to BMO Private Equity (U.S.), Inc. (the “Purchaser” ) pursuant to that certain Note and Warrant Purchase Agreement dated as of July 17, 2012, between CTI Industries Corporation, an Illinois corporation (the “ Company ”), and the Purchaser (the “Agreement” ). Unless otherwise defined herein, the terms used in this Compliance Certificate have the meanings ascribed thereto in the Agreement.

The Undersigned hereby certifies that:

1. I am the duly elected _____________________________________ of the Company;

2. I have reviewed the terms of the Agreement and I have made, or have caused to be made under my supervision, a detailed review of the transactions and conditions of the Company and its Subsidiaries during the accounting period covered by the attached financial statements;

3. The examinations described in paragraph 2 did not disclose, and I have no knowledge of, the existence of any condition or the occurrence of any event which constitutes a Default or Event of Default during or at the end of the accounting period covered by the attached financial statements or as of the date of this Certificate, except as set forth below;

4. The financial statements required by Section 8.5 of the Agreement and being furnished to you concurrently with this certificate are, to the best of my knowledge, true, correct and complete as of the dates and for the periods covered thereby; and

5. The Attachment hereto sets forth financial data and computations evidencing the Company’s compliance with certain covenants of the Agreement, all of which data and computations are, to the best of my knowledge, true, complete and correct and have been made in accordance with the relevant Sections of the Agreement.

Described below are the exceptions, if any, to paragraph 3 by listing, in detail, the nature of the condition or event, the period during which it has existed and the action which the Company has taken, is taking, or proposes to take with respect to each such condition or event:

The foregoing certifications, together with the computations set forth in the Attachment hereto and the financial statements delivered with this Certificate in support hereof, are made and delivered this _________ day of __________________, ___.

	CTI Industries Corporation

	By:	/s/ Stephen M. Merrick
	Name:	Stephen M. Merrick
	Title:	Executive Vice President and Chief Financial Officer

Attachment to Compliance Certificate
CTI Industries Corporation

Compliance Calculations for Note and Warrant Purchase Agreement

Dated as of ________________

Calculations as of _____________, ___

Schedule 6.2

Subsidiaries

Name	Jurisdiction of Incorporation	Percentage Ownership
CTI Helium, Inc.	Illinois
CTI Balloons Limited	England	100%
Flexo Universal S.A. de C.V.	Mexico	100%
CTI Europe	Germany	98.5%
CTI Mexico S.A. de C.V.	Mexico - inactive	52%
CTF International S.A. de C.V.	Mexico - inactive

Schedule 8.7

Existing Intercompany Debt

[to be attached]

Schedule 8.27

Post-Closing

	Requirements/Deliveries	Date by which Requirement/Delivery is to be Completed
1.	With respect to the Mortgaged Premises, deliver to the Purchaser (i) an appraisal report prepared for the Purchaser by a state certified appraiser selected by the Purchaser, which appraisal report shall describe the fair market value of the Mortgaged Premises, and which report shall meet or exceed the requirements of applicable law for appraisals prepared for federally insured depository institutions, and (ii) a Phase I Environmental Report of an independent firm of environmental engineers acceptable to the Purchaser concerning the environmental hazards and matters with respect to the Mortgaged Premises, together with a reliance letter from such firm acceptable in form and substance to the Purchaser.	Within 15 days after the Closing Date
2.	Deliver to the Purchaser endorsements to each property and liability insurance policies for which insurance certificates were delivered on or before the Closing Date	Within 15 days after the Closing Date
3.	Deliver to the Purchaser deposit account control agreements with respect to bank accounts established at or with the Senior Lender.	Within 15 days after the Closing Date
4.	the Company shall deliver to the Purchaser evidence of delivery to the Senior Lender of the stock certificates evidencing 65% of the voting equity interests of Flexo, together with undated executed blank stock powers therefor.	Within 15 days after the Closing Date
5.	the Company shall (A) diligently pursue a release of liens or assignments of intellectual property of the Company in favor of Cole Taylor Bank reflected on records of the United States Patent and Trademark Office, and (B) deliver to the Purchaser, promptly following any request from the Purchaser, evidence satisfactory to the Purchaser that the Company is diligently pursuing that release.	N/A

EXHIBIT 10.4

WARRANT AGREEMENT

This Warrant Agreement is entered into this 17th day of July, 2012 (as amended, supplemented or modified from time to time, this “ Warrant Agreement ”) by and between CTI Industries Corporation , an Illinois corporation (together with its successors and permitted assigns, the “ Issuer ”), and BMO Private Equity (U.S.), Inc. , a Delaware corporation (together with its successors and permitted assigns, “ Holder ”).

Recitals

A. Pursuant to that certain Note and Warrant Purchase Agreement dated as of the date hereof (as the same may be amended, supplemented or otherwise modified from time to time, the “ NWP Agreement ”), between Holder and the Issuer, Holder has agreed to lend to the Issuer up to $5,000,000 on the terms and conditions set forth in the NWP Agreement; and

C. In order to induce Holder to issue the Note (as defined in the NWP Agreement) to the Issuer, the Issuer has agreed to issue to Holder or an Affiliate (as hereinafter defined) thereof the Warrants hereinafter described.

Now, therefore , in consideration of the premises the parties hereto agree as follows:

Agreement

1. Definitions . As used in this Warrant Agreement, unless otherwise defined herein, terms defined in the NWP Agreement (as in effect on the date hereof, whether or not the NWP Agreement is thereafter terminated or expires according to its terms) shall have such defined meanings when used herein and the following terms shall have the following meanings, unless the context otherwise requires:

“ Affiliate ” shall mean any Person controlling, controlled by or under common control with another Person. For purposes of this definition, “Control” means the possession, directly or indirectly, of the power to direct or cause direction of the management and policies of any Person, whether through ownership of equity interests, by contract or otherwise. Without limiting the generality of the foregoing, each of the following shall be an Affiliate: any officer, director, employee or other agent of a Person, any stockholder, member or subsidiary of a Person, and any other Person with whom or which a Person has common stockholders, officers or directors.

“ Applicable Number ” shall mean the number of shares of Common Stock issuable upon the exercise of the Warrants which number shall be equal to One Hundred Forty Thousand and Forty-Eight (140,048) shares of all Common Stock (determined on a Fully Diluted Basis) on the date hereof, as adjusted pursuant to Section 10 hereof.

“ Closing Date ” shall mean the date of the closing of the NWP Agreement.

“ Commission ” shall mean the Securities and Exchange Commission.

“ Common Stock ” shall mean the shares of the Issuer’s Common Stock, no par value, and shall include any stock into which such Common Stock shall have been changed or any stock resulting from any reclassification of such Common Stock and all other stock of any class or classes (however designated) of the Issuer the registered holders of which have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference.

“ Convertible Securities ” means any stock or securities (directly or indirectly) convertible into or exchangeable for any capital stock of a Person.

“ Exchange Act ” shall mean the Securities Exchange Act of 1934, as amended.

“ Exempted Securities ” shall mean (a) the Warrants, (b) the Warrant Shares, (c) options issued pursuant to the Issuer’s 2002 Stock Option Plan together with the shares issued upon the exercise of such options, and (d) shares or options issued pursuant to the Issuer’s 2009 Stock Incentive Plan together with the shares issued upon the exercise of such options.

“ Expiration Date ” shall mean the earlier of (a) ten years from the Closing Date which shall be July 17, 2022; or (b) eighteen (18) months after the full and complete satisfaction of the Obligations.

“ Exercise Price ” shall mean the exercise price of a Warrant, which shall be one cent ($0.01) per Warrant; provided, however, that the Exercise Price is subject to adjustment pursuant to the provisions of Section 10(a) hereof.

“ Fully Diluted Basis ” shall mean, at any time, without duplication, the number of outstanding shares of Common Stock, after giving effect to (a) all shares of Common Stock actually outstanding at the time of determination, (b) all shares of Common Stock issuable upon the exercise of any option, warrant (including, without limitation, the Warrants) or similar right outstanding at the time of determination, and (c) all shares of Common Stock issuable upon the exercise of any conversion or exchange right contained in any security outstanding at the time of determination and convertible into or exchangeable for shares of Common Stock.

“ Market Price ” means as to any security the average of the closing prices of such security’s sales on all domestic securities exchanges on which such security may at the time be listed or quoted, including for this purpose The Nasdaq Stock Market, or, if there have been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day such security is not so listed or quoted, the average of the highest bid and lowest asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each such case averaged over a period of twenty-one (21) days consisting of the day as of which “Market Price” is being determined and the twenty (20) consecutive business days prior to such day; provided that if such security is listed on any domestic securities exchange the term “business days” as used in this sentence means business days on which such exchange is open for trading. If at any time such security is not listed on any domestic securities exchange or quoted on The Nasdaq Stock Market or the domestic over-the-counter market, the “Market Price” shall be the Market Value divided by the total number of shares of the Company’s entire equity outstanding or deemed outstanding, including, without limitation, Common Stock on a Fully-Diluted Basis.

“ Market Value ” means the fair market value of a Person’s entire equity determined on a going concern basis as between a willing buyer and a willing seller and taking into account all relevant factors determinative of value (but not taking into account any discounts for lack of liquidity, minority position or other similar or related discounts), plus (to the extent not otherwise taken into consideration in the determination of fair market value of such Person’s entire equity) the aggregate amount of cash or property payable or to be surrendered to such Person upon exercise or conversion of all Options and Convertible Securities and the principal amount of any debt constituting Convertible Securities; provided, that, in the event that the Put is exercised in connection with a Change of Control or Organic Change, the sale price or public offering price, as the case may be, shall determine Market Value and no appraisal pursuant to the following sentence shall be conducted, except to the extent necessary to determine the cash value of any noncash consideration payable in connection with a Change of Control or Organic Change. Unless otherwise agreed by the Issuer and Holder, Market Value shall be determined by an investment banking firm reasonably acceptable to the Issuer and Holder, which firm shall submit to the Issuer and Holder a written report setting forth such determination. If the parties are unable to agree on an investment banking firm within fifteen (15) days after delivery of a Put Notice, a third firm will be selected by agreement of two investment banking firms, one selected by the Issuer and one selected by Holder. The expenses of such firm shall be borne by the Issuer up to $15,000.00, and the determination of such firm shall be final and binding upon all parties, except that after the determination of Market Value following the exercise of the Put, the Warrant Holders may rescind the exercise of such Put within ten (10) days after receipt of such determination, in which case the expenses of such firm shall be borne by the rescinding party.

“ Non-Public Warrant Shares ” shall mean Warrant Shares that have not been sold to the public and bear the legend set forth in subsection 12(b). This term shall include any securities into which Non-Public Warrant Shares are converted, unless such securities are “margin securities” as that term is construed under federal securities laws.

“ Options ” means any rights or options to subscribe for or purchase capital stock of a Person or Convertible Securities.

“ Person ” shall mean an individual, sole proprietorship, partnership, joint venture, limited liability company, trust, unincorporated organization, association, corporation, government or any agency or political division thereof, or any other entity.

“ Registrable Securities ” shall mean (a) any issued and outstanding Non-Public Warrant Shares and any Non-Public Warrant Shares which may be acquired by the Warrant Holders upon exercise of the Warrants and (b) any other securities of the Issuer (or any successor or assign of the Issuer, whether by merger, consolidation, sale of assets or otherwise) which may be issued or issuable to the Warrant Holders with respect to, in the exchange for, or in substitution of, the Warrants and/or the Registrable Securities referenced in clause (a) above by reason of any dividend or stock split, combination of shares, merger, consolidation, recapitalization, reorganization, sale of assets or similar transaction. As to any particular Registrable Securities, such securities shall cease to be Registrable Securities for so long as (i) a registration statement with respect to the sale of such securities shall have been declared effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement, (ii) such securities are sold to the public pursuant to Rule 144 (or any similar provisions then in force) under the Securities Act or (iii) such securities shall have ceased to be outstanding.

