UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

[X]   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934

                  For the fiscal year ended December 31, 2005

[ ]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934

                         Commission File Number 0-25844

                         TAITRON COMPONENTS INCORPORATED
                 (Name of Small Business Issuer in Its Charter)

                California                                  95-4249240
      (State or Other Jurisdiction of                   (I.R.S. Employer
       Incorporation or Organization)                  Identification No.)

          28040 West Harrison Parkway, Valencia, California 91355-4162
               (Address of Principal Executive Offices, Zip Code)

         (Issuer's Telephone Number, Including Area Code) (661) 257-6060

Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Class A common
                                                               stock, par value
                                                               $.001 per share
                                                               (Title of Class)

Check whether the issuer is not required to file reports pursuant to Section 13
or 15(f) of the Exchange Act. |_|

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 |X| No |_|

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |X|

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|

Registrant's revenues for its most recent fiscal year: $8,400,000

The aggregate market value of the voting common equity held by non-affiliates of
the registrant as of March 1, 2006 was approximately $8.2 million based upon the
closing price of $2.21 per share.

Number of shares outstanding of each of the issuer's classes of common stock, as
of the latest practicable date:

Class                                               Outstanding on March 1, 2006
-------------------------------------               ----------------------------
Class A common stock, $.001 par value                        4,711,811
Class B common stock, $.001 par value                          762,612

Transitional Small Business Disclosure Format:  Yes |_|   No |X|

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement relating to registrant's
Annual Meeting of Shareholders are incorporated by reference in Part III of this
Form 10-KSB, which will be filed within 120 days of the registrant's fiscal year
end.
<PAGE>

FORWARD-LOOKING STATEMENTS

      This   document,   press   releases  and  certain   information   provided
periodically  in writing or orally by the  Company's  officers or its agents may
contain  statements which  constitute  "forward-looking  statements"  within the
meaning of Section 27A of the  Securities  Act of 1933, as amended,  and Section
21E of the Securities Exchange Act of 1934, as amended,  and involve a number of
risks and uncertainties. Forward-looking statements are usually denoted by words
or phrases such as "believes,"  "expects,"  "thinks,"  "projects,"  "estimates,"
"anticipates," "will likely result," or similar expressions.  We wish to caution
readers that all forward-looking  statements are necessarily speculative and not
to place undue reliance on  forward-looking  statements,  which speak only as of
the date made,  and to advise  readers that actual  results  could vary due to a
variety of risks and uncertainties.  Factors associated with the forward-looking
statements that could cause the forward-looking  statements to be inaccurate and
could  otherwise  impact  our  future  results  are set  forth in detail in this
document.  In  addition to the other  information  contained  in this  document,
readers should carefully  consider the information  appearing in Part II, Item 6
of this document under the heading "Cautionary Statements and Risk Factors."

      References  to  "Taitron,"  "the  Company,"  "we," "our" and "us" refer to
Taitron Components  Incorporated and its majority-owned  subsidiary,  unless the
context otherwise requires.

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS.

General

      We are a national distributor of electronic components,  primarily focused
on transistors, diodes and other discrete semiconductors, optoelectronic devices
and passive  components with a reputation of in-depth  inventories and knowledge
of the products it markets.  Our  "superstore"  strategy  consists of carrying a
large quantity and variety of components in inventory to meet the rapid delivery
requirements of our customers. To differentiate from other distributors, we also
manufacture electronic components based on our engineering  specifications under
the brands  "TCI" or "PSD"  through  outsourcing.  At  December  31,  2005,  our
inventory consisted of over 14,000 different products  manufactured by more than
100 different suppliers. We are incorporated in California,  and were originally
formed in 1989.  We  maintain a  majority-owned  subsidiary  in Mexico and three
divisions in each of Taiwan,  Brazil and China.  Our Mexico and Brazil locations
are for regional  distribution,  sales and marketing purposes and our Taiwan and
China  locations for supporting  our  purchasing of components and  manufactured
products.

      Discrete  semiconductors are basic electronic building blocks. One or more
different types of discrete semiconductors generally are found in the electronic
or power supply  circuitry of products as diverse as  automobiles,  televisions,
radios, telephones, computers, medical equipment, airplanes, industrial robotics
and household  appliances.  The term "discrete" is used to  differentiate  those
single  function  semiconductor  products  which  are  packaged  alone,  such as
transistors or diodes,  from those which are  "integrated"  into  microchips and
other integrated circuit devices.

      The  U.S.  electronics  distribution  industry  is  composed  of  national
distributors  (and  international  distributors),  as well as regional and local
distributors.  Electronics  distributors  market  numerous  products,  including
active   components  (such  as  transistors,   microprocessors   and  integrated
circuits),   passive   components   (such  as  capacitors   and  resistors)  and
electromechanical,  interconnect  and  computer  products.  We focus our efforts
almost   exclusively   on   the   distribution   of   discrete   semiconductors,
optoelectronic devices and passive components,  a small subset of the electronic
components market.

      We continue  to be impacted by the severe  decline in demand from the U.S.
market,  which began in late 2000. As a result,  we have  experienced  declining
sales since early 2001.  In  response  to this  declining  demand,  we expect to
increase our sales to existing customers through further expansion of the number
of different types of discrete  components and other integrated  circuits in our
inventory and by attracting additional contract electronic manufacturers (CEMs),
original equipment  manufacturers (OEMs) and electronics  distributor customers.
In addition to traditional component  fulfillment,  we are continuing to develop
our market role into value-added  engineering  services for existing OEM and CEM
customers through partnership agreements with offshore solution providers.

Discrete Semiconductors

      Semiconductors  can be  broadly  divided  into two  categories  - discrete
semiconductors, including transistors, diodes, rectifiers and bridges, which are
packaged  individually to perform a single or limited  function,  and integrated
circuits, such as


                                     - 2 -
<PAGE>

microprocessors  and other  "chips,"  which can  contain  from a few to  several
million  transistors  and other  elements in a single  package,  and usually are
designed to perform complex tasks.

      While  integrated  circuits  may garner  more  public  exposure,  discrete
semiconductors,  the  ancestral  root of integrated  circuits,  have been a core
element of electric  equipment for more than 35 years.  Discrete  semiconductors
are found in most consumer,  industrial  and military  electrical and electronic
applications.

      Discrete  semiconductors  represent  only a small subset of the  different
types  of  semiconductors  currently  available.   Discrete  semiconductors  are
generally  more mature  products  with a more  predictable  demand,  more stable
pricing and more  constant  sourcing  than other  products in the  semiconductor
industry,  and are thus less  susceptible  to  technological  obsolescence  than
integrated circuits.

Optoelectronic Devices and Passive Components

      In addition to discrete  semiconductors,  we offer optoelectronic  devices
such as LED's,  infrared sensors and opto couplers,  along with passive devices,
such as resistors,  capacitors  and inductors  which are  electronic  components
manufactured with  non-semiconductor  materials.  We market these optoelectronic
devices  and  passive  components  through the same  channels,  as the  discrete
semiconductors.  Sales of these  optoelectronic  devices and passive  components
were 45% and 41% of our total  sales for the years ended  December  31, 2005 and
2004, respectively.  During 2005, we purchased $2,240,000 of inventory for these
components, to facilitate our market for these products.

Electronic Distribution Channels

      Electronic component manufacturers,  which we refer to as suppliers,  sell
components  directly to CEMs and OEMs, as well as to distributors.  The practice
among the major  suppliers is generally to focus their direct selling efforts on
larger  volume  customers,  while  utilizing  distributors  to reach  small  and
medium-sized  CEMs and OEMs,  as well as smaller  distributors.  Many  suppliers
consider electronic distributors to be an integral part of their businesses.  As
a stocking,  marketing and financial intermediary,  the distributor relieves its
suppliers of a portion of their costs and personnel associated with stocking and
selling  products,  including  otherwise  sizable  investments in finished goods
inventories and accounts receivable.  By having geographically dispersed selling
and  delivery  capabilities,  distributors  are  often  able to serve  small and
medium-sized companies more effectively and economically than can the supplier.

      Electronic distributors are also important to CEMs and OEMs. CEMs and OEMs
frequently  place orders which are of  insufficient  size to be placed  directly
with the suppliers or require  delivery  schedules not available from suppliers.
Distributors offer product  availability,  selection and more rapid and flexible
delivery  schedules  keyed  to meet  the  requirements  of  their  CEMs  and OEM
customers. Also, they often rely upon electronic distributors to provide timely,
knowledgeable access to electronic components.

      There is also pressure on the  suppliers,  CEMs and OEMs to maintain small
inventories.  Inventory is costly to maintain and thus suppliers  desire to ship
finished  goods as soon as the goods are  manufactured.  CEMs and OEMs typically
demand  "just in time"  delivery  -- receipt of their  requirements  immediately
prior to the time when the  components  are to be used.  Distributors  fill this
niche.

Strategy

      Our  preliminary  goal was to become one of the  leading  distributors  of
discrete semiconductors in North America. In 2004, we began providing design and
engineering   services  to  support  our  existing  OEM  and  CEM  customers  by
outsourcing their product design and manufacturing assembly work offshore. Sales
of these  products  were  $440,000  and  $985,000 in 2004 and 2005.  In order to
facilitate this outsourcing  program,  in 2005, we opened an engineering  design
center  in  Shanghai,  China.  Strategic  allies  such as  Princeton  Technology
Corporation,  a company  controlled by one of our  directors,  and Teamforce Co.
Ltd., both Taiwan-based companies, will assist us with this program. Our goal is
to have 50%  component  sales and 50% design and  manufacturing  sales  within 3
years.

      We initially  gained  market share by  concentrating  on selling  discrete
semiconductors at competitive prices.  Since 1997, we have marketed ourselves as
the  "discrete  components  superstore,"  with an  in-depth  focus  on  discrete
semiconductors, passive and optoelectronic components and extensive inventory of
a wide variety of these products. In creating the "superstore" strategy, we have
attempted to develop a more efficient  link between  suppliers and the small and
medium-sized  customers  which  generally  do not have  direct  access  to large
suppliers  and must  purchase  exclusively  through  distributors.  The  primary
aspects of our strategy include:


                                     - 3 -
<PAGE>

      Inventory.  Our core strategy includes maintaining a substantial inventory
of discrete  and passive  components  purchased at prices  generally  lower than
those commonly  available to its  competitors.  This strategy  allows us to fill
customer orders  immediately  from stock held in inventory.  We believe that our
most important competitive advantage is the depth of our inventory. Unlike other
distributors  who carry only the  best-selling  discretes,  our entire inventory
consists of a wide range of discrete semiconductors,  optoelectronic devices and
passive  components.  However,  we are also  focusing on lowering our  inventory
levels to balance with the weakened  demand  experienced  throughout  2005. With
immediate  availability  of a wide selection of products and brands,  we believe
that sales may grow if the market rebounds.  See Part II, Item 6 - "Management's
Discussion and Analysis - Liquidity and Capital Resources".

      Private  brands and custom made parts.  To assure the best  quality of the
product with the most competitive  price, we choose the best product lines among
existing suppliers and market them under the "TCI" or "PSD" brand. These private
label products are manufactured  according to our specification  under a special
contract  agreement  with  certain  manufacturers.  Custom  made  parts are also
available  by  following  either  customer's  specification  or  specially  made
engineering specification.  We believe custom made parts business is more stable
and profitable than the traditional commodity type business.

      Strategic  Purchasing.  When the  opportunity  presented  itself,  we made
opportunistic  purchases of a supplier's  uncommitted inventory in order to take
advantage of favorable pricing. We also made significant purchases in advance in
an attempt to maintain consistent  inventory levels and meet anticipated orders.
When  possible,  we attempt to control our  inventory  risks by  matching  large
customer orders with simultaneous purchases from suppliers.  See Part II, Item 6
- "Management's Discussion and Analysis - Cautionary Statements and Risk Factors
- Need to Maintain Large Inventory; Price Fluctuations".

