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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   FORM 10-K

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

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

     /X/    TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
            SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]

                        COMMISSION FILE NUMBER 0-25844

                        TAITRON COMPONENTS INCORPORATED
               (Name of Registrant as specified in its charter)

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

              25202 ANZA DRIVE, SANTA CLARITA, CALIFORNIA  91355
              (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

     REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:  (805) 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 each class)

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

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

Approximate aggregate market value of the voting stock held by non-affiliates
of the registrant as of March 18, 1998 was $10,506,000.

Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date:

Number of shares outstanding on March 18, 1998:
Class A Common Stock, $.001 par value 5,591,262
Class B Common Stock, $.001 par value 762,612

                      DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the Registrant's Proxy Statement relating to Registrant's
Annual Meeting of Shareholders scheduled to be held on May 15, 1998 are
incorporated by reference in Part III of this Form 10-K.

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                                    PART I

ITEM 1.  BUSINESS.

           For a discussion of certain material factors which may affect the
Company, see "BUSINESS - Cautionary Statements and Risk Factors" commencing
on page 11 of this report.

GENERAL

           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 to original equipment manufacturers (OEMs) who
incorporate these devices in their products. In order to meet the rapid
delivery requirements of its customers, the Company maintains a significant
inventory of discrete components. At December 31, 1997, the Company's
inventory consisted of over 1.3 billion components. The Company distributes
over 12,000 different products manufactured by more than 60 different
suppliers. The Company's per unit sales price of components for the net sales
made during the year ended December 31, 1997, ranged from under one cent to
$6.50, and averaged approximately 3.6 cents each.

           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 such diverse products 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. ELECTRONIC BUSINESS TODAY
reported in January 1996 that the American market for discrete semiconductors
(which includes discrete semiconductor products which are not currently
included in the Company's product lines) was in excess of $3.1 billion in
1994 and estimated that the market was in excess of $3.9 billion in 1995. The
Company believes that the majority of these sales are made by large
semiconductor manufacturers directly to large OEMs.

           The United States 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. The Company
focuses its efforts almost exclusively on the distribution of discrete
semiconductors, optoelectronic devices and recently passive components, a
small subset of the component market. Based on 1996 sales data, ELECTRONIC
BUYERS NEWS ranked the Company 49th among the top 50 distributors and 17th
for distribution of discrete semiconductors. The largest single distributor
reported sales for 1996 of over $4.3 billion. Of this magazine's top 50
electronics distributors, the Company believes that it is the only
distributor which concentrates its efforts principally on the discrete
semiconductor market.

           The Company has attempted to develop a more efficient link between
the component manufacturers and the small to medium size OEMs and
distributors. The Company's "superstore" strategy typically includes
foregoing certain benefits distributors normally require from component
manufacturers, such as stock-rotation, and requesting only limited price
protection privileges, in order to obtain better pricing, and providing its
customers with one stop, "no hassle" shopping for their discrete component
needs.

           The Company intends to continue to grow by increasing its sales to
existing customers through further expansion of the number of different types
of discrete component and other non-integrated circuit components in its
inventory, and by attracting additional CEMs, OEMs and electronics
distributor customers. The Company has historically sold its products through
a national network of independent sales representatives. To better service
its customers, the Company began, during 1997, to expand its direct sales
force geographically to cover portions of the United States.


                                       1

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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 microprocessors and other "chips,"
which can contain from a few to as many as several million transistors and
other elements in a single package, and usually are designed to perform
complex tasks. During 1996, the Company almost exclusively distributed
discrete semiconductors.