“ Securities Act ” shall mean the Securities Act of 1933, as amended.

“ Triggering Event ” shall mean any of the following events: (a) a Change of Control (as such term is defined in the NWP Agreement), (b) the fifth anniversary of the Closing Date or (c) an Event of Default (as such term is defined in the NWP Agreement).

“ Validly Issued ” shall mean, with respect to any shares of Common Stock, that such stock has been validly issued and is fully paid and nonassessable.

“ Warrant Certificate ” shall mean a certificate evidencing one or more Warrants, substantially in the form of Exhibit A attached hereto, with such changes therein as may be required to reflect any adjustments made pursuant to Section 10 hereof.

“ Warrant Holder ” shall mean the Holder or an Affiliate thereof and such other Persons to whom the Holder or an Affiliate thereof transfers Warrants in compliance with the terms of this Warrant Agreement.

“ Warrant Office ” shall mean the office or agency of the Issuer at which the Warrant Register shall be maintained and where the Warrants may be presented for exercise, exchange, substitution and transfer, which office or agency will be the office of the Issuer at 22160 N. Pepper Road, Barrington, IL 60010 , which office or agency may be changed by the Issuer pursuant to notice in writing to the Persons named in the Warrant Register as the holders of the Warrants.

“ Warrant Register ” shall mean the register, substantially in the form of Exhibit B attached hereto, maintained by the Issuer at the Warrant Office.

“ Warrant Shares ” shall mean the shares of Common Stock issued or issuable upon exercise of the Warrants, as the number of such shares may be adjusted from time to time pursuant to the Warrant Certificate or this Warrant Agreement.

“ Warrants ” shall mean the warrants issued pursuant to this Warrant Agreement entitling the record holders thereof to purchase from the Issuer the Applicable Number of shares of Common Stock.

2. Registration, Transfer and Exchange of Certificates .

(a) The Issuer shall maintain at the Warrant Office the Warrant Register for registration of the Warrants and Warrant Certificates and transfers thereof. On the Closing Date, the Issuer shall register the Warrants and Warrant Certificates in the Warrant Register in the name of the Warrant Holders. The Issuer may deem and treat the registered holders of the Warrant Certificates as the absolute owners thereof and the Warrants represented thereby (notwithstanding any notation of ownership or other writing on the Warrant Certificates made by any Person) for the purpose of any exercise thereof or any distribution to the holders thereof, and for all other purposes, and the Issuer shall not be affected by any notice to the contrary.

(b) Subject to Section 12, the Issuer shall register the transfer of any outstanding Warrants in the Warrant Register upon surrender of the Warrant Certificates evidencing such Warrants to the Issuer at the Warrant Office, accompanied (if so required by it) by a written instrument or instruments of transfer in form reasonably satisfactory to it, duly executed by the registered holder or holders thereof or by the duly appointed legal representative thereof. Upon any such registration of transfer, new Warrant Certificates evidencing such transferred Warrants shall be issued to the transferee and the surrendered Warrant Certificates shall be canceled. If less than all the Warrants evidenced by Warrant Certificates surrendered for transfer are to be transferred, new Warrant Certificate(s) shall be issued to the holder surrendering such Warrant Certificates evidencing such remaining number of Warrants.

(c) Warrant Certificates may be exchanged at the option of the holders thereof, when surrendered to the Issuer at the Warrant Office, for another Warrant Certificate or other Warrant Certificates of like tenor and representing in the aggregate a like number of Warrants. Warrant Certificates surrendered for exchange shall be canceled.

(d) No charge shall be made for any such transfer or exchange except for any tax or other governmental charge imposed in connection therewith. Except as provided in subsection 12(b), each Warrant Certificate issued upon transfer or exchange shall bear the legend set forth in subsection 12(b) if the Warrant Certificate presented for transfer or exchange bore such legend.

3. Mutilated or Missing Warrant Certificates . If any Warrant Certificate shall be mutilated, lost, stolen or destroyed, the Issuer shall issue, in exchange and substitution for and upon cancellation of the mutilated Warrant Certificate, or in lieu of and substitution for the Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate of like tenor and representing an equivalent number of Warrants, but only upon receipt of evidence reasonably satisfactory to the Issuer of such loss, theft or destruction of such Warrant Certificate and, if requested, indemnity reasonably satisfactory to it. The Issuer acknowledges that a written indemnity by Holder or, if an Affiliate of Holder is the holder of such lost, stolen or destroyed Warrant Certificate, by such Affiliate shall be satisfactory to the Issuer for such purpose. No service charge shall be made for any such substitution, but all expenses and reasonable charges associated with procuring such indemnity and all stamp, tax and other governmental duties that may be imposed in relation thereto shall be borne by the holder of such Warrant Certificate.

4. Duration and Exercise of Warrants .

(a) Each Warrant shall entitle the holder to purchase from the Issuer before 5:00 P.M., Chicago, Illinois time, on the Expiration Date one (1) Validly Issued share of Common Stock at the Exercise Price upon surrender of the applicable Warrant Certificate and payment of the Exercise Price to the Issuer. The Exercise Price and number of Warrant Shares purchasable upon exercise of the Warrants are subject to adjustment as set forth in this Warrant Agreement.

(b) Subject to the provisions of this Warrant Agreement, the Warrants evidenced by a Warrant Certificate may be exercised by the registered holder thereof by the surrender of the Warrant Certificate evidencing the Warrants to be exercised, with the form of election purchase on the reverse thereof or attached thereto duly completed and signed, to the Issuer at the Warrant Office, and upon payment of the aggregate Exercise Price for the number of Warrant Shares in respect of which such Warrants are being exercised, at the option of the Warrant Holder, (i) in lawful money of the United States of America, (ii) by surrender of the Note or a portion thereof having an outstanding principal balance equal to the Exercise Price (with concurrent issuance of a replacement Note reflecting the remaining principal balance thereof), and/or (iii) by surrender to the Issuer of shares of Common Stock then owned by the Warrant Holder and valued for purposes hereof at Market Price at the time of exercise. In lieu of exercising Warrants pursuant to the immediately preceding sentence, the Warrant Holder shall have the right to require the Issuer to convert the Warrants, in whole or in part and at any time or times (the “Conversion Right” ), into Warrant Shares, as follows: upon exercise of the Conversion Right, the Issuer shall deliver to the Warrant Holder (without payment by the Warrant Holder of any Exercise Price) that number of Warrant Shares equal to the quotient obtained by dividing:

(i) the difference of:

A. the aggregate Market Price immediately prior to the exercise of the Conversion Right for all Warrant Shares issuable upon exercise of the portion of the Warrants being converted, less

B. the aggregate Exercise Price for all such Warrant Shares immediately prior to the exercise of the Conversion Right,

(ii) the Market Price of one share of Common Stock immediately prior to the exercise of the Conversion Right.

(c) Upon exercise of any Warrants hereunder the Issuer shall issue and cause to be delivered to or upon the written order of the registered holders of such Warrants and in such name or names as such registered holders may designate, a certificate for the Warrant Share or Warrant Shares issued upon such exercise of such Warrants. Any Persons so designated to be named therein shall be deemed to have become holders of record of such Warrant Share or Warrant Shares as of the date of exercise of such Warrants. If less than all of the Warrants evidenced by a Warrant Certificate are exercised at any time, a new Warrant Certificate or Certificates shall be issued for the remaining number of Warrants evidenced by such Warrant Certificate.

5. Fractional Shares . Any fractional share of Common Stock to be issued upon exercise of the Warrants shall be rounded-up to, and issued as, a whole share.

6. Payment of Taxes . The Issuer will pay all taxes attributable to the initial issuance of the Warrants and the initial issuance of Warrant Shares upon the exercise of the Warrants (other than income tax liability of the holders); provided that the Issuer shall not be required to pay any tax that may be payable in respect to any transfer involved in the issue of any Warrant Certificate or any certificate for Warrant Shares in a name other than that of the registered holder of a Warrant Certificate surrendered upon the exercise of a Warrant, and the Issuer shall not be required to issue or deliver such certificate unless or until the person or persons requesting the issuance thereof shall have paid to the Issuer the amount of such tax or shall have established to the reasonable satisfaction of the Issuer that such tax has been paid.

7. Stockholder Rights . Nothing contained in this Warrant Agreement or in any of the Warrant Certificates shall be construed as conferring upon the holders of Warrants the right to vote or to consent or to receive notice as a stockholder in respect of the meetings of stockholders or the election of directors of the Issuer or any other matter, or any rights whatsoever as a stockholder of the Issuer, except as specifically set forth in this Warrant Agreement or the NWP Agreement. Nothing contained in this Warrant Agreement or in any of the Warrant Certificates shall be construed as imposing any obligation on the registered holders of Warrants to purchase any securities or as imposing any liabilities on such holders as stockholders of the Issuer, whether such obligation or liabilities are asserted by the Issuer or by creditors of the Issuer.

8. Reservation and Issuance of Warrant Shares; Charter Provisions . The Issuer will at all times have authorized, and reserve and keep available, free from preemptive rights, for the purpose of enabling it to satisfy any obligation to issue Warrant Shares upon the exercise of the Warrants, the number of shares of Common Stock deliverable upon exercise of all outstanding Warrants and will take all actions necessary to ensure that the Exercise Price at all times remains equal to or greater than the par value per share of any Common Stock, including, without limitation, causing Issuer’s articles or certificate of incorporation to be amended to reduce or eliminate the par value of any Common Stock. The Issuer represents and warrants that it has taken all corporate action that is or may be necessary in order that the Issuer may issue Validly Issued Warrant Shares at the Exercise Price. The Issuer covenants that all Warrant Shares will, upon issuance in accordance with the terms of this Warrant Agreement be Validly Issued and free from all taxes (except as otherwise contemplated in Section 6 hereof) with respect to the issuance thereof and from all liens, charges, claims and security interests (other than any created by or on behalf of any Warrant Holder).

9. Obtaining of Governmental Approvals and Securities Exchange Listings . Subject, in the case of any registration under the Securities Act, to the limitations set forth in Section 13, the Issuer will, at its own expense, from time to time take all action that may be necessary to obtain and keep effective any and all permits, consents and approvals of governmental agencies and authorities that are or become requisite in connection with the issuance, sale, transfer and delivery of the Warrant Certificates and the exercise of the Warrants and the issuance, sale, transfer and delivery of the Warrant Shares and all action that may be necessary so that such Warrant Shares, immediately upon their issuance upon the exercise of Warrants, will be listed on each securities exchange, if any, on which any of the shares of Common Stock are then listed.

10. Adjustments . In order to prevent dilution of the rights granted under this Warrant Agreement, the Exercise Price shall be subject to adjustment from time to time as provided in this Section 10, and the number of shares of Common Stock issuable upon exercise of the Warrants shall be subject to adjustment from time to time as provided in this Section 10.

(a) Adjustment of Exercise Price and Number of Shares .