      Support Small Distributors,  CEMs and OEMs. We focus our marketing efforts
on small contract  manufacturers,  distributors,  CEMs and OEMs who generally do
not have direct access to suppliers because of their limited  purchasing volumes
and,  therefore,   usually  have  to  purchase  their  requirements  from  large
distributors,  often with substantial markups.  During the last few years, there
have  been  substantial   consolidations  within  the  electronics  distribution
industry  creating very large  distributors.  This trend to consolidate  creates
opportunities  for us since suppliers do not usually direct sales efforts toward
small and medium-sized CEMs and OEMs and often the larger distributors no longer
adequately  service small  customers.  We believe that our strategic  purchasing
policies  enable  us to  provide  small  and  medium-sized  CEMs  and  OEMs  and
distributors  competitive prices while maintaining  adequate profit margins.  We
generally  do not impose  minimum  order  limitations  on our  customers,  which
enables smaller customers to avoid the costs of carrying large  inventories.  We
also offer our customers a limited range of value-added services such as cutting
and forming, quality monitoring and product source tracing. We intend to grow by
developing our market role into value-added design and engineering  services for
the small OEMs and CEMs.

      Master  Distributor.   We  distribute   electronic   components  to  other
distributors,  including  nationwide  distributors,  when their inventory cannot
fulfill immediate customer orders. With its higher volume, lower cost inventory,
we act as a master  distributor  for  certain  of its  component  suppliers.  We
estimate  that  approximately  35% of our sales  are a direct  result of being a
master distributor.

      Preferred  Distributors.  We developed a Preferred  Distributor  Agreement
with certain selective distributor customers to promote a much stronger business
relationship.  Under these agreements,  our preferred distributors provide point
of sales (POS) reports which identify the distributor's customers and we provide
the  preferred  distributors  with  limited  price  protection,   limited  stock
rotations and return  privileges  among other  benefits.  As of the date of this
Report,   we  maintain   Preferred   Distributor   Agreements  with  9  selected
distributors.  We intend to maintain only a few preferred  distributors  in each
geographical region.

      Relationships   with  Suppliers.   Stock  rotation  and  price  protection
privileges are beneficial to  distributors  because they enable  distributors to
reduce inventory cost or rotate inventory they are unable to sell, thus reducing
the risks and costs  associated  with  over-purchasing  or  obsolescence.  Price
protection  mitigates  the  risks  of  falling  prices  of  components  held  in
inventory.  Since 2001,  we have been  aggressively  pursuing  new  distribution
agreements that provide us with stock rotation and price protection  privileges.
These distribution  agreements also provide stock buy back terms where suppliers
will  buy  back  inventory  from the  distributor  if  either  the  supplier  or
distributor terminates the distribution  agreement. We also believe that we have
been able to gain a competitive  advantage over other  distributors by sometimes
foregoing or not  demanding  these  privileges  (and thus  assuming the risk for
over-purchasing, product obsolescence and price fluctuations) in order to obtain
better pricing.  See Part II, Item 6 -  "Management's  Discussion and Analysis -
Cautionary Statements and Risk Factors - Need to Maintain Large Inventory; Price
Fluctuations" and "Business - Suppliers".


                                     - 4 -
<PAGE>

      Reliable  One Stop  Shopping.  We  offer a large  selection  of  different
name-brand   discrete   semiconductors,   optoelectronic   devices  and  passive
components  at  competitive  prices which reduce the number of suppliers a buyer
must use to purchase  these devices and  components.  We provide  customers with
catalogs  that are specially  designed to aid customers in quickly  locating the
types and brands of products that they need. Because of our large inventory,  we
often can fill a significant  portion, or all, of a customer's order from stock.
Historically,  we have been able to fill most of our customers' orders within 24
hours and in compliance with their  requested  delivery  schedules.  See Part II
Item 6 -  "Management's  Discussion  and  Analysis  -  Results  of  Operations",
"Business - Customers" and "Business - Sales and Marketing Channels".

      Broken  Package  Sales.  From time to time,  we have  broken  the  minimum
package for specific customers who demanded only a partial reel or bag for their
prototype or pilot run. With the new development of web order entry system (WOE)
and the completion of warehouse  management system (WMS), we are able to perform
the broken package sales more economically and efficiently. We will target local
distributors,  OEMs and CEMs to  release  their  financial  burden  of  carrying
unwanted parts in their stock.

      Web Order Entry (WOE) and Customer Drop Shipment (CDS).  The demand of web
purchasing from buyers around the world is growing rapidly.  We have developed a
web order entry system for existing  customers  to access our  inventory  and to
place  purchase  orders in real time. Not only they will get the sales order and
shipment  confirmation  on the same  day,  but also be able to  assign  the drop
shipments to their  customers  directly.  We believe this is a new trend to many
local   distributors  and  brokers  who  want  to  serve  their  customers  more
effectively and efficiently without material handling costs.

      Vendor  Managed  Inventory  (VMI). A special VMI contract is available for
our major OEM customers who often release their  purchase  orders based on short
notice,   usually   within  24  hours.   Based  on  their   non-cancelable   and
non-returnable  purchase orders,  we allocate these products in advance within a
separate  VMI storage  area in our  warehouse  to ensure we cover any short term
demand. Our VMI system is fully operational from web by mangers who could be our
customers, sales representatives or employees.

Products

      We market a wide variety of discrete semiconductors,  including rectifiers
(or power  diodes),  diodes,  transistors,  optoelectronic  devices  and passive
components, to other electronic distributors,  contract electronic manufacturers
and original equipment manufacturers, who incorporate them in their products. At
December 31, 2005,  our inventory  consisted of over 14,000  different  products
manufactured by more than 100 different suppliers.

      In 2005, we purchased products from over 50 suppliers, including Everlight
Electronics Co, Ltd., KEC America Corporation,  Samsung  Electro-Mechanics  Co.,
Vishay  Americas Inc. and Zowie  Technology  Corporation.  See Part II, Item 6 -
"Management's Discussion and Analysis - Cautionary Statements and Risk Factors -
Suppliers", "Business - Customers" and "Business - Suppliers".

      Discretes are categorized  based on various factors,  including  capacity,
construction, fabrication and function. The products we sell include:

      Rectifiers.  Rectifiers  generally  are utilized in power supply and other
high power  applications to convert  alternating  current to direct current.  We
sell a wide variety of rectifiers,  including silicon rectifiers, fast efficient
rectifiers,  schottky rectifiers,  glass passivated  rectifiers,  fast efficient
glass passivated  rectifiers,  silicon bridge rectifiers,  fast recovery,  glass
passivated bridge rectifiers and controlled avalanche bridge rectifiers.

      Diodes.  Diodes  are  two-lead  semiconductors  that only  allow  electric
current  to flow in one  direction.  They are used in a  variety  of  electronic
applications,  including signal processing and direction of current. Diodes sold
by us include  switching  diodes,  varistor  diodes,  germanium diodes and zener
diodes.

      Transistors.  Transistors  are  used in,  among  other  applications,  the
processing  or  amplification  of  electric  current  and  electronic   signals,
including  data,  television,  sound and power.  We currently sell many types of
transistors,  including small signal  transistors,  power  transistors and power
MOSFETS.

      Optoelectronic  Devices.  Optoelectronic  devices are solid state products
which  provide light  displays  (such as LEDs),  optical  links and  fiber-optic
signal  coupling.  Applications  vary from  digital  displays on consumer  video
equipment to fiber optic transmission of computer signals to pattern sensing for
regulation,  such as is  found in  automobile  cruise  controls.  Optoelectronic
devices  generally are not classified as discrete  semiconductors  or integrated
circuits, although they incorporate semiconductor materials.


                                     - 5 -
<PAGE>

      Passive Components.  Passive components are a type of electronic component
manufactured  with  non-semiconductor  materials.  Passive  components  such  as
resistors, capacitors and inductors are used in electronic circuitry but they do
not provide  amplification.  Passive components are basic electronic  components
found in virtually all electronic products.

      The products distributed by us are mature products that are used in a wide
range of commercial and industrial  products and  industries.  We believe that a
majority of the products we distribute are used in applications where integrated
circuits are not viable  alternatives.  As a result, we have not experienced any
material  amount of product  obsolescence,  and do not expect to experience  any
material amount of product  obsolescence in the foreseeable future.  However, we
cannot assure you that over time the functions for which discretes are used will
not eventually be displaced by integrated circuits.

      We purchase products from reliable  manufacturers  who provide  warranties
for their  products  that are common in the  industry  and  therefore we conduct
limited quality  monitoring of our products.  We are certified  according to the
International Standardization Organization (ISO) and we maintain our Certificate
under the quality standard ISO 9001:2000.

      Our distribution  originates from our 55,000 square-foot  facility located
in  Santa   Clarita,   California.   We   utilize   a   computerized   inventory
control/tracking  system which enables us to quickly access inventory levels and
trace product shipments. See Item 2 - "Properties."

Customers

      We market our products to distributors, CEMs and OEMs. We believe that our
strategic  purchasing  policies  allow us to provide  smaller  and  medium-sized
distributors,  CEMs and OEMs  competitive  prices while  maintaining an adequate
profit  margin.  As a rule, we do not impose  minimum order  limitations,  which
enable customers to avoid the cost of carrying large inventories.  See "Business
- Strategy."

      During 2005, we distributed our products to  approximately  750 customers.
For the years ended  December 31, 2005 and 2004,  no one customer  accounted for
more than 8.5% and 6.2%, respectively,  of our net sales. We do not believe that
the  loss of any one  customer  would  have a  material  adverse  effect  on our
business.

      In 2005, distributors represented approximately 35% and both CEMs and OEMs
together represented approximately 50% of our net sales. The remaining 15% sales
represented other brokers, exporters and overseas customers.

      We historically have not required our distributor customers to provide any
point of sale reporting and therefore we do not know the different industries in
which our products are sold by our distributor customers.  However, based on our
sales to CEMs and OEMs,  we  believe  that no single  industry  accounted  for a
majority of the applications of the products sold in 2005 or 2004.

      We offer customers inventory support which includes carrying inventory for
their specific  needs and providing free samples of our products.  We also offer
customers a limited  range of  value-added  services,  such as lead  cutting and
bending for  specific  applications,  enhanced  quality  monitoring  and product
source tracing,  but, to date, these value-added services have not been material
to our business or results of operations.

      We believe that exceptional  customer  service and customer  relations are
key  elements  of our  success,  and train our sales  force to  provide  prompt,
efficient  and  courteous  service to all  customers.  See "Business - Sales and
Marketing  Channels."  We have the ability to ship most orders the same day they
are placed and,  historically,  most of our customers'  orders have been shipped
within the requested delivery schedule.

      As our customers grow in size, we may lose our larger customers to our own
suppliers and as the electronics distribution industry consolidates, some of our
customers may be acquired by  competitors.  See Part II, Item 6 -  "Management's
Discussion and Analysis - Cautionary Statements and Risk Factors - Competition".

Sales and Marketing Channels

      As of March 1, 2006,  our sales and marketing  department  consisted of 11
employees.  We have  centralized our sales order processing and customer service
department  into our  headquarters  at Santa Clarita,  California.  However,  we
retained  outside  sales  account  managers in the states of  Massachusetts  and
Georgia.  Our inside sales and  customer  service  departments  are divided into
regional sales territories  throughout North America.  The outside sales account
managers are also  responsible for developing new CEM and OEM accounts,  as well
as working  locally with our  independent  sales  representatives  and preferred
distributors.


                                     - 6 -
<PAGE>

      We also supply products to national  distributors who share our franchised
lines. These national distributors usually have many office locations throughout
the United States and are larger than us. We serve the national  distributors by
providing  easy access to discrete  products  that they choose not to stock,  as
well as  supporting  their  needs in  inventory  shortage  situations.  Sales to
national distributors were $51,000 in 2005 and $100,000 in 2004.

      We have sales  channels into Central  America  through our  majority-owned
subsidiary  in Mexico City,  Mexico.  Central  American  sales were $626,000 and
$514,000 in 2005 and 2004, respectively.