           While integrated circuits, such as microprocessor chips, have
garnered more public exposure during the past several years, discrete
semiconductors, the ancestral root of integrated circuits, have been a core
element of electric equipment for more than 30 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. DONALDSON, LUFKIN &
JENRETTE, WORLD SEMICONDUCTOR TRADE STATISTICS estimated that the Worldwide
market purchased over $136 billion of semiconductors in 1997, of which over
$18 billion were discrete devices. The balance were various forms of
integrated circuits. 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.
The Company believes that the market for discrete semiconductors is growing,
although at a slower pace than the market for semiconductors in general. This
could in part be due to the fact that OEMs are designing products which
utilize integrated circuits in place of discrete semiconductors.

OPTOELECTRONIC DEVICES AND PASSIVE COMPONENTS

           During 1994, the Company introduced optoelectronic devices in a
new catalog of all optoelectronic devices. The catalog contains a wide
selection of optoelectronic devices such as LED's, infrared sensors and opto
couplers. During the second quarter of 1997, the Company introduced a new
catalog of all passive components. The catalog was the beginning of an
aggressive marketing campaign to sell passive components, such as resistors,
capacitors and inductors, a type of electronic component manufactured with
non-semiconductor materials. The Company believes that optoelectronic
devices, passive components and discrete semiconductors can be marketed
through existing channels, which in turn will reinforce the Company's current
relationship with its customers. Sales of optoelectronic devices were
$1,721,000, $1,675,000 and $1,472,000 for the years ended December 31, 1997,
1996 and 1995, respectively. Sales of passive components during 1997 were
$799,000 and the Company built-up inventory of $1.5 million of passive
components to facilitate planned increases in sales in the future. This is a
forward looking statement and the Company cannot guarantee that sales of
passive components will increase in the future.

ELECTRONIC DISTRIBUTION CHANNELS

           Electronic component manufacturers ("suppliers") sell components
directly to CEMs and OEMs, as well as to their distributors. The practice
among the major suppliers is generally to focus their direct selling efforts
on larger volume customers, while utilizing distributors to reach medium and
smaller 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 smaller 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
them. Distributors offer product availability, selection and more rapid and
flexible delivery schedules keyed to meet the requirements of their CEMs and OEM
customers. They also often rely upon electronic distributors to provide
timely, knowledgeable access to electronic components.

           There is also pressure on both 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 such 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

                                       2

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to be used. Distributors fill this niche.

           Most large distributors tend to be broad line distributors,
carrying various different categories of electronic products, and usually
focus their resources on the fastest selling products in each category they
distribute. Of 1997's top 50 electronics distributors reported by ELECTRONIC
BUYERS NEWS, the Company believes that, only Taitron and three other
companies focused a significant portion of their distribution efforts on
discrete semiconductors. However, the Company believes that the three other
companies concentrated their selling efforts on other semiconductor
components, such as integrated circuits, microprocessors and memory
components. The Company believes that it was the only distributor which
concentrated its efforts almost exclusively on the discrete semiconductor
market.

STRATEGY

           Since it was founded in 1989, the Company's goal has been to
become one of the leading distributors of discrete semiconductors in North
America. The Company initially gained market share by concentrating on
selling discrete semiconductors at competitive prices. The Company has
marketed itself as a "discrete components superstore," whose in-depth focus
on discrete semiconductors and extensive inventory of products is of benefit
to both suppliers and OEMs. In creating the "superstore" strategy, the
Company has attempted to develop a more efficient link between suppliers and
the small to medium sized OEMs and distributors which generally do not have
direct access to large suppliers and must purchase exclusively through
distributors. The primary aspects of the Company's strategy include:

                 INVENTORY.  The Company  believes  that its most  important
           competitive  advantage is the depth of its inventory. Unlike other
           distributors who carry only the best-selling discretes, the
           Company's entire inventory consists of a wide range of discrete
           semiconductors, optoelectronic devices and passive components. Due
           to manufacturers lead times ranging from eight weeks to twenty
           four weeks, the Company generally attempts to maintain
           approximately a ten month supply of inventory of most products in
           its catalogs. Currently, the Company's inventory is higher than
           this goal as a result of its decision to increase inventory levels
           and intensify its long standing purchasing strategy by making
           opportunistic purchases of suppliers' uncommitted capacity, at
           favorable pricing. With immediate availability of a wide selection
           of products and brands, the Company attempts to function more like
           a wholesale superstore than a franchised distributor. See Part II
           Item 7 - "MANAGEMENT'S DISCUSSION AND ANALYSIS - Liquidity and
           Capital Resources."