(i) If and whenever on or after the Closing Date the Issuer issues or sells, or is deemed to have issued or sold, any shares of Common Stock below the Market Price of such Common Stock determined as of the date of such issuance or sale, then immediately upon such issuance or sale the Exercise Price shall be adjusted to an amount equal to the Exercise Price in effect immediately prior to such issuance or sale multiplied by a fraction, the numerator of which will be the sum of (a) the number of shares of Common Stock on a Fully-Diluted Basis immediately prior to such issuance or sale multiplied by the Market Price of the Common Stock determined as of the date of such issuance or sale without giving effect to such issuance or sale, plus (b) the consideration, if any, received by the Company upon such issuance or sale, and the denominator of which will be the product derived by multiplying the Market Price of the Common Stock determined as of the date of such issuance or sale, without giving effect to such issuance or sale, by the number of shares of Common Stock on a Fully-Diluted Basis immediately after such issuance or sale.

(ii) Upon each such adjustment of the Exercise Price hereunder, the number of Warrant Shares issuable upon exercise of the Warrants shall be adjusted to the number of shares determined by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares issuable upon exercise of the Warrants immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment.

(iii) Notwithstanding the foregoing, there shall be no adjustment to the Exercise Price or the number of Warrant Shares issuable upon exercise of the Warrants with respect to Exempted Securities.

(b) Effect on Exercise Price of Certain Events . For purposes of determining the adjusted Exercise Price under subsection 10(a), the following shall be applicable:

(i) Issuance of Rights or Options . If the Issuer in any manner grants or sells any Options and the lowest price per share for which any one share of Common Stock is issuable upon the exercise of any such Option, or upon conversion or exchange of any Convertible Securities issuable upon exercise of such Option, is less than the Market Price determined as of such time, then such share of Common Stock shall be deemed to have been issued and sold by the Issuer at such time for such price per share. For purposes of this subsection 10(b), the “lowest price per share for which any one share of Common Stock is issuable” shall be determined by dividing (a) the sum of the amounts of consideration (if any) received or receivable by the Issuer (1) upon the granting or sale of the Option, (2) upon exercise of the Option and (3) upon conversion or exchange of the Option or such aforesaid Convertible Securities, by (b) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of the Option and the aforesaid Convertible Securities. No further adjustment of the Exercise Price shall be made upon the actual issuance of such Common Stock or Convertible Securities, upon the exercise of such Options or upon the actual issuance of Common Stock upon conversion or exchange of such Convertible Securities.

(ii) Issuance of Convertible Securities . If the Issuer in any manner issues or sells any Convertible Securities and the lowest price per share for which any one share of Common Stock is issuable upon conversion or exchange thereof is less than the Market Price determined as of such time, then the maximum number of shares of Common Stock issuable upon conversion or exchange of such Convertible Securities shall be deemed to be outstanding and to have been issued and sold by the Issuer at the time of the issuance or sale of such Convertible Securities for such price per share. For the purposes of this subsection 10(b), the “lowest price per share for which any one share of Common Stock is issuable” shall be determined by dividing (a) the sum of (1) the amount received or receivable by the Issuer as consideration for the issue or sale of such Convertible Securities, plus (2) the minimum aggregate amount of additional consideration, if any, payable to the Issuer upon the conversion or exchange thereof, by (b) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment of the Exercise Price shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustments of the Exercise Price had been or are to be made pursuant to other provisions of this subsection 10(b), no further adjustment of the Exercise Price shall be made by reason of such issue or sale.

(iii) Change in Option Price or Conversion Rate . If the purchase price provided for in any Options, the additional consideration, if any, payable upon the issue, conversion or exchange of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock changes at any time, the Exercise Price in effect at the time of such change shall be adjusted immediately to the Exercise Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold and the number of Warrant Shares shall be correspondingly adjusted.

(iv) Treatment of Expired Options and Unexercised Convertible Securities . Upon the expiration of any Option or the termination of any right to convert or exchange any Convertible Securities without the exercise of such Option or right, the Exercise Price then in effect and the number of Warrant Shares shall be adjusted to the Exercise Price and the number of shares which would have been in effect at the time of such expiration or termination had such Option or Convertible Securities, to the extent outstanding immediately prior to such expiration or termination, never been issued.

(v) Calculation of Consideration Received . If any Common Stock, Options or Convertible Securities are issued or sold or deemed to have been issued or sold for cash, the consideration received therefor shall be deemed to be the net amount received by the Issuer therefor. In case any Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Issuer shall be the fair value of such consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Issuer shall be the Market Price thereof as of the date of receipt. In case any Common Stock, Options or Convertible Securities are issued to the owners of the non-surviving entity in connection with any merger in which the Issuer is the surviving entity, the amount of consideration therefor shall be deemed to be the fair value of such portion of the net assets and business of the non-surviving entity as is attributable to such Common Stock, Options or Convertible Securities, as the case may be. The fair value of any consideration other than cash or securities shall be determined jointly by the Issuer and Holder. If such parties are unable to reach agreement within a reasonable period of time, such fair value shall be determined by an appraiser jointly selected by the Issuer and Holder. The determination of such appraiser shall be final and binding on the Issuer and Holder, and the fees and expenses of such appraiser shall be paid by the Issuer.

(vi) Integrated Transactions . In case any Option or Convertible Security is issued in connection with the issue or sale of other securities of the Issuer, together compromising one integrated transaction in which no specific consideration is allocated to such Option or Convertible Security by the parties thereto, the Option or Convertible Security shall be deemed to have been issued for a consideration of $.01.

(vii) Treasury Shares. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Issuer or any Subsidiary, and the disposition of any shares so owned or held shall be considered an issuance or sale of Common Stock.

(c) Subdivision or Combination of Common Stock. If the Issuer at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision shall be proportionately reduced and the number of Warrant Shares issuable upon exercise of the Warrants shall be proportionately increased. If the Issuer at any time combines (by reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall be proportionately increased and the number of Warrant Shares issuable upon exercise of the Warrants shall be proportionately decreased.

(d) Consolidation, Merger or Sale . Any recapitalization, reorganization, reclassification, consolidation, merger or sale of all or substantially all of the Issuer’s assets or other transaction, in each case which is effected in such a way that the holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock, is referred to herein as an “ Organic Change .” Prior to the consummation of any Organic Change, the Issuer shall make appropriate provision to ensure that the Warrant Holders shall thereafter have the right to acquire and receive, in lieu of or addition to (as the case may be) the shares of Common Stock immediately theretofore acquirable and receivable upon the exercise of the Warrants, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for the number of Warrant Shares immediately theretofore acquirable and receivable upon exercise of the Warrants had such Organic Change not taken place. In any such case, the Issuer shall make appropriate provision (in form and substance reasonably satisfactory to Holder) with respect to the Warrant Holders’ rights and interests under the Warrants to insure that all of the provisions of the Warrants shall thereafter continue to be applicable to such holders (including, in the case of any such Organic Change in which the successor entity or purchasing entity is other than the Issuer and in which the value for the Common Stock reflected by the terms of such Organic Change is less than the Exercise Price in effect immediately prior to such Organic Change, an immediate adjustment of the Exercise Price to the value for the Common Stock reflected by the terms of such Organic Change, and a corresponding immediate adjustment in the number of Warrant Shares acquirable and receivable upon exercise of the Warrants). The Issuer shall not effect any Organic Change unless, prior to the consummation thereof, the successor entity (if other than the Issuer) resulting from consolidation or merger or the entity purchasing such assets assumes by written instrument (in form and substance reasonably satisfactory to Holder), the obligation to deliver to the Warrant Holders such shares of stock, securities or assets as, in accordance with the foregoing provisions, the Warrant Holders may be entitled to acquire.

(e) Certain Events. If any event occurs of the type contemplated by the provisions of this Section 10 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Issuer’s board of directors shall make an appropriate adjustment to the Exercise Price and the number of Warrant Shares issuable upon exercise of the Warrants so as to protect the rights of the holders of the Warrants; provided that no such adjustment shall increase the Exercise Price or decrease the number of Warrant Shares.

(f) No Avoidance . In the event the Issuer shall enter into any transaction for the purpose of avoiding the provisions of this Section 10, the benefits provided by such provisions shall nevertheless apply and be preserved.

11. Notices and Information to Warrant Holders .

(a) Upon any adjustment of the Exercise Price payable upon exercise of the Warrants pursuant to Section 10, the Issuer shall promptly but in any event within 20 days thereafter, cause to be given to each of the registered holders of the Warrants at its address appearing on the Warrant Register by registered mail, postage prepaid, return receipt requested, a certificate signed by its chairman, chief executive officer or chief financial officer setting forth the Exercise Price payable upon exercise of the Warrants as so adjusted and describing in reasonable detail the facts accounting for such adjustment and the method of calculation used. Where appropriate, such certificate may be given in advance and included as a part of the notice required to be mailed under the other provisions of this Section 11.

(b) In the event:

(i) that the Issuer shall authorize the issuance to all holders of Common Stock of rights or warrants to subscribe for or purchase capital stock of the Issuer or of any other subscription rights or warrants; or

(ii) that the Issuer shall authorize the distribution to all holders of Common Stock of evidences of its indebtedness or assets (including, without limitation, distributions of securities or cash or distributions payable in Common Stock); or

(iii) of any consolidation or merger to which the Issuer is a party and for which approval of any stockholders of the Issuer is required, or of the conveyance or transfer of the properties and assets of the Issuer substantially as an entirety, or of any capital reorganization or reclassification or change of the Common Stock; or

(iv) of the voluntary or involuntary dissolution, liquidation or winding up of the Issuer; or

(v) that the Issuer proposes to take any other action that would require an adjustment pursuant to this Warrant Agreement in the number of Warrant Shares or other securities or assets to which each Warrant Holder is entitled;

then the Issuer shall cause to be given to each of the registered holders of the Warrants at its address appearing on the Warrant Register at least 20 calendar days prior to the applicable record date, if any, hereinafter specified, or, if no such record date is specified, 20 calendar days prior to the taking of any action referred to in clauses (i) through (v) above, by registered mail, postage prepaid, return receipt requested, a written notice stating (x) the date as of which the holders of record of Common Stock to be entitled to receive any such rights, warrants or distribution are to be determined, or (y) the date on which any such consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up is expected to become effective, or (z) the date on which such other action is to be effected, and the date as of which it is expected that holders of record of Common Stock shall be entitled to exchange their shares for securities or other property, if any, deliverable upon such reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up or other action.

(c) For the term of the Warrants, the Warrant Holders shall be entitled to the benefit of the Covenants set forth in Sections 8.1, 8.2, 8.3, 8.4, 8.5, 8.6, 8.11, 8.12, 8.13, 8.14, 8.15, 8.18, 8.20(a), 8.24 and 8.25 of the NWP Agreement, notwithstanding the satisfaction of the Issuer’s obligations under the NWP Agreement.

12. Restrictions on Transfer .

(a) Each of Warrant Holders who are issued Warrants pursuant to this Agreement:

(i) represents that it is an “accredited investor” within the meaning of the Securities Act and is acquiring the Warrants for its own account for investment and not with a view to any distribution or public offering within the meaning of the Securities Act, except in any case pursuant to the registration of such Warrants or Warrant Shares under the Securities Act or pursuant to a valid exemption from such registration requirement;

(ii) acknowledges that the Warrants and the Warrant Shares issuable upon exercise thereof have not been registered under the Securities Act; and

(iii) agrees that it will not sell or otherwise transfer any of its Warrants or Warrant Shares except upon the terms and conditions specified herein and that it will cause any transferee thereof to agree to take and hold the same subject to the terms and conditions specified herein, provided that the Warrant Holders may sell the Warrants or the Warrant Shares purchased upon exercise of the Warrants in one or more private transactions not requiring registration under the Securities Act.