      We have sales  channels  into Asia  through  our branch  office in Taipei,
Taiwan.  Sales to Asian  customers  were $439,000 and $507,000 in 2005 and 2004,
respectively.

      We also have sales  channels into South America  through our branch office
in Sao Paulo,  Brazil.  South  American sales were $351,000 and $322,000 in 2005
and 2004, respectively.

      Independent  sales  representatives  have  played  an  important  role  in
developing  our client base,  especially  with  respect to OEMs.  Many OEMs want
their  suppliers to have a local presence and our network of  independent  sales
representatives is responsive to those needs.  Independent sales representatives
are primarily responsible for face-to-face meetings with our customers,  and for
developing  new  customers.  Independent  sales  representatives  are each given
responsibility   for  a  specific   geographic   territory.   Typically,   sales
representatives  are only compensated for sales made to CEMs, OEMs and preferred
distributors.  We believe that this commission policy directs  independent sales
representatives'  attention to those end users with potential to increase market
share.  Along with our independent sales  representatives,  we jointly advertise
and participate in trade shows. We utilized 7 independent sales  representatives
during 2005.

      We provide customers with catalogs that are specially designed to aid them
to quickly find the types and brands of discrete  semiconductors and passive and
optoelectronic devices that they need.

Suppliers

      We believe that it's important to develop and maintain good  relationships
with  our  suppliers.   We  do  not  typically  enter  into  long-term   supply,
distribution or franchise  agreements with our suppliers,  but instead cultivate
strong  working  relationships  with  each of our  suppliers.  However,  we have
entered  into  certain  franchise  agreements  with some of our  suppliers.  The
franchise  agreements  have terms from one to two years with inventory and price
protection programs. See Part II, Item 6 - "Management's Discussion and Analysis
- Cautionary Statements and Risk Factors - Relationship with Suppliers".

      In order to facilitate good relationships with our suppliers, we typically
will carry a complete line of each supplier's discrete products. We also support
our  suppliers  by  increasing   their   visibility   through   advertising  and
participation   in  regional  and  national  trade  shows.  We  generally  order
components far in advance, helping suppliers plan their production.  Outstanding
commitments  to  purchase  inventory  from  suppliers  as of March 1,  2006 were
approximately  $2,054,000.  In addition,  we have  distribution  agreements with
certain suppliers which provide  stock-rotation,  price protection and stock buy
back  terms.  See Part II,  Item 6 -  "Management's  Discussion  and  Analysis -
Cautionary Statements and Risk Factors - Need to Maintain Large Inventory; Price
Fluctuations" and "Business - Strategy".

      In  2005,  we  purchased  components  from  over 50  different  suppliers,
including  Everlight  Electronics Co, Ltd.,  Samsung  Electro-Mechanics  Co. and
Vishay Americas Inc. We are continually  attempting to build  relationships with
suppliers  and from time to time add new  suppliers in an attempt to provide our
customers with a better product mix. Also, our relationships with suppliers have
been terminated  from time to time. The possibility  exists that the loss of one
or more distribution relationships with a supplier might have a material adverse
effect on us and our results of operations.  See Part II, Item 6 - "Management's
Discussion and Analysis - Cautionary  Statements and Risk Factors - Relationship
with Suppliers".

      For the year ended December 31, 2005,  Samsung  Electro-Mechanics  Co. and
Everlight  Electronics Co, Ltd., together accounted for approximately 31% of our
net  purchases.  However,  we do not regard any one supplier as essential to our
operations, since equivalent replacements for most of the products we market are
either  available from one or more of our other  suppliers or are available from
various other sources at competitive prices. We believes that, even if we lose a
direct relationship with a supplier, there exist alternative sources for another
supplier's products. See Part II, Item 6 - "Management's Discussion and Analysis
- Cautionary Statements and Risk Factors - Relationship with Suppliers."

      In design and engineering  services,  we have built relationships with few
selected  system  integration  vendors in China  providing  quality  service and
warranty of the finished products. Most of our current projects involve multiple
year cooperation


                                     - 7 -
<PAGE>

among  components  suppliers,  overseas  vendors  and our end  customers  in the
U.S.A.,  therefore,  we believe  such  arrangements  may  increase  the business
stability and reduce the financial risk of excess inventory.

Competition

      We operate in a highly  competitive  environment and face competition from
numerous  local,  regional and national  distributors  (both in  purchasing  and
selling inventory) and electronic component manufacturers, including some of our
own suppliers.  Many of our  competitors  are more  established and have greater
name recognition and financial and marketing  resources than us. We believe that
competition  in the  electronic  industry is based on breadth of product  lines,
product  availability,  choice of brand name,  customer service,  response time,
competitive pricing and product knowledge,  as well as value-added  services. We
believe we compete  effectively  with  respect to breadth  and  availability  of
inventory,  response  time,  pricing and  product  knowledge.  Generally,  large
component  manufacturers  and large  distributors  do not focus  their  internal
selling efforts on small and  medium-sized  OEMs, CEMs and  distributors,  which
constitute  the vast majority of our  customers.  However,  should our customers
increase in size,  component  manufacturers  may find it cost effective to focus
direct  sales  efforts on those  customers,  which  could  result in the loss of
customers  or  decreased  selling  prices.  See Part II, Item 6 -  "Management's
Discussion and Analysis - Cautionary  Statements and Risk Factors - Competition"
and "Business - Electronic Distribution Channels".

Management Information Systems

      We have made a significant  investment in computer hardware,  software and
personnel.  The Management  Information  Systems (MIS) department is responsible
for software and hardware upgrades,  maintenance of current software and related
databases,  and designing custom systems.  We believe that our MIS department is
crucial to our success and believe in  continually  upgrading  our  hardware and
software. We also developed a vendor management inventory software program which
allows participating  customers to access and manage their own inventory through
the internet.  The web site also provides  users with other current  information
about us.

Warehouse Management System

      We utilize a wireless,  fully  bar-coded  warehouse  tracking  system that
greatly enhances the processing speed, accuracy of product quantity and location
control within the warehouse.  It also reduces  potential errors and accelerates
the  delivery  of  components  to our  customers.  We  continuously  improve our
warehouse management system with custom programming features.

Foreign Trade Regulation

      A large portion of the products we distribute  are  manufactured  in Asia,
including  Taiwan,  Hong Kong,  Japan,  China,  South  Korea,  Thailand  and the
Philippines.  The purchase of goods manufactured in foreign countries is subject
to a number of risks, including economic disruptions,  transportation delays and
interruptions,  foreign  exchange rate  fluctuations,  imposition of tariffs and
import and export controls,  and changes in governmental  policies, any of which
could have a material adverse effect on our business and results of operations.

      Sales to Asian customers were 5.2% and 5.4% of our total sales in 2005 and
2004, respectively.

      From time to time,  protectionist  pressures  have  influenced  U.S. trade
policy   concerning  the  imposition  of  significant   duties  or  other  trade
restrictions  upon foreign products.  We cannot predict whether  additional U.S.
customs quotas,  duties,  taxes or other charges or restrictions will be imposed
upon the  importation of foreign  components in the future or what effect any of
these  actions  would have on our  business,  financial  condition or results of
operations.

      The ability to remain  competitive with respect to the pricing of imported
components  could be  adversely  affected  by  increases  in  tariffs or duties,
changes in trade treaties,  strikes in air or sea  transportation,  and possible
future U.S.  legislation  with respect to pricing and import  quotas on products
from foreign countries.  For example,  it is possible that political or economic
developments in China, or with respect to the United States'  relationship  with
China,  could  have an adverse  effect on our  business.  Our  ability to remain
competitive  also could be affected by other  governmental  actions  related to,
among  other  things,   anti-dumping   legislation  and  international  currency
fluctuations. While we do not believe that any of these factors adversely impact
our  business  at  present,  we cannot  assure you that these  factors  will not
materially adversely affect us in the future. Any significant  disruption in the
delivery  of  merchandise  from  our  suppliers,  substantially  all of whom are
foreign,  could have a material  adverse  impact on our  business and results of
operations.  See Part II, Item 6 -  "Management's  Discussion  and  Analysis - -
Cautionary Statements and Risk Factors - Foreign Trade Regulation."


                                     - 8 -
<PAGE>

Employees

      At March 1, 2006, we had 27 employees,  all of whom are employed on a full
time  basis.  None of our  employees  are  covered  by a  collective  bargaining
agreement and we consider our relations with employees to be good.

Website Availability of Our Reports Filed with the Securities and Exchange
Commission

      We maintain a website with the address  www.taitroncomponents.com.  We are
not  including  the  information  contained  on this  website  as a part of,  or
incorporating  it by reference into, this annual report on Form 10-KSB.  We make
available  free of charge  through  this website our annual  reports,  quarterly
reports and current  reports on Form 8-K, and  amendments to these  reports,  as
soon as reasonably practicable after it electronically files that material with,
or furnish the material to, the Securities and Exchange Commission.

ITEM 2. DESCRIPTION OF PROPERTY.

      We own our headquarters and main distribution facility which is located in
approximately  55,000  square  feet at 28040 West  Harrison  Parkway,  Valencia,
California.  We believe this facility is adequately covered by insurance (except
earthquake coverage).  We also own 15,000 square feet of office and distribution
space through our  subsidiary in Mexico and 2,500 square feet of office space in
Taipei,  Taiwan  (currently  leased to an unrelated  tenant).  We believe  these
existing facilities are adequate for the foreseeable future and have no plans to
renovate or expand them.

      In  addition,  we lease  350  square  feet of  office  space for sales and
marketing  functions  in Brazil,  expiring in May 2006 and 1,400  square feet of
office space for engineering  services  support in China,  expiring in September
2006.

ITEM 3. LEGAL PROCEEDINGS.

      In the  ordinary  course of  business,  we may  become  involved  in legal
proceedings  from time to time. As of the date of this report,  we are not aware
of any material pending legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

      None.

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Market Information

      Our Class A common stock is traded on the Nasdaq Smallcap Market under the
symbol "TAIT". The following table sets forth for the periods indicated the high
and low sale prices of the Common Stock as reported by Nasdaq:

                                                      High             Low
                                                      ----             ---

      Year Ended December 31, 2004:
      First Quarter                                  $ 2.49          $ 1.75
      Second Quarter                                   3.57            2.00
      Third Quarter                                    2.50            1.62
      Fourth Quarter                                   2.55            1.82

      Year Ended December 31, 2005:
      First Quarter                                  $ 2.60          $ 1.65
      Second Quarter                                   2.20            1.52
      Third Quarter                                    2.10            1.70
      Fourth Quarter                                   2.05            1.75

      Year Ended December 31, 2006:
      First Quarter (through March 1, 2006)          $ 2.50          $ 1.75

      On March 1,  2006,  the last  sale  price of the  Class A common  stock as
reported by Nasdaq was $2.21 per share.


                                     - 9 -
<PAGE>

Holders

      As of March 1,  2006,  there  were 42  registered  holders  of our Class A
common stock (not including  those holders whose shares of common stock are held
in street name) and one holder of our Class B common stock.

Dividends and Dividend Policy

      To  date,  we have  not  declared  nor  paid  any  cash  dividends  to our
shareholders.  However,  under our current cash flow and financial position,  we
are considering a cash dividend policy  considering the recent  advantageous tax
law  treatment  for cash  dividends  paid before  2008.  We are not aware of any
contractual  or similar  restrictions  that limit our ability to pay  dividends,
currently or in the future. See "Management's  Discussion and Analysis - Results
of Operations; Liquidity and Capital Resources."

Recent Sales of Unregistered Securities

      We have not issued or sold any of our  securities  during fiscal 2005 that
were not registered under the Securities Act of 1933.

Repurchase of Equity Securities

      We have not repurchased any shares during fiscal 2005.


ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

      The  following   discussion   should  be  read  in  conjunction  with  the
consolidated  financial  statements,  including the related notes,  appearing in
Item 7 of this report.  Also,  several of the matters discussed in this document
contain  forward-looking   statements  that  involve  risks  and  uncertainties.
Forward-looking  statements  usually  are  denoted by words or  phrases  such as
"believes,"  "expects,"  "projects,"  "estimates,"  "anticipates,"  "will likely
result"  or  similar   expressions.   We  wish  to  caution   readers  that  all
forward-looking  statements are  necessarily  speculative and not to place undue
reliance on  forward-looking  statements,  which speak only as of the date made,
and to advise  readers that actual  results could vary due to a variety of risks
and uncertainties.  Factors associated with the forward-looking  statements that
could cause the forward-looking  statements to be inaccurate and could otherwise
impact our future results are set forth in detail in this report. In addition to
the  other  information  contained  in this  report,  readers  should  carefully
consider  the  following  information  appearing  under the heading  "Cautionary
Statements and Risk Factors."

Critical Accounting Policies and Estimates

      Use of  Estimates  - We have made a number of  estimates  and  assumptions
relating  to the  reporting  of assets and  liabilities  and the  disclosure  of
contingent assets and liabilities to prepare our financial  statements  included
in Item 7 of this  report  in  conformity  with  generally  accepted  accounting
principles.  These  estimates  have a  significant  impact on our  valuation and
reserve accounts relating to the allowance for sales returns, doubtful accounts,
inventory  reserves and deferred income taxes.  Actual results could differ from
these estimates.

      Revenue  Recognition  - We recognize  revenue when we have  evidence of an
arrangement,  a  determinable  fee,  and when  collection  is  considered  to be
probable  and  products  are  delivered,   This  occurs  upon  shipment  of  the
merchandise,  which is when legal  transfer of title occurs.  Reserves for sales
allowances and customer returns are established based upon historical experience
and our estimates of future  returns.  Sales returns for the year ended December
31, 2005 were  $90,000  compared to $86,000 for 2004.  The  allowance  for sales
returns and doubtful  accounts at December  31, 2005 was $64,000.  We review the
actual sales  returns and bad debts for our  customers and establish an estimate
of future returns and allowance for doubtful accounts.

         Inventory - Inventory, consisting principally of products held for
resale, is recorded at the lower of cost (determined using the first in-first
out method) or estimated market value. We had inventory balances in the amount
of $16,681,000 at December 31, 2005, which is presented net of valuation
allowances of $1,267,000. We evaluate inventories to identify excess, high-cost,
slow-moving or other factors rendering inventories as unmarketable at normal
profit margins. For inventories supplied under franchise agreements, we take
into account our contractual rights to receive compensation for price
differences caused by market fluctuations. Due to the large number of
transactions and the complexity of managing and maintaining a large inventory of
product offerings, estimates are made regarding adjustments to the cost of
inventories. If our assumptions about


                                     - 10 -
<PAGE>

future demand change, or market conditions are less favorable than those
projected, additional write-downs of inventories may be required. In any case,
actual amounts could be different from those estimated.

      Also, our worldwide  operations are subject to local laws and regulations.
As such, of particular  interest is the European Union ("EU") directive relating
to the Restriction of Certain Hazardous  Substance  ("RoHS").  Effective July 1,
2006,  this  directive  restricts  the  distribution  of products  within the EU
containing certain substances,  including lead. At the present time, much of our
inventory contains substances prohibited by the RoHS directive. Further, many of
our suppliers are not yet supplying RoHS compliant products.  Upon effectiveness
of the  RoHS  legislation,  some  of  our  inventory  may  become  obsolete  and
unsaleable  and,  as a result,  have to be  written  off.  While we are  working
closely with our customers and suppliers to minimize this impact,  at this time,
it is difficult  to quantify  the  financial  impact,  if any, of such  obsolete
inventory.

      Deferred  Taxes - We review the nature of each  component  of our deferred
income taxes for  reasonableness.  If determined that it is more likely than not
that we will not  realize  all or part of our net  deferred  tax  assets  in the
future, we record a valuation  allowance against the deferred tax assets,  which
allowance  will  be  charged  to  income  tax  expense  in the  period  of  such
determination.   We  also  consider  the  scheduled  reversal  of  deferred  tax
liabilities,  tax planning strategies and future taxable income in assessing the
realizability  of  deferred  tax  assets.  We also  consider  the weight of both
positive and negative evidence in determining  whether a valuation  allowance is
needed.  However,  due to the  continued  net losses,  we have fully  reserved a
$721,000 allowance against our net deferred tax assets.

Recent Accounting Policies

      In December 2004, the FASB issued SFAS No. 123 (R),  "Share-Based Payment"
("SFAS 123(R)") which establishes  standards for the accounting for transactions
in which an entity exchanges its equity instruments for goods or services.  This
SFAS 123(R) standard requires that the fair value of such equity  instruments be
recognized  as expense in the  historical  financial  statements as services are
performed.  Prior to SFAS  123(R),  only certain pro forma  disclosures  of fair
value were required.  SFAS 123(R) shall be effective for small business  issuers
as of the beginning of the first interim or annual  reporting period that begins
after December 15, 2005. The adoption of this new accounting  pronouncement  may
have a material  impact on our financial  statements  during the next year ended
December 31, 2006.

Overview

      We  distribute a wide variety of  transistors,  diodes and other  discrete
semiconductors,   optoelectronic   devices  and  passive   components  to  other
electronic  distributors,  contract electronic manufacturers (CEMs) and original
equipment manufacturers (OEMs), who incorporate them in their products.

      We believe  that demand for  discrete  semiconductors  in the U.S.  market
began to  diminish  towards  the end of 2000 and the  demand  through  today has
drastically  declined.  In addition, we believe the declining demand in the U.S.
market has resulted from the accelerated trend of moving the production capacity
of OEM/CEM customers abroad and the consolidation of CEM customers domestically.
In response,  we have focused our business  strategy beyond the traditional role
of electronic  components  fulfillment to the additional role of engineering and
turn-key  services  for the  existing  OEM  and CEM  customers.  We  formed  few
strategic  business  partnerships  with a few selected  existing  customers  and
provide them with original  design and  manufacturing  (ODM)  services for their
multi-year  turn-key  projects.  We expect to see more ODM opportunities and the
results from our existing ODM services during 2006.

      Our core strategy  still includes  maintaining a substantial  inventory of
electronic  components that allows us to fill customer orders  immediately  from
stock held in inventory. However, since demand remained weak throughout 2005, we
focused on lowering  our  inventory  balances and changing our product mix. As a
result,  net  inventory  levels  decreased  throughout  the year by  $1,572,000,
including a non-cash provision of approximately $486,000 during 2005 to increase
our  inventory  reserves for price  declines and  slow-moving  components.  This
provision is mainly used to increase our inventory  reserve in  anticipation  of
future inventory value fluctuation and excess inventory.

      In accordance  with  Generally  Accepted  Accounting  Principles,  we have
classified  inventory as a current asset in our December 31, 2005,  consolidated
financial statements representing approximately 82% of current assets and 67% of
total  assets.  However,  if all or a  substantial  portion of the inventory was
required to be  immediately  liquidated,  the inventory  would not be as readily
marketable or liquid as other items  included or classified as a current  asset,
such as cash.  We cannot  assure you that demand in the  discrete  semiconductor
market will increase and that market conditions will improve.  Therefore,  it is
possible that further declines in our carrying values of inventory may result.


                                     - 11 -
<PAGE>

      Since the beginning of 2001, our gross profit margins in general have been
stable.  Our gross profit margins are subject to a number of factors,  including
product demand, a strong U.S. dollar,  manufacturer's price protection programs,
our ability to purchase inventory at favorable prices and our sales product mix.


Results of Operations

The Year Ended December 31, 2005 Compared to the Year Ended December 31, 2004

      Net sales for the year  ended  December  31,  2005  decreased  by 10.2% to
$8,400,000  from  $9,352,000 in the prior year.  The overall  decrease came from
declining domestic sales of our components by $1,497,000, or 16.8%, offset by an
increase of $545,000, or 123.9%, in our manufactured products, compared with the
year-earlier period..

      Gross margins were 27.5% for the year ended December 31, 2005, compared to
28.4% for the year ended  December  31,  2004.  The  decrease  can be  primarily
attributed to pricing pressures for our components sold in the domestic market.

      Selling,  general and  administrative  expenses increased by $9,000 or .4%
for 2005 as compared to the prior year. While the overall  expenditure  remained
at approximately  the same level for the years ended December 31, 2005 and 2004,
our headcount and related  salaries  decreased by $80,000,  offset by $89,000 of
increase in professional fees.

      Operating  loss was $289,000 or 3.4% of net sales for 2005, as compared to
$84,000 in the prior year.  Operating  loss  increased  primarily as a result of
lower gross margins discussed above.

      Interest expense was $12,000 for 2005 as compared to $171,000 in the prior
year.  The decrease is due to lowered  borrowing  levels related to repayment of
our long-term debt obligations.  As of December 31, 2005, we have no outstanding
borrowings on interest-bearing debt.

      Income tax  provision was $14,000 for 2005, as compared to $33,000 for the
prior year.  Our tax  provision  is  primarily  based upon our state  income tax
liabilities for both 2005 and 2004.

      We incurred net losses of $205,000 for 2005 as compared with net losses of
$248,000  for the prior  year,  a decrease  of  $43,000 or 17.3%.  Net loss as a
percentage of net sales decreased to 2.4% from 2.7%.

Liquidity and Capital Resources

      We  historically  have satisfied our liquidity  requirements  through cash
generated from operations,  short-term commercial loans, subordinated promissory
notes and issuance of equity  securities.  A summary of our cash flows resulting
from our  operating,  investing  and  financing  activities  for the years ended
December 31, 2005 and 2004 were as follows:

                                                     Year Ended December 31,
                                                  ----------------------------
                                                     2005              2004
                                                     ----              ----
Operating activities...........................   $1,798,000       $ 1,711,000
Investing activities...........................      (31,000)         (117,000)
Financing activities...........................     (324,000)       (4,032,000)

      Cash flows provided by operating activities increased to $1,798,000 during
2005, as compared to $1,711,000 in the prior year.

      Cash flows used in  investing  activities  was  $31,000  during  2005,  as
compared to $117,000 in the prior year.

      Cash flows used in financing  activities  decreased to $324,000 in 2005 as
compared with $4,032,000 in the prior year.

      We believe that funds generated from operations,  our $3 million revolving
line of credit facility and existing cash balances,  are likely to be sufficient
to finance our working  capital and  capital  expenditure  requirements  for the
foreseeable future. If these funds are not sufficient, we may secure new sources
of  asset-based  lending  on  accounts  receivables  or  issue  debt  or  equity
securities. Otherwise, we may need to liquidate assets to generate the necessary
working capital.

      Inventory is included and  classified as a current  asset.  As of December
31, 2005, inventory  represented  approximately 82% of current assets and 67% of
total assets.  However,  it is likely to take over one year for the inventory to
turn and therefore


                                     - 12 -
<PAGE>

is likely not to be  saleable  within a one-year  time frame.  Hence,  inventory
would not be as readily  marketable or liquid as other items included in current
assets, such as cash.

      On July 15,  2005,  we  renewed  our  revolving  line of  credit  facility
providing up to $3 million for operating purposes.  The agreement governing this
credit facility contains security agreements covering essentially all our assets
and financial covenants  requiring  compliance with certain financial ratios. As
of the date of this  report,  we have not yet used,  nor  anticipate  using this
credit facility before its renewal date on June 17, 2006.

Off-Balance Sheet Arrangements

      We had no material off-balance sheet arrangements that have, or are likely
to have, a current or future material effect on our operations.