                 STRATEGIC  PURCHASING.  When the  opportunity  presents
           itself, the Company also makes  opportunistic purchases of a
           supplier's uncommitted inventory in order to take advantage of
           favorable pricing. The Company also makes significant purchases in
           advance in an attempt to maintain consistent inventory levels and
           meet anticipated orders. When possible, the Company attempts to
           control its inventory risks by matching large customer orders with
           simultaneous purchases from suppliers. See "BUSINESS - Cautionary
           Statements and Risk Factors - NEED TO MAINTAIN LARGE INVENTORY;
           PRICE FLUCTUATIONS."

                 MASTER  DISTRIBUTOR.  The  Company  distributes  Electronic
           components  to other  nationwide distributors when their inventory
           cannot fulfill immediate customer orders. The Company, with its high
           volume, low cost inventory acts as a master distributor for certain
           of its component manufacturer suppliers. The Company estimates that
           approximately 10% of its sales are a direct result of being a master
           distributor.


                                       3

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                 RELATIONSHIPS  WITH  SUPPLIERS.  During  1997,  the Company
           entered into agreements with certain suppliers that provide the
           Company with return privileges. The amount of inventory subject to
           these agreements that provide return privileges was approximately
           $8.9 million of total inventory at December 31, 1997. For the
           balance of the Company's inventory, unlike most other
           distributors, the Company does not demand return or stock-rotation
           privileges which  are generally available from its suppliers.
           Return and stock-rotation privileges are beneficial to
           distributors because they enable distributors to return or rotate
           inventory they are unable to sell, thus significantly reducing the
           risks and costs associated with over-purchasing or obsolescence.
           The Company requests and will accept price protection from its
           suppliers, but does not demand formal price protection agreements
           from its suppliers. Price protection mitigates the risks of
           falling prices of components held in inventory. Approximately
           $13.3 million of the Company's inventory at December 31, 1997 was
           subject to price protection arrangements with suppliers. The
           Company believes that it has been able to gain a competitive
           advantage over other distributors by typically foregoing or not
           demanding these privileges (and thus assuming the majority of risk
           for over-purchasing, product obsolescence and the risk for price
           fluctuations) in order to obtain better pricing. During 1997, the
           Company opened an office in Taipei, Taiwan. This office will focus
           on product procurement and strengthening relationships with
           suppliers in the far east. See "BUSINESS -Cautionary Statements
           and Risk Factors - NEED TO MAINTAIN LARGE INVENTORY; PRICE
           FLUCTUATIONS" and "BUSINESS Suppliers."

                 RELIABLE ONE STOP  SHOPPING.  The Company  offers a large
           selection of different  name-brand  discrete semiconductors,
           optoelectronic devices and passive components at competitive
           prices which reduces significantly the number of suppliers a buyer
           must purchase from. The Company provides customers with catalogs
           that are specially designed to aid customers in quickly locating
           the types and brands of products that they need. Because of its
           large inventory, the Company can often fill a significant portion,
           or all, of a customer's order from stock. Historically, the
           Company has been able to fill most of its customers' orders within
           24 hours and in compliance with their requested delivery
           schedules. The Company also follows a lenient policy of "no
           hassle" returns. Under this policy, if a customer can demonstrate
           an acceptable cause for a return, it may generally return products
           to the Company for a reasonable period of time after purchase,
           without penalty or restocking charge. See "BUSINESS - Cautionary
           Statements and Risk Factors PRODUCT RETURNS," Part II Item 7 -
           "MANAGEMENT'S DISCUSSION AND ANALYSIS -Results of Operations,"
           "BUSINESS - Customers" and "BUSINESS - Sales and Marketing."