(b) Except as provided in subsection 12(d) hereof each Warrant Certificate and each certificate for the Warrant Shares issued to the Warrant Holders or to a subsequent transferee thereof pursuant to subsection 12(c) shall include a legend in substantially the following form (with such changes therein as may be appropriate to reflect whether such legend refers to Warrants or Warrant Shares), provided that such legend shall not be required if such transfer is being made pursuant to an effective registration statement filed with the Commission in accordance with the Securities Act, in connection with a sale that is exempt from registration pursuant to Rule 144 under the Securities Act or if the opinion of counsel referred to in subsection 12(c) is to the further effect that neither such legend nor the restrictions on transfer in this Section 12 are required in order to ensure compliance with the Securities Act:

THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE SHARES FOR WHICH THE WARRANTS ARE EXERCISABLE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAW AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT OR LAW. SUCH WARRANTS AND SHARES MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH THE CONDITIONS SPECIFIED IN AND ARE SUBJECT TO OTHER PROVISIONS OF THE WARRANT AGREEMENT, DATED AS OF JULY 17, 2012, BETWEEN THE ISSUER AND BMO PRIVATE EQUITY (U.S.), INC., A COMPLETE AND CORRECT COPY OF WHICH IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE ISSUER AND WILL BE FURNISHED TO THE HOLDER HEREOF UPON WRITTEN REQUEST AND WITHOUT CHARGE.

(c) Prior to any assignment, transfer or sale of any Warrant or any Warrant Shares, the holder thereof shall give written notice to the Issuer of such holder’s intention to effect such assignment, transfer or sale, which notice shall set forth the date of such proposed assignment, transfer or sale and the identity of the proposed transferee. Each holder wishing to effect such a transfer of any Warrant or Warrant Shares shall also furnish to the Issuer an agreement by the transferee thereof that it is taking and holding the same subject to the terms and conditions specified herein and a written opinion of such holder’s counsel, in form reasonably satisfactory to the Issuer, to the effect that the proposed transfer may be effected without registration under the Securities Act. Each holder agrees that it will not assign, transfer or sell any Warrant or any Warrant Shares without Issuer’s prior written consent (not to be unreasonably withheld); provided that no such consent shall be required if such transferee is an accredited investor (defined above) consisting of (i) any lender to, or Affiliate of, the Holder or (ii) any reputable financial institution in the business of investment banking, commercial finance or similar activities; provided further , that no such transferee shall consist of a competitor of Issuer.

(d) The restrictions set forth in this Section 12 shall terminate and cease to be effective with respect to any Warrants or Warrant Shares registered under the Securities Act or upon receipt by the Issuer of an opinion of counsel to the holders, in form reasonably satisfactory to the Issuer, to the effect that compliance with such restrictions is not necessary in order to comply with the Securities Act with respect to the transfer of the Warrants and the Warrant Shares. Whenever such restrictions shall so terminate the holder of such Warrants and/or Warrant Shares shall be entitled to receive from the Issuer, without expense (other than transfer taxes, if any), Warrant Certificates or certificates for such Warrant Shares not bearing the legend set forth in subsection 12(b) at which time the Issuer will rescind any transfer restrictions relating thereto.

(e) With a view to making available to the Holder and its Affiliates and subsequent holders of the Warrants or the Warrant Shares the benefits of certain rules and regulations of the Commission (including, without limitation, Rules 144 and 144A under the Securities Act) which may permit the sale of Warrants and Warrant Shares to the public or certain other institutions without registration, the Issuer agrees to take any and all such actions as may be required of it to make available to the Holder and its Affiliates and such subsequent holders such benefits, including, without limitation, to:

(i) make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act or any successor provision thereto from and after the date the Issuer first becomes subject to the provisions of Section 13 or 15(d) of the Exchange Act;

(ii) file with the Commission in a timely manner all reports and other documents required of the Issuer under the Securities Act and the Exchange Act from and after the date the Issuer first becomes subject to the provisions of Section 13 or 15(d) of the Exchange Act; and

(iii) so long as Holder or an Affiliate thereof owns any Warrants or Warrant Shares, furnish to Holder forthwith upon request a written statement by the Issuer as to its compliance with the reporting requirements of Rule 144 or any successor provision thereto, and of the Securities Act and the Exchange Act, (to the extent not previously furnished to the Holder) a copy of the most recent annual or quarterly report of the Issuer filed with the Commission, in each case from and after the date the Issuer first becomes subject to the provisions of Section 13 or 15(d) of the Exchange Act, and such other reports and documents of the Issuer and other information in the possession of or reasonably obtainable by the Issuer as Holder and its Affiliates and subsequent holders of the Warrants or Warrant Shares may reasonably request in availing itself of any rule or regulation of the Commission allowing Holder and its Affiliates and subsequent holders of the Warrants or the Warrant Shares to sell any such securities without registration.

13. Registration .

(a) Upon the written demand of any Warrant Holder to the Issuer (a “ Demand Registration ”) at any time and from time to time after the Closing Date requesting that the Issuer effect the registration under the Securities Act of Registrable Securities of such Warrant Holder, the Issuer will promptly give written notice (a “ Demand Notice ”) of such Demand to all other Warrant Holders. Each other Warrant Holder may request that the Issuer effect the registration under the Securities Act of additional Registrable Securities of such Warrant Holder by delivering written notice to the Issuer specifying such number of Registrable Securities within 20 days of receipt of the Demand Notice. Within such 20-day period the Issuer shall give written notice (a “ Registration Notice ”) to all Warrant Holders that the Issuer will be filing a registration statement pursuant to this subsection 13(a) and will thereupon use its reasonable best efforts promptly to effect the registration under the Securities Act of (x) the Registrable Securities which Warrant Holders have requested to be registered within 20 days of the Demand Notice, and (y) additional Registrable Securities which Warrant Holders have requested to be registered within 10 days of the Registration Notice. Promptly within 20 days of the Registration Notice, the Issuer will notify all Warrant Holders whose Registrable Securities are to be included in the registration of the number of additional Registrable Securities requested to be included therein by the other Warrant Holders. If the registration of which the Issuer gives notice pursuant to subsection 13(a) is for an underwritten public offering, only Registrable Securities which are to be included in the underwriting may be included in such registration, and the selling Warrant Holders shall, after reasonable consultation with the Issuer, have the right to designate the managing underwriter(s) in any such underwritten public offering with the consent of the Issuer (which consent shall not be unreasonably withheld). Warrant Holders who include Registrable Securities in a registration pursuant to subsection 13(a) shall bear the cost of any underwriters’ discounts and commissions relating to their Registrable Securities which are sold.

(b) The Issuer is obligated to effect one (1) demand registration under subsection 13(a) and, with respect to each such registration, the Issuer shall bear all expenses other than underwriting discounts and commissions, if any, in connection with registrations, filings or qualifications pursuant to subsection 13(a), including, without limitation, all registration, filing and qualification fees, printers’ and accounting fees, the fees and disbursements of counsel for the Issuer and the fees and disbursements of one counsel for the selling Warrant Holders, provided that (i) a registration will not constitute a Demand Registration under subsection 13(a) until it has been declared effective under the Securities Act, and (ii) if a registration statement filed pursuant to subsection 13(a) is terminated or withdrawn by the Issuer before all Registrable Securities covered thereby have been sold such registration will not constitute a Demand Registration and the Issuer shall be obligated to pay the expenses of an additional Demand Registration under subsection 13(a) (provided that if such registration statement is withdrawn by the holders of Registrable Securities, such registration shall constitute a Demand Registration under this subsection). Each holder of Registrable Securities shall be deemed to have agreed by acquisition of such Registrable Securities not to exercise a Demand Registration right under subsection 13(a) within thirty (30) days after the filing of any registration statement of the Issuer as to which the Issuer gave the notice required by subsection 13(c).

(c) If, at any time after the date hereof, the Issuer proposes to register any of its securities under the Securities Act (except pursuant to a registration statement filed on Form S–8 or Form S–4 or such other form as shall be prescribed under the Securities Act for the same purposes or a registration statement filed in connection with an interest or dividend reinvestment plan) (any such registration, a “ Piggy-back Registration ”), it will at each such time give written notice (which notice shall state the intended method of disposition thereof by the prospective sellers) to all Warrant Holders of its intention to do so and the proposed minimum offering price per share of the Registrable Securities and upon the written request of any holder thereof given within 10 days after the Issuer’s giving of such notice, the Issuer will use its reasonable best efforts to effect the registration of any Registrable Securities which it shall have been so requested to register by including the same in such Piggy-back Registration statement all to the extent required to permit the sale or other disposition thereof in accordance with the intended method of sale or other disposition. If the Piggy-back Registration of which the Issuer gives notice pursuant to this subsection 13(c) is for an underwritten public offering, only Registrable Securities that are to be included in the underwriting may be included in such Piggy-back Registration, and the Issuer shall have the right to designate the managing underwriter(s) in any such underwritten public offering; provided that any registration statement filed pursuant to this subsection 13(c) may be withdrawn at any time at the discretion of the Issuer.

(d) If a registration under subsection 13(a) or 13(c) shall be in connection with an underwritten public offering:

(i) if the managing underwriter(s) delivers an opinion to the Warrant Holders and all other Persons seeking to include securities of the Issuer held by them in the registration statement (“ Other Security Holders ”) that the total amount of securities which they, the Issuer and any Other Security Holders intend to include in such offering is sufficiently large to materially and adversely affect the success of such offering:

A. if the registration statement was filed pursuant to a demand under subsection 13(a) or under any other agreement providing demand registration rights to Other Security Holders (“ Demand Registration Right(s) ”), the amount of securities to be offered for the accounts of all Persons seeking to include securities of the Issuer in the registration statement shall be reduced in the following order of priority to the extent necessary to cause the amount to be included in the registration statement not to exceed the amount recommended by such managing underwriter(s):

1. first, the amount of securities to be offered for the accounts of all Warrant Holders and Other Security Holders who did not exercise a Demand Registration Right (or join in any such demand within a time period provided in a Demand Registration Right) shall be reduced pro rata (based upon the amount of securities each such Person sought to include in the offering) to zero, if necessary;

2. next, the amount of securities to be offered for the account of the Issuer shall be reduced to zero, if necessary; and

3. finally, the amount of securities to be offered for the accounts of the Warrant Holders or the Other Security Holders exercising their Demand Registration Rights shall be reduced pro rata (based upon the amount of securities each such Person sought to include in the offering);

provided, however, that if the registration statement was filed pursuant to a Demand Registration Right under subsection 13(a) and Warrant Holders are required to reduce by more than 10% the Registrable Securities included in the registration statement, the Warrant Holders initially making such demand will be entitled to withdraw such demand and, if such demand is withdrawn, such registration will not count as a permitted Demand Registration under subsection 13(b) and the Issuer will pay all expenses in connection with such registration in accordance with subsection 13(b); and

B. if the registration statement was not filed pursuant to a Demand Registration Right, the amount of securities to be offered for the accounts of all Warrant Holders and all Other Security Holders shall be reduced pro rata (based upon the amount of securities each Person sought to include in the offering) to the extent necessary to reduce the total amount of securities to be included in the offering to the amount recommended by such managing underwriter(s) (which amount may be zero, if so recommended by such managing underwriter(s));

(ii) each Warrant Holder shall be deemed to have agreed by acquisition of such Warrants or Non-Public Warrant Shares not to effect any sale or distribution, including any sale pursuant to Rule 144, of any Warrants or Non-Public Warrant Shares or any other equity security of the Issuer or of any security convertible into or exchangeable or exercisable for any equity security of the Issuer (other than as part of such underwritten public offering) within any period requested by the managing underwriter(s) not to exceed the period beginning seven days before and ending 90 days after the effective date of such registration statement (and the Issuer hereby also so agrees and agrees to use its best efforts to cause each holder of more than 1.0% of any class of equity securities of the Issuer, or of any security convertible into or exchangeable or exercisable for 1.0% of any class of equity securities of the Issuer so to agree).