Cautionary Statements and Risk Factors

      Several of the matters discussed in this document contain  forward-looking
statements  that involve risks and  uncertainties.  Factors  associated with the
forward-looking statements which could cause actual results to differ materially
from those projected or forecast in the statements  appear below. In addition to
other information contained in this document,  readers should carefully consider
the following cautionary statements and risk factors:

      If environmental  laws and regulations  restrict the ability to distribute
our products,  our inventory may become obsolete and  unsaleable.  Our worldwide
operations are subject to local laws and regulations,  compliance with which may
require  substantial  expense.  As such, of particular  interest is the European
Union  ("EU")  directive  relating  to  the  Restriction  of  Certain  Hazardous
Substance  ("RoHS").  Effective  July 1,  2006,  this  directive  restricts  the
distribution of products within the EU containing certain substances,  including
lead. At the present time, much of our inventory contains substances  prohibited
by the RoHS directive. Further, many of our suppliers are not yet supplying RoHS
compliant  products.  Upon  effectiveness of the RoHS  legislation,  some of our
inventory  may become  obsolete  and  unsaleable  and,  as a result,  have to be
written off.

      If we fail to retain key  personnel  our  operations  could suffer and our
stock price  could be  negatively  impacted.  We are highly  dependent  upon the
services of Stewart Wang, our Chief Executive Officer and President. Our success
to date has been largely  dependent  upon the efforts and  abilities of Mr. Wang
and the loss of Mr. Wang's services for any reason could have a material adverse
effect upon us. In addition,  our work force  includes  executives and employees
with  significant  knowledge  and  experience  in the  electronics  distribution
industry.  Our future  success  will be  strongly  influenced  by our ability to
continue to  recruit,  train and retain a skilled  work force.  While we believe
that we would be able to locate  suitable  replacements  for our  executives  or
other  personnel if their services were lost, we cannot assure you that we would
be able to do so on terms  favorable  to us.  In  particular,  the  hiring  of a
suitable replacement for Mr. Wang could be very difficult. We have purchased and
currently  intend to maintain a key-man life insurance policy on Mr. Wang's life
with benefits of $2 million payable to us in the event of Mr. Wang's death.  The
benefits received under this policy might not be sufficient to compensate us for
the loss of Mr. Wang's services should a suitable replacement not be employed.

      Difficulties  with or termination of our  relationship  with our suppliers
could  adversely  impact our  ability to provide  sufficient  quantities  of our
products on a timely basis.  Typically,  we do not have written long-term supply
or  distribution  agreements  with any of our  non-franchise  suppliers  and our
written franchise supplier  agreements have terms of one to two years.  Although
we  believe  that we have  established  close  working  relationships  with  our
principal  suppliers,  our success will depend,  in large part,  on  maintaining
these  relationships and developing new supplier  relationships for our existing
and future product lines. Because of the lack of long-term contracts,  we cannot
assure you that we will be able to maintain  these  relationships.  However,  we
believe  that,  even  if we  lose  our  direct  relationship  with  a  supplier,
alternative  sources exist for our products.  We cannot assure you that the loss
or a  significant  disruption  in  the  relationship  with  one or  more  of our
suppliers  would not have a material  adverse effect on our business and results
of operations.

      We may not  receive  the full value of our  inventory  if we are forced to
liquidate  within a limited  time  period.  Inventory,  according  to  Generally
Accepted Accounting Principles, is included and classified as a current asset in
our December 31, 2005 consolidated  financial  statements.  However, if all or a
substantial portion of the inventory was required to be immediately  liquidated,
the  inventory  would not be as  readily  marketable  or  liquid as other  items
included or classified as a current  asset,  such as cash.  Further,  we may not
realize the full carrying value of our reported inventories.

      Our  revenues and  operating  results have been and may again be adversely
affected  by  downturns  or  other  changes  in the  general  economy  or in the
semiconductor industry. The electronics  distribution industry has been affected
historically by general economic  downturns,  which have had an adverse economic
effect upon manufacturers and end-users of discrete


                                     - 13 -
<PAGE>

components,  as well as  electronic  distributors  such as us. In addition,  the
life-cycle  of  existing  electronic  products  and the  timing  of new  product
development  and  introduction  can  affect  demand for  electronic  components.
Downturns in the electronics  distribution industry, or the electronics industry
in general, could adversely affect our business and results of operations.

      Our gross  margins  may  decline as we  increasingly  compete  with larger
companies with greater  financial  resources and foreign  distributors.  We face
intense  competition,  both in our selling efforts and purchasing efforts,  from
the  significant  number of companies that  manufacture  or distribute  discrete
products.  Many of these companies have substantially greater assets and possess
substantially  greater  financial  and  personnel  resources  than  we do.  Many
competing  distributors  also  carry  product  lines  which  we  do  not  carry.
Generally,  large component  manufacturers  and large  distributors do not focus
their  direct  selling  efforts  on  smaller  and  medium-sized  CEMs,  OEMs and
distributors,  which  constitute  the vast majority of our  customers.  However,
should our customers increase in size, component  manufacturers may find it cost
effective to focus direct selling efforts on those customers, which could result
in the loss of customers  or decrease on profit  margins.  We cannot  assure you
that we will  be able to  continue  to  compete  effectively  with  existing  or
potential competitors. Also, we have seen new competition from Asia in two major
areas: (a) more Asian  manufacturers  competing directly with U.S.  distributors
and (b) more OEMs and CEMs moving production capacity to Asia for cost savings.

      Because  we   maintain  a  large   inventory,   price   fluctuations   can
significantly  affect our  results of  operations.  To  adequately  service  our
customers,  we believe that it is necessary to maintain a significant  inventory
supply of our product  offerings.  However,  if prices of components held in our
inventory  supply  decline or if new  technology  is  developed  that  displaces
products  distributed  by us and held in inventory,  our business and results of
operations could be materially adversely affected.

      An  unanticipated  shortage  of  products  may  cause us to fall  short of
expected quarterly revenues and operating results.  The semiconductor  component
business  has from time to time  experienced  periods  of extreme  shortages  in
product supply,  generally as the result of demand exceeding  available  supply.
When these shortages occur,  suppliers tend to either raise unit prices in order
to reduce order backlog or place their customers on  "allocation,"  reducing the
number of units sold to each  customer.  While we believe that, due to the depth
of our  inventory,  we have not been  adversely  affected by past  shortages  in
certain discrete components, we cannot assure you that future shortages will not
adversely impact us.

      Because we depend on international  suppliers for a significant  amount of
our products,  we are subject to all of the risks and  uncertainties  associated
with the conduct of international business. A significant number of the products
distributed  by us are  manufactured  in  Taiwan,  China,  South  Korea  and the
Philippines.  The purchase of goods manufactured in foreign countries is subject
to a number of risks, including economic disruptions,  transportation delays and
interruptions,  foreign  exchange rate  fluctuations,  imposition of tariffs and
import and export  controls and changes in governmental  policies,  any of which
could have a material adverse effect on our business and results of operations.

      The ability to remain  competitive with respect to the pricing of imported
components  could be  adversely  affected  by  increases  in  tariffs or duties,
changes in trade treaties,  strikes in air or sea  transportation,  and possible
future U.S.  legislation  with respect to pricing and import  quotas on products
from foreign countries.  For example,  it is possible that political or economic
developments  in China,  or with  respect to the U.S.  relationship  with China,
could have an adverse effect on our business.  Our ability to remain competitive
could also be affected by other  governmental  actions  related to,  among other
things, anti-dumping legislation and international currency fluctuations.  While
we do not believe  that any of these  factors  adversely  impact our business at
present,  we cannot assure you that these factors will not materially  adversely
affect  us in  the  future.  Any  significant  disruption  in  the  delivery  of
merchandise  from our suppliers,  substantially  all of whom are foreign,  could
also have a material adverse impact on our business and results of operations.

      Because one  shareholder  holds the  majority  of the voting  power of our
common stock, we may not be an attractive  candidate for acquisition,  which may
have a negative  effect on our stock price.  Stewart Wang,  our Chief  Executive
Officer and President,  beneficially owns all of our Class B common stock, which
carries  ten votes per  share,  and he thus  controls  approximately  62% of the
voting power of our common  stock.  As a result,  Mr. Wang is able to control us
and our  operations,  including the election of at least a majority of our Board
of  Directors.  Also,  at any time while we have at least 800  shareholders  who
beneficially  own shares of our common  stock,  our  Articles  of  Incorporation
provide for the automatic  elimination of cumulative  voting,  which would allow
Mr. Wang to elect all of our directors.  The disproportionate  vote afforded the
Class B common stock could also serve to  discourage  potential  acquirers  from
seeking to acquire  control of us  through  the  purchase  of the Class A common
stock,  which might have a depressive  affect on the price of the Class A common
stock.

      If our  customers  return  products at a rate  significantly  in excess of
historical  levels,  our  reserves  for  returns  may  not  be  adequate.  On  a
case-by-case  basis,  we accept returns of products from our customers,  without
restocking charges, when they


                                     - 14 -
<PAGE>

can  demonstrate  an  acceptable  cause for the
return.  Requests by a  distributor  to return  products  purchased  for its own
inventory  generally  are not  included  under this policy.  We also will,  on a
case-by-case basis, accept returns of products upon payment of a restocking fee,
which  generally  is set at 15% to 30% of the sales  price.  We will not  accept
returns  of any  products  that  were  special-ordered  by a  customer,  or that
otherwise are not generally  included in our inventory.  During the fiscal years
ended December 31, 2005 and 2004, sales returns  aggregated $90,000 and $86,000,
or 1.1%  and  0.9% of net  sales,  respectively.  Historically,  most  allowable
returns occur during the first two months following shipment.  While we maintain
reserves for product  returns which we consider to be adequate,  the possibility
exists that we could experience returns in any period at a rate significantly in
excess of historical  levels,  which could  materially and adversely  impact our
results of operations for that period.

ITEM 7. FINANCIAL STATEMENTS.

                          INDEX TO FINANCIAL STATEMENTS
                         TAITRON COMPONENTS INCORPORATED

<TABLE>
<CAPTION>
                                                                                                                      Page
                                                                                                                      ----

<S>                                                                                                                  <C>
Report of Independent Registered Public Accounting Firm ..........................................................      16
Consolidated Balance Sheet at December 31, 2005 ..................................................................      17
Consolidated Statements of Operations for the Years Ended December 31, 2005 and 2004 .............................      18
Consolidated Statement of Shareholders' Equity for the Years Ended December 31, 2005 and 2004 ....................      19
Consolidated Statements of Cash Flows for the Years Ended December 31, 2005 and 2004 .............................      20
Notes to Consolidated Financial Statements .......................................................................   21-27
</TABLE>


                                     - 15 -
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors
Taitron Components Incorporated:

We  have  audited  the  accompanying   consolidated  balance  sheet  of  Taitron
Components Incorporated (the "Company") as of December 31, 2005, and the related
consolidated  statements of operations,  shareholders' equity and cash flows for
each of the two years in the period ended December 31, 2005. These  consolidated
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the consolidated financial position of Taitron Components
Incorporated  as of  December  31,  2005,  and the  consolidated  results of its
operations  and its cash  flows  for each of the two years in the  period  ended
December 31, 2005, in conformity with accounting  principles  generally accepted
in the United States of America.

                                                   /s/ Haskell & White LLP

Irvine, California
March  9, 2006

                                     - 16 -
<PAGE>

                         TAITRON COMPONENTS INCORPORATED

                           Consolidated Balance Sheet

                                December 31, 2005

<TABLE>
<CAPTION>
                       Assets

<S>                                                                                <C>
Current assets:
    Cash and cash equivalents                                                      $  1,962,000
    Trade accounts receivable, net                                                    1,552,000
    Inventory, net                                                                   16,681,000
    Prepaid expenses and other current assets                                           151,000
                                                                                   ------------

           Total current assets                                                      20,346,000

Property and equipment, net                                                           4,428,000
Other assets                                                                             78,000
                                                                                   ------------

           Total assets                                                            $ 24,852,000
                                                                                   ============

                Liabilities and Shareholders' Equity

Current liabilities:
    Trade accounts payable                                                         $  1,020,000
    Accrued liabilities                                                                 585,000
                                                                                   ------------
           Total current liabilities                                                  1,605,000

           Total liabilities                                                          1,605,000
                                                                                   ------------

Commitments and contingencies (Notes 3, 6 and 9)

Shareholders' equity:
    Preferred stock, $.001 par value.  Authorized 5,000,000 shares;
      None issued or outstanding                                                             --
    Class A common stock, $.001 par value.  Authorized 20,000,000 shares;                 5,000
      4,700,145 shares issued and outstanding
    Class B common stock, $.001 par value.  Authorized, issued and outstanding            1,000
      762,612 shares
    Additional paid-in capital                                                       10,416,000
    Accumulated other comprehensive loss                                                (17,000)
    Retained earnings                                                                12,842,000
                                                                                   ------------

           Total shareholders' equity                                                23,247,000
                                                                                   ------------

           Total liabilities and shareholders' equity                              $ 24,852,000
                                                                                   ============
</TABLE>

See accompanying notes to consolidated financial statements.

