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 ZipVacŪ 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 ZipVacŪ 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:

i. 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.

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.

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.