(e) As a condition to the inclusion of a holder’s Registrable Securities in any registration statement, each such holder of Registrable Securities requesting registration thereof will furnish to the Issuer such information with respect to such holder as is required to be disclosed in the registration statement (and the prospectus included therein) by the applicable rules, regulations and guidelines of the Commission. Failure of a holder to furnish such information or agreement shall not affect the obligation of the Issuer under this Section 13 to the remaining holders who furnish such information.

(f) If and whenever the Issuer is required under this Section 13 to use its reasonable best efforts to effect the registration of Registrable Securities under the Securities Act, the Issuer shall:

(i) as expeditiously as possible and subject to the limitations set forth in subsection 13(c), prepare and file with the Commission a registration statement on the appropriate form with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective as soon as practicable after such filing;

(ii) as expeditiously as possible, prepare and file with the Commission such amendments and supplements (including post-effective amendments and supplements) to the registration statement covering such Registrable Securities and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and usable for resale for a period necessary to complete the distribution of such securities, but in no event in excess of 12 months plus any period during which the holders of Registrable Securities are obligated to refrain from selling because the Issuer is required to amend or supplement the prospectus under subsection 13(f)(iv), and to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such registration statement during such period in accordance with the intended method of disposition of the sellers set forth therein;

(iii) as expeditiously as possible, furnish to each seller of such Registrable Securities registered or to be registered under the Securities Act, and to each underwriter, if any, of such Registrable Securities, such number of copies of a prospectus and preliminary prospectus in conformity with the requirements of the Securities Act, and such other documents as such seller or underwriter may reasonably request in order to facilitate the public sale or other disposition of such Registrable Securities;

(iv) as expeditiously as possible, notify each seller of such Registrable Securities if, at any time when a prospectus relating to such Registrable Securities, is required to be delivered under the Securities Act, any event shall have occurred as a result of which the prospectus then in use with respect to such Registrable Securities would include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading or for any other reason it shall be necessary to amend or supplement such prospectus in order to comply with the Securities Act and prepare and furnish to all sellers as promptly as possible, and in any event within thirty (30) days of such notice, a reasonable number of copies of a supplement to or an amendment of such prospectus that will correct such statement or omission or effect such compliance;

(v) as expeditiously as possible, use its reasonable best efforts to register or qualify such Registrable Securities under such other securities or blue sky laws of such jurisdictions as such seller shall reasonably request and do any and all other acts and things that may be reasonably necessary to enable such seller to consummate the public sale or other disposition in each such jurisdiction of the Registrable Securities owned by such seller and included in such registration statement, provided that the Issuer shall not be required to consent to the general service of process or to qualify to do business in any jurisdiction where it is not then qualified, use its reasonable best efforts to keep the holders of such Registrable Securities informed of the Issuer’s best estimate of the earliest date on which such registration statement or any post-effective amendment or supplement thereto will become effective and will promptly notify such holders and the managing underwriters, if any, participating in the distribution pursuant to such registration statement of the following:

A. when such registration statement or any post-effective amendment or supplement thereto becomes effective or is approved;

B. of the issuance by any competent authority of any stop order suspending the effectiveness or qualification of such registration statement or the prospectus then in use or the initiation or threat of any proceeding for that purpose; and

C. of the suspension of the qualification of any Registrable Securities included in such registration statement for sale in any jurisdiction;

(vi) make available to its security holders, as soon as practicable, an earnings statement covering a period of at least twelve months that satisfies the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder;

(vii) cooperate with the sellers of such Registrable Securities and the underwriters, if any, of such Registrable Securities, give each seller of such Registrable Securities, and the underwriters, if any, of such Registrable Securities and their respective counsel and accountants, such access to its books and records and such opportunities to discuss the business of the Issuer with its officers and independent public accountants as shall be necessary to enable them to conduct a reasonable investigation within the meaning of the Securities Act and, in the event that Registrable Securities are to be sold in an underwritten offering, enter into an underwriting agreement containing customary representations and warranties, covenants, conditions and indemnification provisions, including without limitation the furnishing to the underwriters of a customary opinion of independent counsel to the Issuer and a customary “comfort” letter from the Issuer’s independent public accountants;

(viii) provide a CUSIP number for all Registrable Securities not later than the effective date of the registration statement;

(ix) as to all registrations under subsection 13(c), pay all costs and expenses incident to the performance and compliance by the Issuer of this Section 13 including, without limitation:

A. all registration and filing fees;

B. all printing expenses;

C. all fees and disbursements of counsel and independent public accountants for the Issuer;

D. all blue sky fees and expenses (including fees and expenses of counsel in connection with blue sky surveys);

E. all transfer taxes;

F. the entire expense of any special audits required by the rules and regulations of the Commission;

G. the cost of distributing prospectuses in preliminary and final form as well as any supplements thereto; and

H. the fees and expenses of one counsel for the holders of the Registrable Securities being registered;

and as to the registration under subsection 13(a) that is in respect of an underwritten offering, as expeditiously as possible, take such actions as the underwriters reasonably request in order to expedite or facilitate the disposition of the Registrable Securities to be included in such offering (including, without limitation, effecting a stock split, stock dividend or a combination of shares of Common Stock).

(g) The Issuer will indemnify and hold harmless each seller of Registrable Securities, each director, officer, employee and agent of each seller, and each other Person, if any, who controls such seller within the meaning of the Securities Act or the Exchange Act from and against any and all losses, claims, damages, liabilities and legal and other expenses (including costs of investigation) caused by any untrue statement or alleged untrue statement of a material fact contained in any registration statement under which such Registrable Securities were registered under the Securities Act, any prospectus or preliminary prospectus contained therein or any amendment or supplement thereto, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or expenses are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to such seller and furnished to the Issuer in writing by such seller expressly for use therein, and provided that the Issuer will not be liable to any Person who participates as an underwriter in the offering or sale of Registrable Securities or any other Person, if any, who controls such underwriter within the meaning of the Securities Act under the indemnity agreement in this subsection 13(g) with respect to any preliminary prospectus or the final prospectus or the final prospectus as amended or supplemented, as the case may be, to the extent that any such loss, claim, damage or liability of such underwriter or controlling Person results from the sale by such underwriter of Registrable Securities to a Person to whom there was not sent or given, at or prior to the written confirmation of such sale, a copy of the final prospectus or of the final prospectus as then amended or supplemented, whichever is most recent, if the Issuer has previously furnished copies thereof to such underwriter, or from a sale to a Person in a state where the offering has not been registered or qualified, if the Issuer has notified the seller and any underwriter involved in such sale of the states where the offering has been registered or qualified.

(i) It shall be a condition to the obligation of the Issuer to effect a registration of Registrable Securities under the Securities Act pursuant hereto that:

A. each seller, severally and not jointly, indemnify and hold harmless the Issuer and each Person, if any, who controls the Issuer within the meaning of the Securities Act or the Exchange Act to the same extent as the indemnity from the Issuer in the foregoing paragraph, but only with reference to any breach by such seller of any agreement between such seller and the Issuer with respect to the offering and with reference to information relating to such seller furnished to the Issuer in writing by such seller expressly for use in the registration statement, any prospectus or preliminary prospectus contained therein or any amendment or supplement thereto; and

B. each seller, in the event that Registrable Securities are to be sold in an underwritten offering, enters into an underwriting agreement containing customary representations and warranties, covenants, conditions and indemnification provisions.

(ii) In case any claim shall be made or any proceeding (including any governmental investigation) shall be instituted involving any indemnified party in respect of which indemnity may be sought pursuant to this subsection 13(g), such indemnified party shall promptly notify the indemnifying party in writing of the same, provided that failure to notify the indemnifying party shall not relieve it from any liability it may have to an indemnified party otherwise than under this subsection 13(g).

(iii) The indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party in such proceeding and shall pay the fees and disbursements of such counsel. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and disbursements of such counsel shall be at the expense of such indemnified party unless:

A. the indemnifying party shall have failed to retain counsel for the indemnified party as aforesaid,

B. the indemnifying party and such indemnified party shall have mutually agreed to the retention of such counsel; or

C. representation of such indemnified party by the counsel retained by the indemnifying party would, in the reasonable opinion of the indemnified party, be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding, provided that the Issuer shall not be liable for the fees and disbursements of more than one additional counsel for all indemnified parties (in addition to local counsel).

The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment.

(h) In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in subsection 13(g) is due in accordance with its terms but is for any reason held by a court to be unavailable on grounds of policy or otherwise, the Issuer or the applicable sellers of Registrable Securities, as the case may be, shall contribute to the aggregate losses, claims, damages and liabilities incurred (including legal or other expenses reasonably incurred in connection with the investigating or defending of same) by the other and for which such indemnification was sought. In determining the amount of contribution to which the respective parties are entitled, there shall be considered the relative benefits received by each party from the offering of the securities included in the registration statement (taking into account the portion of the proceeds of the offering realized by each), the relative fault of each such party, each party’s relative knowledge and access to information concerning the matter with respect to which the claim was asserted, and any other equitable considerations appropriate in the circumstances; provided, however, that:

(i) in no case shall any seller of Registrable Securities be required to contribute any amount if it has no relative fault for the action giving rise to such losses, claims or liabilities or, in any other case, be required to contribute any amount in excess of the total public offering price of the Registrable Securities sold by it; and

(ii) no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation.

For purposes of this subsection 13(h), each Person who controls any seller of Registrable Securities or the Issuer shall have the same rights to contribution as such seller or the Issuer. Any party entitled to contribution shall, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against the Issuer or the seller of Registrable Securities under this subsection 13(h), notify the Issuer or such seller, as the case may be, but the omission to so notify the Issuer or such seller, as the case may be, shall not relieve it from any other obligation it may have hereunder or otherwise.

(i) The Issuer shall not grant to any holder of securities of the Issuer any registration rights that have a priority greater than or equal to those granted to holders of Registrable Securities pursuant to this Section 13 without the prior written consent of the holders of at least a majority of the aggregate outstanding Registrable Securities, voting as a single group.

(j) The rights set forth in this Section 13 may be assigned in connection with any direct or successive transfer of the Warrants or the Warrant Shares, provided that the Issuer shall have no obligations hereunder unless and until it is notified of such assignment.

14. Put Rights and Preemptive Rights .

(a) Put Rights . At any time after the occurrence of a Triggering Event, each Warrant Holder may deliver written notice to the Issuer of its intention to require the Issuer to purchase for cash all of the Warrants and Non-Public Warrant Shares then owned by such Warrant Holder (each a “ Put Notice ”). Within thirty (30) days of receipt of such notice, the Issuer shall purchase such Warrants and Non-Public Warrants Shares for cash. In the event any Triggering Event is rescinded or otherwise voided for any reason, the Warrant Holders may elect to rescind its notice to require the Issuer to make such purchase and such notice shall be deemed void and of no effect. The purchase price the Issuer shall pay for each Warrant or Non-Public Warrant Share, as the case may be, shall be the greater of: (A) the Market Price of a Warrant Share on the date of such notice, less , in the case of a Warrant, the Exercise Price, (B) the Market Value divided by the total number of shares of the Company’s entire equity outstanding or deemed outstanding, including, without limitation, Common Stock on a Fully-Diluted Basis, less , in the case of a Warrant, the Exercise Price or (C) the book value of the Issuer, as determined in good faith by the Issuer and Holder, divided by the total number of shares of the Company’s entire equity outstanding or deemed outstanding, including, without limitation, Common Stock on a Fully-Diluted Basis, less, in the case of a Warrant, the Exercise Price (the “ Redemption Price ”). Each Warrant Holder may exercise its rights under this Section 14(a) in whole or in part, and at any time and from time to time on or after the occurrence of any Triggering Event. If for any reason the Issuer shall fail to pay its obligations under this Section 14(a) when due, interest at a per annum rate equal to the Default Rate, compounded daily, shall accrue on the unpaid principal amount of such unpaid obligations until paid in full in cash. Following any such default in payment, at the option of any Warrant Holder, Issuer shall promptly issue to such Warrant Holder a demand note in the principal amount equal to any unpaid amounts, bearing interest at a rate per annum equal to the Default Rate, compounded daily, with the Issuer required to use any available cash to pay any accrued interest and unpaid principal on such note. Such rights shall be in addition to all other rights and remedies available to any Warrant Holder upon a breach by the Issuer of its obligations under this Section 14(a). The Issuer shall provide each Warrant Holder with 30 days prior written notice of any Triggering Event to the extent the Issuer has knowledge of such Triggering Event.