                                     - 17 -
<PAGE>

                         TAITRON COMPONENTS INCORPORATED

                      Consolidated Statements of Operations

                             Year ended December 31,

                                                      2005            2004
                                                   ----------      ----------
Net sales                                          $8,400,000      $9,352,000
Cost of goods sold                                  6,092,000       6,701,000
                                                   ----------      ----------
         Gross profit                               2,308,000       2,651,000

Selling, general and administrative expenses        2,597,000       2,588,000
Impairment losses                                          --         147,000
                                                   ----------      ----------
         Operating loss                              (289,000)        (84,000)

Interest expense, net                                 (12,000)       (171,000)
Other income, net                                     110,000          34,000
Gain on sale of assets                                     --           6,000
                                                   ----------      ----------
         Loss before income taxes                    (191,000)       (215,000)

Income tax provision                                  (14,000)        (33,000)
                                                   ----------      ----------

         Net loss                                  $(205,000)      $ (248,000)
                                                   ==========      ==========

Loss per share:  Basic & Diluted:                  $     (.04)     $     (.05)
                                                   ==========      ==========
Weighted average common shares outstanding:
         Basic & Diluted                            5,462,153       5,464,912
                                                   ==========      ==========

See accompanying notes to consolidated financial statements.


                                     - 18 -
<PAGE>

                         TAITRON COMPONENTS INCORPORATED
                 Consolidated Statement of Shareholders' Equity
                        Two years ended December 31, 2005

<TABLE>
<CAPTION>
                                                                                            Accumulated
                                 Class A common stock   Class B common stock   Additional      Other                      Total
                                 --------------------   --------------------    Paid-in     Comprehensive   Retained   Shareholders'
                                   Shares     Amount      Shares    Amount      capital     Income (Loss)   Earnings      Equity
                                  ---------   ------      -------   ------     ----------   -------------   --------   -------------

<S>                               <C>         <C>         <C>       <C>       <C>             <C>         <C>           <C>
Balances at December 31, 2003     4,827,599   $5,000      762,612   $1,000    $10,709,000     $(21,000)   $13,295,000   $23,989,000

Issuances of common stock            18,567       --           --       --         27,000           --             --        27,000

Repurchase of common stock         (148,520)      --           --       --       (322,000)          --             --      (322,000)

Comprehensive loss:
   Foreign currency                      --       --           --       --             --       24,000             --        24,000
      translation adjustment

   Net loss                              --       --           --       --             --           --       (248,000)     (248,000)
      Comprehensive loss                 --       --           --       --             --           --             --      (224,000)
                                  ---------   ------      -------   ------    -----------     --------    -----------   -----------

Balances at December 31, 2004     4,697,646   $5,000      762,612   $1,000    $10,414,000     $  3,000    $13,047,000   $23,470,000

Issuances of common stock             2,499       --           --       --          2,000           --             --         2,000

Comprehensive loss:
   Foreign currency                      --       --           --       --             --      (20,000)            --       (20,000)
      translation adjustment

   Net loss                              --       --           --       --             --           --       (205,000)     (205,000)
      Comprehensive loss                 --       --           --       --             --           --             --      (225,000)
                                  ---------   ------      -------   ------    -----------     --------    -----------   -----------

Balances at December 31, 2005     4,700,145   $5,000      762,612   $1,000    $10,416,000     $(17,000)   $12,842,000   $23,247,000
                                  =========   ======      =======   ======    ===========     ========    ===========   ===========
</TABLE>

See accompanying notes to consolidated financial statements.


                                     - 19 -
<PAGE>

                         TAITRON COMPONENTS INCORPORATED

                      Consolidated Statements of Cash Flows

                             Year ended December 31,

<TABLE>
<CAPTION>
                                                                                            2005             2004
                                                                                         -----------      -----------
<S>                                                                                      <C>              <C>
Cash flows from operating activities:
    Net loss                                                                             $  (205,000)     $  (248,000)
                                                                                         -----------      -----------
    Adjustments to reconcile net loss to net cash provided by operating activities:
        Depreciation and amortization                                                        236,000          310,000
        Amortization of debt discount related to options issued with notes payable                --           28,000
        Provision for inventory reserve                                                      486,000          585,000
        Provision for sales returns and doubtful accounts                                     90,000           31,000
        Impairment losses                                                                         --          147,000
        Gain on sale of assets                                                                    --           (6,000)
        Changes in assets and liabilities:
          Trade accounts receivable                                                         (543,000)          86,000
          Inventory                                                                        1,086,000          878,000
          Prepaid expenses and other current assets                                          266,000         (222,000)
          Other assets                                                                       (14,000)          (3,000)
          Trade accounts payable                                                             214,000          (29,000)
          Accrued liabilities                                                                182,000          154,000
                                                                                         -----------      -----------
              Total adjustments                                                            2,003,000        1,959,000
                                                                                         -----------      -----------
              Net cash provided by operating activities                                    1,798,000        1,711,000
                                                                                         -----------      -----------

Cash flows from investing activities:
    Acquisition of property and equipment                                                    (31,000)        (123,000)
    Proceeds on sale of assets                                                                    --            6,000
                                                                                         -----------      -----------
              Net cash used in investing activities                                          (31,000)        (117,000)
                                                                                         -----------      -----------

Cash flows from financing activities:
    Payments on notes payable                                                             (1,326,000)      (2,737,000)
    Repurchase of Class A common stock                                                            --         (322,000)
    Decrease (increase) of restricted cash                                                 1,000,000       (1,000,000)
    Exercise of Class A common stock options                                                   2,000           27,000
                                                                                         -----------      -----------
              Net cash used in financing activities                                         (324,000)      (4,032,000)
                                                                                         -----------      -----------
Impact of exchange rates on cash                                                             (20,000)          24,000
                                                                                         -----------      -----------
              Net increase (decrease) in cash and cash equivalents                         1,423,000       (2,414,000)
Cash and cash equivalents, beginning of year                                                 539,000        2,953,000
                                                                                         -----------      -----------
Cash and cash equivalents, end of year                                                   $ 1,962,000      $   539,000
                                                                                         ===========      ===========

Supplemental disclosures of cash flow information:
    Cash paid for interest                                                               $    48,000      $   177,000
                                                                                         ===========      ===========
    Cash paid for income taxes, net                                                      $    10,000      $    30,000
                                                                                         ===========      ===========
</TABLE>

See accompanying notes to consolidated financial statements.


                                     - 20 -
<PAGE>

                         TAITRON COMPONENTS INCORPORATED

                   Notes to Consolidated Financial Statements

Note 1 - Summary of Significant Accounting Policies

      Description of Business

      Taitron  Components   Incorporated  ("Taitron"  or  the  "Company")  is  a
      "discrete  components  superstore,"  which  distributes  a wide variety of
      transistors,  diodes  and other  discrete  semiconductors,  optoelectronic
      devices and passive components to other electronic distributors,  contract
      electronic  manufacturers  (CEMs)  and  original  equipment  manufacturers
      (OEMs),  who incorporate  these devices into their  products.  In order to
      meet  the  rapid  delivery  requirements  of its  customers,  the  Company
      maintains a significant inventory of discrete components.

      Principles of Consolidation

      The consolidated  financial statements include the accounts of the Company
      and its 60%  majority-owned  subsidiary,  Taitron Components Mexico, SA de
      CV. All  significant  intercompany  transactions  and  balances  have been
      eliminated  in  consolidation.  The  ownership  interests  of the minority
      investors  in Taitron  Components  Mexico,  SA de CV are  recorded  in the
      accompanying consolidated balance sheet as minority interests,  which have
      a  balance  of $0 as of  December  31,  2005,  based  on  the  net  losses
      experienced by Taitron Components Mexico, SA de CV.

      Concentration of Risk

      A  significant  number of the  products  distributed  by the  Company  are
      manufactured in Taiwan, Hong Kong, China, South Korea and the Philippines.
      The purchase of goods  manufactured  in foreign  countries is subject to a
      number of risks, including economic disruptions, transportation delays and
      interruptions,  foreign exchange rate fluctuations,  imposition of tariffs
      and import and export controls and changes in governmental  policies,  any
      of which could have a material  adverse  effect on the Company's  business
      and results of operations.

      The ability to remain  competitive with respect to the pricing of imported
      components could be adversely  affected by increases in tariffs or duties,
      changes  in trade  treaties,  strikes  in air or sea  transportation,  and
      possible future U.S. legislation with respect to pricing and import quotas
      on products  from  foreign  countries.  For example,  it is possible  that
      political  or  economic  developments  in China,  or with  respect  to the
      relationship of the United States with China, could have an adverse effect
      on the Company's  business.  The Company's  ability to remain  competitive
      could also be affected by other government actions related to, among other
      things,  anti-dumping legislation and international currency fluctuations.
      While the Company  does not believe  that any of these  factors  adversely
      impact its business at present,  the Company  cannot assure you that these
      factors will not  materially  adversely  affect the Company in the future.
      Any  significant  disruption  in the  delivery  of  merchandise  from  the
      Company's  suppliers,  substantially  all of whom are foreign,  could also
      have a material  adverse  impact on the Company's  business and results of
      operations.  Management  estimates that over 80% of the Company's products
      were produced in Asia.

      Samsung Electro-Mechanics Co. and Everlight Electronics Co, Ltd., together
      accounted  for  approximately  31% and 27% of Taitron's  net purchases for
      2005 and 2004,  respectively.  However,  Taitron  does not  regard any one
      supplier as essential to its operations, since equivalent replacements for
      most of the products Taitron markets are either available from one or more
      of Taitron's  other  suppliers or are available from various other sources
      at competitive prices.  Taitron believes that, even if it loses its direct
      relationship  with a  supplier,  there  exist  alternative  sources  for a
      supplier's products.

      Cash and Cash Equivalents

      The  Company  considers  all highly  liquid  investments  with an original
      maturity of 90 days or less to be cash equivalents.

      The Company maintains cash balances in multiple accounts at several banks.
      Accounts at the various financial  institutions are insured by the Federal
      Deposit Insurance  Corporation up to $100,000 in the aggregate.  From time
      to time,  the  Company  has  uninsured  amounts  on  deposit  in excess of
      insurable limits. Management does not believe that


                                     - 21 -
<PAGE>

      there is a significant credit risk with respect to the  non-performance of
      these  institutions  based  on  their  respective   creditworthiness   and
      liquidity.

      Revenue Recognition

      The Company recognizes  revenue when it has evidence of an arrangement,  a
      determinable  fee, and when  collection  is  considered to be probable and
      products  are  delivered,  This occurs upon  shipment of the  merchandise,
      which  is  when  legal  transfer  of  title  occurs.  Reserves  for  sales
      allowances  and customer  returns are  established  based upon  historical
      experience and management's estimates of future returns. Sales returns for
      the years ended December 31, 2005 and 2004 aggregated $90,000 and $86,000,
      respectively.

      Allowance for Sales Returns and Doubtful Accounts

      On a case-by-case  basis, the Company accepts returns of products from its
      customers,  without  restocking  charges,  when  they can  demonstrate  an
      acceptable  cause for the  return.  Requests  by a  distributor  to return
      products purchased for its own inventory  generally are not included under
      this policy. The Company will, on a case-by-case  basis, accept returns of
      products upon payment of a restocking  fee,  which is generally 10% to 30%
      of the net  sales  price.  The  Company  will not  accept  returns  of any
      products that were special-ordered by a customer or that otherwise are not
      generally  included in our inventory.  The allowance for sales returns and
      doubtful accounts at December 31, 2005 aggregated $64,000.

      Inventory

      Inventory,  consisting  principally of products held for resale, is stated
      at the lower of cost, using the first-in, first-out method, or market. The
      amount presented in the accompanying  consolidated balance sheet is net of
      valuation  allowances of $1,267,000 at December 31, 2005. The Company uses
      a systematic methodology that includes regular evaluations of inventory to
      identify  costs in excess of the lower of cost or market  and  slow-moving
      inventory.

      Depreciation and Amortization

      Depreciation  and  amortization  of property  and  equipment  are computed
      principally using accelerated and straight-line methods using lives from 5
      to 7 years for  furniture,  machinery  and  equipment  and 31.5  years for
      building and building improvements. Renewals and betterments, which extend
      the life of an existing asset,  are  capitalized  while normal repairs and
      maintenance costs are expensed as incurred.

      Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

      Long-lived  assets and certain  identifiable  intangibles are reviewed for
      impairment  whenever events or changes in circumstances  indicate that the
      carrying  amount of an asset  may not be  recoverable.  Recoverability  of
      assets to be held and used is measured  by a  comparison  of the  carrying
      amount of an asset to future net cash flows  expected to be  generated  by
      the asset.  If these assets are considered to be impaired,  the impairment
      to be recognized is measured by the amount by which the carrying amount of
      the assets  exceed the fair value of the assets.  Assets to be disposed of
      are reported at the lower of the carrying  amount or fair value less costs
      to sell.

      Stock-Based Compensation

      Statement of Financial  Accounting  Standards (SFAS) No. 123,  "Accounting
      for Stock-Based  Compensation,"  permits  entities to recognize as expense
      the fair  value of all  stock-based  awards.  Alternatively,  SFAS No. 123
      allows  entities to continue to apply the provisions of APB Opinion No. 25
      to  employee  stock-based  awards  under  which  compensation  expense  is
      recorded  on the date of grant  only if the  current  market  price of the
      underlying  stock exceeds the exercise price,  and provides for disclosure
      of pro forma earnings and per share information for employee stock options
      as if the  fair-value-based  method  defined  in SFAS  No.  123  had  been
      applied.

      The Company has elected to continue to apply the provisions of APB Opinion
      No. 25 and provide the pro forma disclosure provisions of SFAS No. 123, as
      amended  by  SFAS  No.  148.  If the  Company  had  elected  to  recognize
      compensation  cost  based  on the  fair  value  at  the  grant  dates  for
      stock-based  awards under the 1995 Stock  Incentive  Plan  (including  the
      modified  awards),  consistent with the method prescribed by SFAS No. 123,
      net loss and loss per  share  would  have  been  changed  to the pro forma
      amounts indicated below:


                                     - 22 -
<PAGE>

      For purposes of this pro-forma disclosure, the estimated fair value of the
      stock-based  awards  is  assumed  to be  amortized  to  expense  over  the
      stock-based award's vesting periods.

                                                 Year Ended December 31,
                                                 -----------------------
                                                  2005             2004
                                                  ----             ----
      Net loss            As reported          $(205,000)       $(248,000)
                          Pro forma            $(235,000)       $(278,000)

      Loss per share      As reported          $    (.04)       $    (.05)
                          Pro forma            $    (.04)       $    (.05)

Income Taxes

      The  Company  accounts  for  income  taxes  under the asset and  liability
      method.  Deferred tax assets and liabilities are recognized for future tax
      consequences  attributable to differences  between the financial statement
      carrying  amounts of existing assets and liabilities and their  respective
      tax bases.  Deferred tax assets and liabilities are measured using enacted
      tax rates  expected  to apply to taxable  income in the years in which the
      temporary  differences are expected to be recovered or settled. The effect
      on  deferred  tax  assets  and  liabilities  of a change  in tax  rates is
      recognized  in income in the period  that  includes  the  enactment  date.
      Valuation allowances are recorded,  when necessary, to reduce deferred tax
      assets to the amount expected to be realized.

      Financial Instruments

      The  estimated  fair  values  of  cash  and  cash  equivalents,   accounts
      receivable,  accounts payable,  and accrued liabilities  approximate their
      carrying  value because of the short-term  maturity of these  instruments.
      All financial instruments are held for purposes other than trading.

      Net Loss Per Share

      Basic loss per share is computed by dividing net loss  available to common
      shareholders by the weighted  average number of common shares  outstanding
      during the period. Common equivalent shares, consisting primarily of stock
      options, of approximately 534,000 and 572,000 for the years ended December
      31, 2005 and 2004,  respectively,  are excluded  from the  computation  of
      diluted loss per share as their effect is anti-dilutive.

      Foreign Currency Translation

      The financial  statements of the  Company's  majority-owned  subsidiary in
      Mexico and divisions in Taiwan,  Brazil and China,  which were established
      in 1998,  1997,  1996 and 2005,  respectively,  are  translated  into U.S.
      dollars for  financial  reporting  purposes.  Balance  sheet  accounts are
      translated at year-end or  historical  rates while income and expenses are
      translated at  weighted-average  exchange rates for the year.  Translation
      gains or losses related to net assets are shown as a separate component of
      shareholders' equity as accumulated other comprehensive  income. Gains and
      losses resulting from realized foreign currency transactions (transactions
      denominated  in a currency other than the entities'  functional  currency)
      are included in  operations.  The  transactional  gains and losses are not
      significant to the consolidated financial statements.

      Use of Estimates

      The Company's  management  has made a number of estimates and  assumptions
      relating to the reporting of assets and  liabilities and the disclosure of
      contingent assets and liabilities to prepare these financial statements in
      conformity with  accounting  principles  generally  accepted in the United
      States  of  America.  These  estimates  have a  significant  impact on the
      Company's  valuation  and reserve  accounts  relating to the allowance for
      sales returns,  doubtful accounts and inventory  reserves.  Actual results
      could differ from these estimates.

      Recent Accounting Pronouncements

      In December 2004, the Financial  Accounting  Standards Board (FASB) issued
      SFAS No.  123(R),  "Share-Based  Payment".  This  statement  revises  FASB
      Statement  No.  123,   "Accounting  for  Stock-Based   Compensation"   and
      supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees."
      SFAS No. 123(R) focuses  primarily on the accounting for  transactions  in
      which  an  entity  obtains  employee   services  in  share-based   payment
      transactions.  SFAS No.  123(R)  requires  companies  to  recognize in the
      statement of operations the cost of employee services


                                     - 23 -
<PAGE>

      received  in  exchange  for  awards  of  equity  instruments  based on the
      grant-date fair value of those awards (with limited  exceptions).  For the
      Company, this Statement is effective as of the first reporting period that
      begins  after  December 15, 2005.  Accordingly,  the Company  adopted SFAS
      123(R) in its first  quarter of fiscal  2006.  The  Company  is  currently
      completing its  evaluation of the  provisions of SFAS 123(R),  but expects
      that  stock-based  compensation  will  increase in future  periods  should
      employee stock options be granted.

      Note 2 - Property and Equipment

      Property and equipment, at cost, is summarized as follows:

                                                                  12/31/2005
                                                                 -----------

         Land                                                    $ 1,293,000
         Buildings and improvements                                3,692,000
         Furniture and equipment                                     903,000
         Computer software and equipment                           2,141,000
                                                                 -----------
            Total Property and Equipment                           8,029,000
         Less: Accumulated depreciation and amortization          (3,601,000)
                                                                 -----------

            Property and Equipment, net                          $ 4,428,000
                                                                 ===========

      Note 3 - Revolving Line of Credit

      On July 15,  2005,  the Company  entered  into a revolving  line of credit
      facility providing up to $3 million for operating purposes. As of the date
      of this  Report,  the Company has not yet used this credit  facility.  The
      agreement  governing this credit  facility  contains  security  agreements
      covering  essentially  all assets of the Company and  financial  covenants
      that require the Company to maintain  compliance  with  certain  financial
      ratios.

      Note 4 - Shareholders' Equity

      There are 5,000,000 shares of authorized  preferred stock, par value $.001
      per share, with no shares of preferred stock outstanding. The terms of the
      shares are subject to the discretion of the Board of Directors.

      There are 20,000,000  shares of authorized Class A common stock, par value
      $.001 per share,  with 4,700,145 issued and outstanding as of December 31,
      2005. Each holder of Class A common stock is entitled to one vote for each
      share held.

      There are 762,612  shares of authorized  Class B common  stock,  par value
      $.001 per share, with 762,612 shares issued and outstanding as of December
      31, 2005. Each holder of Class B common stock is entitled to ten votes for
      each share held. The shares of Class B common stock are convertible at any
      time at the election of the  shareholder  into one share of Class A common
      stock,  subject to certain  adjustments.  The  Company's  Chief  Executive
      Officer  is the sole  beneficial  owner of all the  outstanding  shares of
      Class B common stock.

      During  2005,  the  Company did not  repurchase  any shares of its Class A
      common  stock.  However,  the Company  issued 2,499 shares of common stock
      upon the exercise of stock  options  (Note 7).  During  2004,  the Company
      repurchased  148,520 shares of its Class A common stock on the open market
      for  $322,000,  and  permanently  retired  the shares.  Additionally,  the
      Company  issued  18,567  shares of common stock upon the exercise of stock
      options (Note 7).


                                     - 24 -
<PAGE>

      Note 5 - Income Taxes

      Income tax provision is summarized as follows:

                                                    Year Ended December 31,
                                                    -----------------------
                                                      2005           2004
                                                    --------       --------
         Current:
            Federal                                 $     --       $     --
            State                                     14,000         33,000
                                                    --------       --------

                                                      14,000         33,000
                                                    --------       --------
         Deferred:
            Federal                                  (40,000)       (17,000)
            State                                    (12,000)            --
            Increase in valuation allowance           52,000         17,000
                                                    --------       --------
                                                          --             --
                                                    --------       --------

         Income tax provision                       $ 14,000       $ 33,000
                                                    ========       ========

      The actual income tax provision  differs from the  "expected" tax computed
      by  applying  the  Federal  corporate  tax rate of 34% to the loss  before
      income taxes as follows:

                                                                 Year Ended
                                                                December 31,
                                                            -------------------
                                                              2005       2004
                                                            --------   --------
      "Expected" income tax expense (benefit)               $(59,000)  $(74,000)
      State tax (benefit) expense, net of Federal benefit      5,000      4,000
      Foreign (income)loss                                    (2,000)    52,000
      Increase in valuation allowance                         52,000     17,000
      Other                                                   18,000     34,000
                                                            --------   --------
      Income tax provision                                  $ 14,000   $ 33,000
                                                            ========   ========

      The tax effects of temporary  differences  which give rise to  significant
      portions of the deferred taxes are summarized as follows:

         Deferred tax assets:                     12/31/2005
                                                  ----------
         Inventory reserves                       $ 543,000
         Section 263a adjustment                     96,000
         Allowances for bad debts and returns        27,000
         Accrued expenses                            15,000
         Asset valuation reserve                     56,000
         State net operating loss carry forward      64,000
         Other                                        5,000
                                                  ---------
         Total deferred tax assets                  806,000
         Valuation allowance                       (721,000)

         Deferred tax liabilities:
         Depreciation                               (11,000)
         Deferred state taxes                       (74,000)
                                                  ---------
         Net deferred tax assets                  $      --
                                                  =========

      The Company has a net operating loss  aggregating  approximately  $699,000
      for  state  tax  purposes   that  expires  in  2015.   In  assessing   the
      realizability of the deferred tax assets,  management considers whether it
      is more  likely  than not that some  portion  or all of the  deferred  tax
      assets will not be realized.  Management  considers the scheduled reversal
      of deferred tax assets,  the level of  historical  taxable  income and tax
      planning  strategies  in making the  assessment  of the  realizability  of
      deferred tax assets.