(b) Intentionally Omitted .

(c) Preemptive Rights . The Issuer shall not issue any equity securities unless such issuance is in compliance with the following procedures:

(i) Prior to the date of a proposed issuance of equity securities, the Issuer shall deliver notice of such proposed issuance (an “ Issuance Notice ”) to each Warrant Holder. The Issuance Notice shall specify (A) the number of shares and class of equity securities which the Issuer proposes to issue, the consideration to be received therefor and the date on which such consideration for shares shall be paid (which date shall be no less than thirty-one (31) days from the date of delivery of the Issuance Notice), (B) all of the material terms and conditions, including the terms and conditions of payment, upon which the Issuer proposes to issue such equity securities; (C) the proportionate number of equity securities which each Warrant Holder shall have the option to purchase hereunder, which proportionate number shall be equal to the percentage of outstanding shares of Common Stock, on an as-converted basis, already held by such Warrant Holder, and (D) where the proposed purchasers of equity securities are known, the identities of such proposed purchasers.

(ii) Upon delivery of an Issuance Notice, each of the Warrant Holders shall have the right (exercisable by delivery to the Issuer of written notice within the thirty-day period following the date of delivery of the Issuance Notice) to purchase its proportionate portion of the shares of equity securities described in the Issuance Notice, at the price and on the terms and conditions contained therein.

(iii) The preemptive rights granted by this Section 14(c) shall not apply Exempted Securities or any public offering of securities.

15. Distributions . In the event that the Issuer shall make a distribution to all holders of shares of Common Stock (including any such distribution made in connection with a consolidation or merger in which the Issuer is the continuing entity) or evidences of its indebtedness, cash or other assets (including securities other than shares of Common Stock), the Warrant Holders shall receive such distribution as if the Warrants had been exercised. Issuer shall provide Holder with 30 days prior written notice of any such distribution.

16. Board of Directors .

(a) The Issuer’s Board of Directors (the “ Board ”) shall meet at least quarterly.

(b) Prior to the Expiration Date, Holder shall have the right (effective upon the Closing Date) to designate by written notice to the Issuer one (1) employee or agent of the Holder, who will receive reasonable written notice of, and be entitled to attend, all meetings of the Board as a non-voting observer (the “ Observer ”). The Issuer or the applicable members of the Board will give the Observer oral or written notice of each meeting of the Board (whether annual or special) in the same time and in the same manner as oral or written notice is given to the applicable members of the Board (which notice may be waived by the Observer). Notwithstanding the foregoing, if the Observer attends (or, in the case of a telephonic meeting, listens by telephone to) any such meeting of the Board, then the Observer shall be deemed to have had proper notice of such meeting. The Issuer will permit the Observer to attend (or, in the case of a telephonic meeting, to listen by telephone to) each meeting of the Board as a non-voting observer. The Issuer shall provide the Observer all written materials and other information (including copies of meeting minutes) given to the members of the Board in connection with any such meeting at the same time as such information as delivered to the members of the Board and, if the Observer does not attend (or, in the case if a telephonic meeting does not listen by telephone to) the meeting of the Board, Issuer shall, promptly following such meeting of the Board, provide the written minutes or an oral summary of the meeting from the secretary of the Issuer or any of its Subsidiaries, as the case may be, to the Observer. If the Issuer or any of its Subsidiaries, as the case may be, wishes to take an action by written consent of the Board in lieu of a meeting, then the Issuer or any of its Subsidiaries, as the case may be, shall circulate such written consent to Observer at the same time that it circulates such instrument for signature by directors, and should give proper notice of any action taken pursuant there to the Observer.

(c) Holder shall be entitled to claim reimbursement from the Issuer for all reasonable out-of-pocket expenses, including, without limitation, travel expenses, pertaining to the attendance of the Observer at meetings of the Board.

17. Amendments, Waivers and Survival . Any provision of this Warrant Agreement may be amended, supplemented, waived, discharged or terminated by a written instrument signed by the Issuer and Holder. The rights of the Warrant Holders in Section 13 and 14 of this Warrant Agreement shall expressly survive any cancellation, expiration or other termination of this Warrant Agreement.

18. Specific Performance . The holders of the Warrants and/or Non-Public Warrant Shares shall have the right to specific performance by the Issuer of the provisions of this Warrant Agreement. The Issuer hereby irrevocably waives, to the extent that it may do so under applicable law, any defense based on the adequacy of a remedy at law that may be asserted as a bar to the remedy of specific performance in any action brought against the Issuer for specific performance of this Warrant Agreement by the holders of the Warrants and/or Non-Public Warrant Shares.

19. Notices .

(a) Any notice or demand to be given or made by the Warrant Holders or the holders of Warrant Shares to or on the Issuer pursuant to this Warrant Agreement shall be sufficiently given or made if actually delivered or sent by registered mail, return receipt requested, postage prepaid, addressed to the Issuer at the Warrant Office.

(b) Any notice to be given by the Issuer to the Warrant Holders or the holders of Warrant Shares shall be sufficiently given or made if actually delivered or sent by registered mail, return receipt requested, postage prepaid, addressed to such holder as such holder’s name and address shall appear on the Warrant Register or the Common Stock registry of the Issuer, as the case may be.

20. Costs and Expenses . The Issuer shall pay all reasonable costs and expenses (including without limitation reasonable attorneys’ fees) incurred by the Warrant Holders in connection with the preparation, negotiation and enforcement of, and exercise of rights under, this Warrant Agreement and the Warrant Certificates, any amendment, modification or supplement of this Warrant Agreement or the Warrant Certificates, any waiver by any Warrant Holder of any provision under this Warrant Agreement or the Warrant Certificates, and any action or proceeding by any Warrant Holder for specific performance or other equitable relief in connection with this Warrant Agreement or the Warrant Certificates.

21. Binding Agreement . This Warrant Agreement shall be binding upon and inure to the sole and exclusive benefit of the Issuer, its successors and assigns, the Holder, Affiliates of the Holder (if they hold Warrants or Warrant Shares) and the registered holders from time to time of the Warrants and the Warrant Shares (and with respect to Section 13 the other indemnitees thereunder).

22. Counterparts . This Warrant Agreement may be executed in one or more separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed counterpart of this Warrant Agreement by telefacsimile shall be equally as effective as delivery of a manually executed counterpart of this Warrant Agreement. Any party delivering an executed counterpart of this Warrant Agreement by telefacsimile shall also deliver a manually executed counterpart of this Warrant Agreement, but the failure to deliver a manually executed counterpart shall not affect the validity, enforceability, and binding effect of this Warrant Agreement.

23. GOVERNING LAW, JURISDICTION, VENUE AND SERVICE . THIS AGREEMENT SHALL BE INTERPRETED IN ACCORDANCE WITH THE INTERNAL LAWS AND DECISIONS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO CONFLICTS OF LAW PRINCIPLES. THE ISSUER HEREBY CONSENTS TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF COOK COUNTY, ILLINOIS AND THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS OR, AT THE SOLE OPTION OF THE HOLDER, OF ANY OTHER COURT IN WHICH THE HOLDER SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY, AS WELL AS TO THE JURISDICTION OF ALL COURTS FROM WHICH AN APPEAL MAY BE TAKEN FROM SUCH COURTS, FOR THE PURPOSE OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF ANY OF ITS OBLIGATIONS UNDER THIS AGREEMENT OR ANY OTHER RELATED DOCUMENTS OR WITH RESPECT TO THE TRANSACTIONS CONTEMPLATED HEREBY. THE ISSUER EXPRESSLY WAIVES ANY CLAIM THAT SUCH COURTS ARE AN INCONVENIENT FORUM OR AN IMPROPER FORUM BASED UPON LACK OF VENUE. THE ISSUER FURTHER WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT. THE ISSUER AGREES AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE BY MESSENGER OR OVERNIGHT COURIER SERVICE (WITH DELIVERY SIGNATURE), CERTIFIED MAIL (RETURN RECEIPT REQUESTED) OR REGISTERED MAIL DIRECTED TO THE ISSUER AT THE WARRANT OFFICE AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON THE EARLIER OF ACTUAL RECEIPT OR THREE (3) BUSINESS DAYS AFTER THE SAME SHALL HAVE BEEN POSTED TO EITHER SUCH ADDRESS.

24. WAIVER OF TRIAL BY JURY. HOLDER AND THE ISSUER HEREBY WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDINGS, CLAIMS OR COUNTER-CLAIMS, WHETHER IN CONTRACT OR TORT, AT LAW OR IN EQUITY, ARISING OUT OF OR IN ANY WAY RELATING TO THIS WARRANT AGREEMENT OR THE OTHER DOCUMENTS TO BE EXECUTED AND DELIVERED IN CONNECTION HEREWITH.

25. Benefits of This Warrant Agreement . Nothing in this Warrant Agreement shall be construed to give to any Person other than the Issuer and the registered holders of the Warrants and the Warrant Shares (and with respect to Section 13 the other indemnitees thereunder) any legal or equitable right, remedy or claim under this Warrant Agreement.

26. Drag Along Upon Sale of Issuer .

(a) If at any time holders of at least a majority of the shares of Common Stock then outstanding (each such holder, a “ Control Seller ” and collectively the “ Control Sellers ” ) approve a sale of the Issuer (an “ Approved Sale ” ), the Warrant Holders (the “ Non-Control Sellers ” ), shall consent to and raise no objections against the Approved Sale, and if the Approved Sale is structured as a sale of shares of Common Stock, the Non-Control Sellers shall, if requested by the Control Sellers, sell (or otherwise transfer) their shares, including Warrant Shares (or any portion thereof if requested), on the terms and conditions approved by the Control Sellers, it being agreed and understood that the Non-Control Sellers shall only be obligated to transfer the same percentage of their respective holdings of Common Stock as the percentage of all outstanding shares of Common Stock proposed to be transferred in such Approved Sale. The Non-Control Sellers shall promptly take all actions deemed necessary or desirable (in the reasonable judgment of the Control Sellers) in connection with, and to facilitate the consummation of, the Approved Sale, including the execution of all agreements and instruments as reasonably requested by the Control Sellers. Without limiting the foregoing, (i) if the Approved Sale is structured as a merger, consolidation, joint venture or similar transaction, the Non-Control Sellers (solely in such Non-Control Sellers’ capacity as stockholders of the Issuer) shall vote in favor of the Approved Sale and waive any dissenters’ rights, appraisal rights or similar rights in connection with such merger or consolidation, and (ii) if the Approved Sale is structured as a sale or exchange of shares of Common Stock, the Non-Control Sellers shall sell or exchange their shares, including the Warrant Shares and Warrants on the terms and conditions approved by the Control Sellers. The Issuer shall notify the Non-Control Sellers in writing not less than thirty (30) days prior to the proposed consummation of an Approved Sale; provided , however , that the Non-Control Sellers agree not to directly or indirectly (without the prior written consent of the Issuer) disclose to any other Person (other than to such Non-Control Sellers’ legal counsel and other advisors in confidence, as necessary to protect such Non-Control Sellers’ rights under this Warrant Agreement, as otherwise required by law or as otherwise required by the Non-Control Seller’s obligations to its stockholders) any information related to such potential sale of the Issuer.