                                     - 25 -
<PAGE>

      Note 6 - 401(k) Profit Sharing Plan

      In January 1995,  the Company  implemented a defined  contribution  profit
      sharing plan pursuant to Section 401(k) of the Internal  Revenue Code (the
      Code) covering all employees of the Company.  Participants  once eligible,
      as defined by the plan,  may  contribute up to 15% of their  compensation,
      but not in excess of the  maximum  allowed  under the Code.  The plan also
      provides  for a 20%  matching  contribution  vesting  immediately,  at the
      discretion of the Company. For the years ended December 31, 2005 and 2004,
      employer  matching  contributions   aggregated  approximately  $8,000  and
      $12,000, respectively.

      The plan  invests  a portion  of its  assets  in the  common  stock of the
      Company.  The plan held 77,243  shares of the  Company's  common  stock at
      December 31, 2005.

      Note 7 - Stock Options

      In March 1995, the Company  established the 1995 Stock Incentive Plan (the
      Plan) that expired in March 2005. The Plan provided for the issuance of an
      aggregate 1,080,000 incentive stock options, nonstatutory options or stock
      appreciation rights (SAR's) to directors,  officers and other employees of
      the  Company.  Under the Plan,  incentive  stock  options  were granted at
      prices  equal to at least the fair market value of the  Company's  Class A
      common  stock  at the  date  of  grant.  Nonstatutory  options  and  stock
      appreciation rights were granted at prices equal to at least 85% and 100%,
      respectively,  of the fair market  value of the  Company's  Class A common
      stock at the date of grant.  Outstanding  options and rights vest in three
      equal annual  installments  beginning  one year from the date of grant and
      are subject to  termination  provisions  as defined in the Plan.  The Plan
      also provided for  automatic  grants of  nonstatutory  options to purchase
      5,000  shares  of Class A common  stock to all  members  of the  committee
      administering  the Plan, upon their initial  election to the committee and
      each year  thereafter.  The exercise  prices of these options are equal to
      the fair market value of the Company's Class A common stock at the date of
      grant.

      The fair  value of options  and SAR's  used to compute  pro forma loss and
      loss per share  disclosures  is the estimated  present value at grant date
      using the Black-Scholes  option-pricing  model with the following weighted
      average  assumptions  used  for  2005:  dividend  yield  of  0%;  expected
      volatility of 35%; a risk free interest  rate of  approximately  5% and an
      expected holding period of five years; and for 2004: dividend yield of 0%;
      expected  volatility of 24%; a risk free interest rate of approximately 5%
      and an expected holding period of five years.

      As  described  in Note 1, the  Company  has  adopted  the  disclosure-only
      provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," but
      applies   Accounting   Principles   Board   Opinion  No.  25  and  related
      interpretations in accounting for its Plan options and SAR's.

      Stock option and SAR activity during the periods indicated is as follows:

                                               Number       Weighted Average
                                              of Shares      Exercise Price
                                              ---------     ----------------

         Balance at December 31, 2003          567,899            $1.84
            Granted                             80,000             1.74
            Exercised                          (18,567)            1.46
            Forfeited                          (30,333)            2.14
                                               -------
         Balance at December 31, 2004          598,999             1.81
            Exercised                           (2,499)            1.06
            Forfeited                          (70,334)            2.10
                                               -------
         Balance at December 31, 2005          526,166            $1.78
                                               =======

      The weighted average fair value of options granted in 2004 was $0.55.

      At December 31, 2005, the range of individual  weighted  average  exercise
      prices was $1.29 to $2.17.  The remaining  contractual life of outstanding
      options is 90 days after termination of employment of option holder.

      At December 31, 2005,  the number of options  exercisable  was 431,000 and
      the weighted  average  exercise prices of those  exercisable  options were
      $1.85.


                                     - 26 -
<PAGE>

      Note 8 - Net Loss Per Share

      The  following  data  shows a  reconciliation  of the  numerators  and the
      denominators  used in computing  loss per share and the  weighted  average
      number of shares of dilutive potential common stock.

<TABLE>
<CAPTION>
                                                                                     2005             2004
                                                                                  ----------       ----------

<S>                                                                               <C>               <C>
      Net loss available to common shareholders used in basic loss per share      $ (205,000)      $ (248,000)

      Weighted average number of common shares used in basic loss per share        5,462,153        5,464,912
                                                                                  ----------       ----------

      Basic loss per share                                                        $     (.04)      $     (.05)
                                                                                  ==========       ==========

      Effect of dilutive securities:
           Options                                                                        --               --
                                                                                  ----------       ----------
      Weighted average number of common shares and dilutive potential
           common shares used in diluted loss per share                            5,462,153        5,464,912
                                                                                  ==========       ==========

      Diluted loss per share                                                      $     (.04)      $     (.05)
                                                                                  ==========       ==========
</TABLE>

      Note 9 - Commitments and Contingencies

      Legal and Regulatory Proceedings
      --------------------------------
      The  Company  is  engaged  in  various  legal and  regulatory  proceedings
      incidental to its normal business activities,  none of which, individually
      or in the  aggregate,  are  deemed to be  material  risk to its  financial
      condition.

      Inventory Purchasing
      --------------------
      Outstanding  commitments to purchase  inventory from suppliers  aggregated
      $1,110,000 as of December 31, 2005.

      Regulation
      ----------
      Effective July 1, 2006, the European  Union ("EU")  directive  relating to
      the Restriction of Certain Hazardous  Substance ("RoHS") will restrict the
      distribution  of products  within the EU  containing  certain  substances,
      including  lead.  At the  present  time,  much of our  inventory  contains
      substances  prohibited by the RoHS directive and some of our inventory may
      become obsolete and unsaleable and, as a result, have to be written off.

      Note 10 - Geographic information

      The following table presents  summary  geographic  information  about 2005
      revenues and  long-lived  assets (land and  property,  net of  accumulated
      depreciation)  as of December 31, 2005, attributed to countries based upon
      location of our customers:

                                                         Long-lived
                                          Revenues          Assets
                                          --------       ----------

            United States                $6,775,000      $3,794,000
            Mexico                          626,000         163,000
            Brazil                          351,000              --
            Taiwan                          247,000         314,000
            China                           170,000              --
            Canada                           98,000              --
            Other foreign countries         133,000              --

                                         ----------      ----------
            Total                        $8,400,000      $4,271,000
                                         ----------      ----------


                                     - 27 -
<PAGE>

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.

            None

ITEM 8A. CONTROLS AND PROCEDURES.

            As of the end of the fiscal period  covered by this Annual Report on
      Form 10-KSB, an evaluation was performed under the Securities Exchange Act
      of  1934  under  the  supervision  and  with  the   participation  of  our
      management,  including  the Principal  Executive  and Principal  Financial
      Officer,  of  the  effectiveness  of  the  design  and  operation  of  our
      disclosure  controls  and  procedures.  Based  upon that  evaluation,  the
      Principal  Executive and Principal  Financial  Officer  concluded that our
      disclosure controls and procedures were effective.  During the three-month
      period ended  December 31,  2005,  no change in our internal  control over
      financial  reporting occurred that materially  affected,  or is reasonably
      likely  to  materially   affect,   our  internal  control  over  financial
      reporting.

ITEM 8B. OTHER INFORMATION.

            None

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(a) OF THE EXCHANGE ACT.

            The  information  required  by Item 9,  with  the  exception  of the
      information  provided below concerning the Company's Code of Ethics,  will
      appear in the Proxy  Statement for the 2006 Annual Meeting of Shareholders
      (the  "Proxy  Statement")  under the  captions  "Election  of  Directors",
      "Compliance  with Section  16(a) -  Beneficial  Ownership  Reporting"  and
      "Report  of the  Audit  Committee"  and is  incorporated  herein  by  this
      reference.  The Proxy  Statement  will be filed  with the  Securities  and
      Exchange Commission within 120 days following December 31, 2005.

            The  Company  has  adopted  a Code of  Ethics  that  applies  to all
      officers (including its principal  executive officer,  principal financial
      officer, controller and any person performing similar functions). The Code
      of    Ethics    is    available    on    the    Company's    website    at
      www.taitroncomponents.com.

ITEM 10. EXECUTIVE COMPENSATION.

            The  information  required  by  Item  10 will  appear  in the  Proxy
      Statement under the caption  "Executive  Compensation" and is incorporated
      herein by this reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.

            The  information  required  by  Item  11 will  appear  in the  Proxy
      Statement  under the caption  "Security  Ownership  of Certain  Beneficial
      Owners and Management" and is incorporated herein by this reference.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

            The  information  required  by  Item  12 will  appear  in the  Proxy
      Statement   under  the   caption   "Certain   Relationships   and  Related
      Transactions" and is incorporated herein by this reference.


                                     - 28 -
<PAGE>

ITEM 13. EXHIBITS.

      3.1      Articles of Incorporation of Taitron Components Incorporated. (1)

      3.2      Bylaws. (1)

      4.1      Specimen certificate evidencing Class A common stock. (1)

      4.2      Form of Underwriter's Warrant. (1)

      10.1*    Form of Director and Officer Indemnification Agreement. (1)

      10.2*    1995 Stock Incentive Plan, as Amended. (2)

      21.1**   List of Subsidiaries.

      23.1**   Consent of Independent Registered Public Accounting Firm -
               Haskell & White LLP.

      24.1**   Power of Attorney (contained on the signature page hereof).

      31.1**   Principal Executive and Financial Officer - Section 302
               Certification.

      32.1**   Principal Executive and Financial Officer - Section 906
               Certification.

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

      *        Management contract or compensatory plan or arrangement.

      **       Filed  herewith.

      (1)      Incorporation by reference from the Company's Registration
               Statement on Form SB-2, Registration No. 33-90294-LA.

      (2)      Incorporated by reference from the Company's  Quarterly Report on
               Form 10-QSB for the quarter. ended June 30, 1998.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

      Information  regarding principal  accountant fees and services will appear
in the Proxy  Statement  for the 2006  Annual  Meeting  of  Shareholders  and is
incorporated herein by this reference.

                                   SIGNATURES

      In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                          Taitron Components Incorporated

Dated: March 31, 2006                     By: /s/ Stewart Wang
                                              ----------------------------------
                                              Stewart Wang
                                              Chief Executive Officer, President
                                              and Chief Financial Officer


                                     - 29 -
<PAGE>

                                POWER OF ATTORNEY

      KNOW ALL MEN BY THESE PRESENTS,  that each person whose signature  appears
below constitutes and appoints Stewart Wang his attorney-in-fact and agent, with
full  power  of  substitution,  for him in any and all  capacities,  to sign any
amendments to this Annual Report,  and to file the same,  with exhibits  thereto
and other  documents in connection  therewith,  with the Securities and Exchange
Commission,  hereby ratifying and confirming all that said attorney-in-fact,  or
his substitutes, may do or cause to be done by virtue hereof.

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

    Signature         Title                                           Date
    ---------         -----                                           ----

/s/ Johnson Ku       Chairman of the Board                       March 31, 2006
-------------------------------------------------------------------------------
Johnson Ku

/s/ Stewart Wang     Chief Executive Officer, President,         March 31, 2006
--------------------------------------------------------------------------------
Stewart Wang         Chief Financial Officer and Director
                     (Principal Executive, Financial and Accounting Officer)

/s/ Richard Chiang   Director                                    March 31, 2006
--------------------------------------------------------------------------------
Richard Chiang

/s/ Craig Miller     Director                                    March 31, 2006
--------------------------------------------------------------------------------
Craig Miller

/s/ Felix Sung       Director                                    March 31, 2006
--------------------------------------------------------------------------------
Felix Sung


                                     - 30 -