(b) The Non-Control Sellers shall have no obligation to transfer Warrant Shares or the Warrants pursuant to subsection (a) above unless, upon the consummation of the Approved Sale pursuant to subsection (a) above, (i) all of the participating holders of shares of Common Stock and the Warrant Holders shall receive substantially the same form and amount of consideration per share of Common Stock or Warrant Share (subject, in the case of a transfer of the Warrant, to reduction for any portion of the Exercise Price per Warrant Share not paid by the Warrant Holder), (ii) if any such participating holders of the Issuer’s equity securities are given an option as to the form and amount of consideration to be received, the participating Non-Control Sellers shall be given substantially the same option, in each case as the other participating holders of the Issuer’s equity securities, (iii) the only representations, warranties or covenants that any Warrant Holder shall be required to make are with respect to its own ownership of the Issuer’s securities to be sold by it (including its ability to convey title free and clear of liens and reasonable covenants regarding confidentiality, publicity and similar matters); (iv) the amount that any Warrant Holder would be required to pay for indemnity obligations or purchase price adjustments will be the lesser of: (A) its pro-rata share based upon its ownership percentage; and (B) the proceeds received by such Warrant Holder; and (vii) no Warrant Holder shall be required to agree to any covenant not to compete or covenant not to solicit customers, employees or suppliers of any party to a sale of the Issuer.

[SIGNATURE PAGE FOLLOWS]

(Signature page to Warrant Agreement)

IN WITNESS WHEREOF the parties hereto have caused this Warrant Agreement to be duly executed and delivered by their proper and duly authorized officers, as of the date and year first above written.


	CTI INDUSTRIES CORPORATION,
	an Illinois corporation



	By:	/s/ Stephen M. Merrick
	Name:	Stephen M. Merrick
	Title:	Executive Vice President and Chief
		Financial Officer


	BMO PRIVATE EQUITY (U.S.), INC. ,
	a Delaware corporation

	By:	/s/ Douglas Sutton
		Douglas Sutton, Managing Director

Exhibit A To Warrant Agreement

FORM OF WARRANT CERTIFICATE

THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE SHARES FOR WHICH THE WARRANTS ARE EXERCISABLE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAW AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT OR LAW. SUCH WARRANTS AND SHARES MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH THE CONDITIONS SPECIFIED IN AND ARE SUBJECT TO OTHER PROVISIONS OF THE WARRANT AGREEMENT, DATED AS OF JULY 17, 2012 BETWEEN THE ISSUER AND BMO PRIVATE EQUITY (U.S.), INC., A COMPLETE AND CORRECT COPY OF WHICH IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE ISSUER AND WILL BE FURNISHED TO THE HOLDER HEREOF UPON WRITTEN REQUEST AND WITHOUT CHARGE.

THE WARRANTS REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN PUT RIGHTS AND EXCHANGE RIGHTS MORE FULLY SET FORTH IN THE WARRANT AGREEMENT.

EXERCISABLE ONLY ON OR BEFORE
Expiration Date set forth in the Warrant

Warrant Certificate

This Warrant Certificate is one of the Warrant Certificates referred to in the Warrant Agreement, dated as of July 17, 2012 between the CTI INDUSTRIES CORPORATION, an Illinois corporation (the “ Issuer ”) and BMO PRIVATE EQUITY (U.S.), iNC. (the “ Warrant Agreement ” ). Such Warrant Agreement is hereby incorporated by reference and made a part of this instrument and is hereby referred to for a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Issuer and the holders. All defined terms used in this Warrant Certificate that are not otherwise defined herein shall have the meanings ascribed to them in the Warrant Agreement.

This Warrant Certificate certifies that BMO PRIVATE EQUITY (U.S.), INC., or its registered assigns, is the registered holder of Warrants (the “ Warrants ” ) to purchase the “Applicable Number” of shares of “Common Stock” of the Issuer. Each Warrant evidenced hereby entitles the holder hereof, subject to the conditions set forth herein and in the Warrant Agreement, to purchase from the Issuer before 5:00 P.M., Chicago, Illinois time, on the Expiration Date set forth in the Warrant Agreement, one (1) Validly Issued share of the Common Stock of the Issuer (the “ Warrant Share ” ) to the extent set forth in the Warrant Agreement, at a price (the “ Exercise Price ” ) of one cent ($0.01) per Warrant, upon surrender of this Warrant Certificate, execution of the annexed Form of Election to Purchase and payment of the Exercise Price at the office of the Issuer at 22160 N. Pepper Road, Barrington, IL 60010 , or such other address as the Issuer may specify in writing to the registered holder of the Warrants evidenced hereby (the “ Warrant Office ” ). The Exercise Price and number of Warrant Shares purchasable upon exercise of the Warrants are subject to adjustment as set forth in the Warrant Agreement.

Exhibit A - Page 1

No Warrant may be exercised after 5:00 P.M., Chicago, Illinois time, on the Expiration Date and (except as otherwise provided in the Warrant Agreement) all rights of the registered holders of the Warrants shall cease after 5:00 P.M., Chicago, Illinois time, on the Expiration Date.

The Issuer may deem and treat the registered holders of the Warrants evidenced hereby as the absolute owners thereof (notwithstanding any notation of ownership or other writing hereon made by anyone), for the purpose of any exercise hereof and of any distribution to the holders hereof and for all other purposes, and the Issuer shall not be affected by any notice to the contrary.

Warrant Certificates, when surrendered at the office of the Issuer at the above-mentioned address by the registered holder hereof in Person or by a legal representative duly authorized in writing, may be exchanged, in the manner and subject to the limitations provided in the Warrant Agreement, but without payment of any service charge, for another Warrant Certificate or Warrant Certificates of like tenor evidencing in the aggregate a like number of Warrants.

Upon due presentment for registration of a transfer of this Warrant Certificate at the office of the Issuer at the above-mentioned address, a new Warrant Certificate or Warrant Certificates of like tenor and evidencing in the aggregate a like number of Warrants shall be issued in exchange for this Warrant Certificate to the transferee(s) and, if less than all of the Warrants evidenced hereby are to be transferred, to the registered holder hereof, subject to the limitations provided in the Warrant Agreement, without charge except for any tax or other governmental charge imposed in connection therewith.

[SIGNATURE PAGE FOLLOWS]

Exhibit A - Page 2

Signature Page to Warrant Certificate

IN WITNESS WHEREOF the Issuer has caused this Warrant Certificate to be signed by its duly authorized officers and has caused its corporate seal to be affixed hereunto.


	CTI INDUSTRIES CORPORATION, an
	Illinois corporation



	By:	/s/ Stephen M. Merrick
	Name:	Stephen M. Merrick
	Title:	Executive Vice President and Chief
		Financial Officer

Exhibit A - Page 3

ANNEX TO FORM OF WARRANT CERTIFICATE

FORM OF ELECTION TO PURCHASE

(To be executed upon exercise of Warrant)

The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to purchase _____ Warrant Shares and herewith tenders payment for such Warrant Shares to the order of the Issuer in the amount of $_______________ in accordance with the terms hereof. The undersigned requests that a certificate for such Warrant Shares be registered in the name of _______________________________________________ whose address is _____________________________________ and that such certificate be delivered to ___________________ whose address is ________________________. If said number of Warrant Shares is less than all of the Warrant Shares purchasable under this Warrant Certificate, the undersigned requests that a new Warrant Certificate representing the remaining balance of the Warrant Shares be registered in the name of ______________________ whose address is ___________________________ and that such Warrant Certificate be delivered to _________________________ whose address is ___________________________________.

Signature:


(Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate.)

Date:

Exhibit A - Page 4

EXHIBIT B TO WARRANT AGREEMENT

WARRANT REGISTER

Warrant Certificate Number	Original Number of Warrants and Warrant Shares	Number of Warrants Exercised	Name and address Warrant Holders
1	140,048	0	BMO Private Equity (U.S.), Inc. c/o BMO Mezzanine Fund 115 S. LaSalle St. 18th Floor – West Chicago, IL 60603 Attn: Douglas P. Sutton

Exhibit B - Page 1

EXHIBIT 10.5

THIS NOTE WAS ORIGINALLY ISSUED ON JULY 17, 2012, AND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE ILLINOIS SECURITIES LAW OF 1953, AS AMENDED, AND IT MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OR AN OPINION FROM COUNSEL SATISFACTORY TO THE BORROWER THAT SUCH REGISTRATION IS NOT REQUIRED. The transfer of such security is subject to the conditions specified in that certain Note and Warrant Purchase Agreement dated as of July 17, 2012 (as amended, restated or otherwise modified from time to time), by and between CTI Industries Corporation, an Illinois corporation, and BMO Private Equity (U.S.), Inc., a Delaware corporation.

This Note is subject to the terms of a Subordination and Intercreditor Agreement dated as of July 17, 2012 (as amended, restated or supplemented from time to time, the “ Subordination Agreement ”) between BMO Private Equity (U.S.), Inc., a Delaware corporation, and BMO Harris Bank N.A. (formerly known as Harris N.A.).

THIS NOTE HAS BEEN ISSUED WITH ORIGINAL ISSUE DISCOUNT AND, AS REQUIRED BY TREASURY REGULATION §1.1275-3(b)(1), INFORMATION REGARDING THE ISSUE PRICE, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT, THE ISSUE DATE AND THE YIELD TO MATURITY MAY BE OBTAINED FROM THE ISSUER HEREOF AT 22160 N. PEPPER ROAD, LAKE BARRINGTON, ILLINOIS 60010.

SENIOR SECURED SUBORDINATED PROMISSORY NOTE

July 17, 2012

$5,000,000.00

FOR VALUE RECEIVED, CTI Industries Corporation, an Illinois corporation (referred to herein as the “ Borrower ”), hereby promises to pay to the order of BMO Private Equity (U.S.), Inc., a Delaware corporation, or its assignee (the “ Holder ”), the principal amount of Five Million and No/100 Dollars ($5,000,000.00) (the “ Original Principal Amount ”), together with interest thereon calculated from the date hereof (the “ Date of Issuance ”), in accordance with the provisions of this instrument (this “ Note ”). For purposes of this Note, the term “ Principal Balance ” shall mean an amount equal to (a) the Original Principal Amount minus (b) all payments of principal made by the Borrower from time to time pursuant to the terms of this Note.

This Note was issued pursuant to the terms of that certain Note and Warrant Purchase Agreement dated as of July 17, 2012 (as amended, restated or otherwise modified from time to time, the “ Purchase Agreement ”), by and between the Borrower and the Holder. This Note is the “Note” referred to in the Purchase Agreement. The Purchase Agreement contains terms governing the rights of the Holder of this Note and all provisions of the Purchase Agreement are hereby incorporated herein in full by reference. Except as otherwise indicated herein, capitalized terms used in this Note have the same meanings set forth in the Purchase Agreement.

Payment of Interest . Except as otherwise expressly provided herein, the Principal Balance of this Note shall bear interest (computed on the basis of actual days elapsed in a 360-day year) at the rate of eleven and 50/100 percent (11.50%) per annum (“ Current Interest ”). Current Interest accruing on the Principal Balance of this Note shall be payable quarterly in arrears in accordance with the payment schedule on Exhibit A attached hereto and made a part hereof (assuming for purposes of Exhibit A that no portion of the Principal Balance of this Note is prepaid and that this Note is not accelerated prior to the Maturity Date). In addition, all accrued and unpaid Current Interest on this Note shall be paid upon the payment in full of the entire outstanding Principal Balance of this Note (whether on the Maturity Date or as a result of the acceleration of the maturity thereof), or if a prepayment of this Note is made, on the Principal Balance prepaid, and, if payment in full is not paid when due, thereafter on demand. Unless prohibited under applicable law, any accrued interest which is not paid on the date on which it is due and payable shall bear interest at the same rate at which interest is then accruing on the Principal Balance of this Note until such interest is paid. Any accrued interest which for any reason has not theretofore been paid shall be paid in full on the date on which the final principal payment on this Note is made. Interest shall accrue on any payment due under this Note until such time as payment therefor is actually delivered to the Holder.

Payment of Principal on Note .

(a)

Scheduled Payment . The Principal Balance of this Note, plus accrued and unpaid interest, shall be payable in full on January 18, 2018 (the “ Maturity Date ”).

(b)

Optional Prepayments . Subject to the terms of Section 2(c) below, the Borrower, at its option, may prepay all or any portion of this Note on any scheduled quarterly payment date at a prepayment price of one hundred percent (100%) of the Principal Balance to be prepaid, plus accrued and unpaid interest to the prepayment date.

(c)

Prepayment Premium . The Borrower, at its option, may at any time and from time to time prepay all or any portion of the Principal Balance of this Note, in minimum increments of $500,000, plus (i) accrued and unpaid interest to the prepayment date and (ii) a prepayment fee calculated as follows:

Prepayment Date	Prepayment Fee

Prior to July 17, 2013	3% multiplied by the principal amount prepaid
July 18, 2013 to July 18, 2014	2% multiplied by the principal amount prepaid
July 19, 2014 to July 19, 2015	1% multiplied by the principal amount prepaid
On or after July 20, 2015	No Fee

Except as provided herein and in the Purchase Agreement, this Note may not be voluntarily prepaid by the Company.

(d)

Notice of Prepayments . The Borrower shall give notice (which shall be irrevocable) to the Holder of this Note of each prepayment not later than 1:00 p.m. (Chicago time) on the Business Day that is not less than two (2) Business Days preceding the date of prepayment, specifying the aggregate Principal Balance to be prepaid and the prepayment date. Once any such notice has been given, the Principal Balance specified in such notice, together with all accrued and unpaid interest on the amount of each such prepayment to the date of payment, and any prepayment premium, shall become due and payable on such date of payment.

(e)

Mandatory Prepayments . The Borrower shall prepay this Note in full upon the occurrence of those events set forth in the Purchase Agreement requiring mandatory prepayment.

Payment Schedule . Set forth as Exhibit A attached hereto is a schedule which reflects the amount of Current Interest payable quarterly and the Principal Balance of this Note at the beginning and at the end of each quarter during the term of this Note (assuming for purposes of Exhibit A that no portion of the Principal Balance of this Note is prepaid and that this Note is not accelerated prior to the Maturity Date). Upon any voluntary or mandatory prepayment of the Principal Balance, the Current Interest reflected on Exhibit A attached hereto shall be recomputed based upon the remaining Principal Balance. The Holder shall amend Exhibit A hereto to reflect such recomputation and deliver the same to the Borrower, and such amended Exhibit A shall constitute rebuttable presumptive evidence of the Principal Balance owing and unpaid on this Note and the interest accruing and payable thereafter under this Note. The failure to amend Exhibit A hereto or to deliver the same to the Borrower shall not, however, affect the obligations of the Borrower to pay the Principal Balance and all accrued and unpaid interest on this Note.

Transfer and Exchange; Replacement; Cancellation .

(a)

Transfer and Exchange .

(i)

Subject to the transfer conditions referred to in this Section 4 and in the legends endorsed hereon, this Note and all rights hereunder are transferable, in whole or in part, without charge to the Holder, upon surrender of this Note with a properly executed assignment in form and substance reasonably acceptable to the Borrower at the principal office of the Borrower.

(ii)

Upon surrender of this Note for transfer or for exchange, the Borrower, at its expense, will (subject to the conditions set forth herein and in the Purchase Agreement) execute and deliver in exchange therefor a new Note or Notes, as the case may be, as requested by the Holder or transferee, which aggregates the unpaid Principal Balance of such Note, issued as the Holder or such transferee may request, dated so that there will be no gain or loss of interest on such surrendered Note and otherwise of like tenor. The issuance of new Notes shall be made without charge to the Holder(s) of the surrendered Note for any issuance tax in respect thereof or other cost incurred by the Borrower in connection with such issuance.

(b)

Replacement . Upon receipt of evidence reasonably satisfactory to the Borrower (an affidavit of the Holder of this Note shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of this Note and, in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Borrower (provided that if the Holder is a financial institution or other institutional investor, its own agreement shall be satisfactory), or, in the case of any such mutilation, upon the surrender of this Note, the Borrower shall (at its expense) execute and deliver, in lieu thereof, a new Note of the same class and representing the same rights represented by such lost, stolen, destroyed or mutilated Note dated so that there will be no loss of interest on this Note.

Payments . All payments to be made to the Holder of this Note shall be made by wire transfer to the Holder in lawful money of the United States of America in same-day available funds. Any payment received by the Holder of this Note after 1:00 p.m. (Chicago time) on any day will be deemed to have been received on the next following Business Day.

Place of Payment . Payments of principal, interest, premium and other amounts shall be made by wire transfer of immediately available funds to the following account of the Holder hereof:

ABA No.: 071 000 288

Account No.: 181-570-3

Account Name: BMO Private Equity (U.S.), Inc.

Bank: BMO Harris Bank N.A., Chicago, Illinois

Attention: Doug Sutton

or to such other account or to the attention of such other Person as specified by the Holder in a prior written notice to either Borrower.

Business Days . If any payment is due, or any time period for giving notice or taking action expires, on a day which is not a Business Day, the payment shall be due and payable on, and the time period shall automatically be extended to, the next Business Day immediately following, and interest shall continue to accrue at the required rate hereunder until any such payment is made.

Governing Law . This Note shall be governed and construed in accordance with the domestic laws of the State of Illinois, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Illinois or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Illinois.

Liabilities . In furtherance and not in limitation of the rights and remedies of the Holder of this Note hereunder or at law, the Holder of this Note may proceed under this Note against the Borrower in its absolute and sole discretion for any of the liabilities of the Borrower under this Note or any other liability or obligation of the Borrower arising hereunder.

10.

Events of Default . Upon the occurrence of any “Event of Default,” as described and specified in the Purchase Agreement, the Holder shall have all of the rights and remedies in accordance with, and as provided by, the terms of the Purchase Agreement. In addition, the Holder shall be entitled to recover from the Borrower any and all costs and expenses, including reasonable attorneys’ fees and court costs, incurred in enforcing its rights hereunder.

11.

Usury Laws . It is the intention of the Borrower and the Holder of this Note to conform strictly to all applicable usury laws now or hereafter in force, and any interest payable under this Note shall be subject to reduction to an amount not in excess of the maximum legal amount allowed under the applicable usury laws as now or hereafter construed by the courts having jurisdiction over such matters. If the maturity of this Note is accelerated by reason of an election by the Holder hereof resulting from an Event of Default, voluntary prepayment by the Borrower or otherwise, then the earned interest may never include more than the maximum amount permitted by law, computed from the date hereof until payment, and any interest in excess of the maximum amount permitted by law shall be canceled automatically and, if theretofore paid, shall at the option of the Holder hereof either be rebated to the Borrower or credited on the Principal Balance of this Note, or if this Note has been paid, then the excess shall be rebated to the Borrower. The aggregate of all interest (whether designated as interest, service charges, points or otherwise) contracted for, chargeable, or receivable under this Note shall under no circumstances exceed the maximum legal rate upon the Principal Balance of this Note remaining unpaid from time to time. If such interest does exceed the maximum legal rate, it shall be deemed a mistake and such excess shall be canceled automatically and, if theretofore paid, at the option of the Holder hereof either be rebated to the Borrowers or credited on the Principal Balance of this Note, or if this Note has been repaid, then such excess shall be rebated to the Borrower.

12.

Section 163 of the Internal Revenue Code . Notwithstanding any other provisions contained in this Note, payments under this Note shall not be deferred beyond any date if deferral beyond such date would result in this Note being treated as an “applicable high yield discount obligation” under Section 163(e)(5) and Section 163(i) of the Code. The preceding sentence shall apply only to the extent necessary to achieve the objective herein described and shall apply only to amounts treated as interest or original issue discount under the Code.

13.

Note in Registered Form . This Note is in registered form within the meaning of that term under Section 163(f) of the Code. The Borrower shall keep at its principal executive office a register in which the Borrower shall provide for the registration and transfer of the Note. The Holder of this Note, at such Holder’s option, may in person or by duly authorized attorney surrender this Note for exchange at the principal office of the Borrower, accompanied by a written opinion of legal counsel who shall be reasonably satisfactory to the Borrower, addressed to the Borrower and reasonably satisfactory in form and substance to the Borrower’s counsel, to the effect that the proposed exchange may be effected without registration under the Securities Act of 1933, as amended, or under any applicable state securities laws, to receive in exchange therefor a new Note or Notes, as may be requested by such Holder, of the same series and in the same aggregate unpaid principal amount as the aggregate unpaid principal amount of the Note or Notes so surrendered. Each such new Note shall be dated as of the date to which interest has been paid on the unpaid principal amount of the Note or Notes so surrendered and shall be in such principal amount and registered in such name or names as such Holder may designate in writing.

[SIGNATURE PAGE FOLLOWS]

Senior Secured Subordinated Promissory Note Signature Page

IN WITNESS WHEREOF, the Borrower has caused this Note to be executed and delivered by a duly authorized officer as of the date first written above.

	CTI I ndustries C orporation

	By:	/s/ Stephen M. Merrick
	Name:	Stephen M. Merrick
	Title:	Executive Vice President and
		Chief Financial Officer

EXHIBIT A

(See attached)

EXHIBIT 31.1

CERTIFICATIONS

I, Howard W. Schwan, certify that:

1. I have reviewed this quarterly report on Form 10-Q of CTI Industries Corporation.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the condensed consolidated financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 14, 2012

	By:	/s/ Howard W. Schwan
		Howard W. Schwan, President and Chief Executive Officer

EXHIBIT 31.2

CERTIFICATIONS

I, Stephen M. Merrick, certify that:

1. I have reviewed this quarterly report on Form 10-Q of CTI Industries Corporation.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 14, 2012

	By:	/s/ Stephen M. Merrick
		Stephen M. Merrick, Executive Vice-President and Chief Financial Officer

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of CTI Industries Corporation (the “Company”) for the quarterly period ended June 30, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Howard W. Schwan, as President and Chief Executive Officer of the Company, and Stephen M. Merrick, as Executive Vice-President and Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Howard W. Schwan

Howard W. Schwan

President and Chief Executive Officer

Date: August 14, 2012

/s/ Stephen M. Merrick

Stephen M. Merrick

Executive Vice-President and Chief Financial Officer

Date: August 14, 2012

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and is not being “filed” as part of the Form 10-Q or as a separate disclosure document for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to liability under that section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act except to the extent that this Exhibit 32 is expressly and specifically incorporated by reference in any such filing.

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.