                 SUPPORT SMALLER DISTRIBUTORS,OCMS AND OEMS. The Company
           focuses its marketing efforts on smaller OEMs, distributors and
           contract manufacturers 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 has been substantial consolidations within the
           electronics distribution industry creating very large distributors.
           This trend to consolidate creates opportunities for the Company since
           suppliers do not usually direct sales efforts toward smaller or
           medium sized CEMs and OEMs and often the larger distributors no
           longer adequately service smaller customers. The Company believes
           that its strategic purchasing policies enable the Company to provide
           medium and smaller OEMs and distributors competitive prices while
           still maintaining adequate profit margins. The Company, generally,
           does not impose minimum order limitations on its customers, which
           enables smaller customers to avoid the costs of carrying large
           inventories. The Company also offers its customers a limited range of
           value added services such as cutting and forming, quality monitoring
           and product source tracing. The Company intends to continue to grow
           through further expansion of the number of different types and brands
           of products in its inventory and by continuing to expand its direct
           sales force geographically to attract additional electronics
           distributors, CEMs and OEMs. See "BUSINESS - Sales and Marketing."


                                       4

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PRODUCTS

           The Company markets a wide variety of discrete semiconductors,
including rectifiers (or power diodes), diodes and transistors, optoelectronic
devices and passive components. The Company maintains a broad line of brands and
products including a "Taitron" label produced by certain suppliers on selected
products in order not to conflict with their own marketing channels. The Company
attempts to maintain at least ten months of inventory for each component in its
catalogs. At December 31, 1997, the Company's inventory contained over 1.3
billion separate components and over 10,000 distinct products. The Company's
products can range in sales price from under one cent for a chip resistor to
$6.50 for certain optoelectronic devices. In 1997, the average component sales
price of the products sold by the Company was approximately 3.6 cents.

           In 1997, the Company purchased products from over 60 suppliers,
including Everlight Electronics Co, Ltd., Fairchild Semiconductor Corporation,
Frontier Electronics Co., Ltd., General Semiconductor, Inc., Hi-Sincerity
Microelectronics, Pan - Jit Semiconductor Inc., QT Optoelectronics, Samsung
Semiconductors Inc., TEMIC Semiconductors and United Parts Mart. See "BUSINESS -
Cautionary Statements and Risk Factors - SUPPLIERS," "BUSINESS -Customers" and
"BUSINESS - Suppliers."

           Discretes are categorized based on various factors, including
function, construction, fabrication and capacity. The products sold by the
Company include:

                 RECTIFIERS. Rectifiers are generally utilized in power
           supply and other high power applications to convert alternating
           current to direct current. The Company sells a wide variety of
           rectifiers, including silicon rectifiers, fast efficient
           rectifiers, schottky rectifiers, glass passivated rectifiers, fast
           efficient glass passivated rectifiers, silicon bridge rectifiers,
           schottky bridge rectifiers, 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 the Company 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. The Company currently stocks 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 fiberoptic
           transmission of computer signals to pattern sensing for
           regulation, such as is found in automobile cruise controls.
           Optoelectronic devices are not generally classified as discrete
           semiconductors or integrated circuits, although they incorporate
           semiconductor materials.

                 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 the Company are mature products that are
used in a wide range of commercial and industrial products and industries. The
Company believes that a majority of the products it distributes are used in
applications where integrated circuits are not viable alternatives. As a result,
the Company has never experienced any material amount of product obsolescence,
and does not expect to experience any material amount of product obsolescence in
the foreseeable future. This is a forward looking statement and, as such, is
subject to uncertainties. There can be no assurance that over time the functions
for which discretes are used will not eventually be displaced by integrated
circuits.

                                       5
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           The Company conducts limited quality monitoring of its products. The
Company purchases products from reliable manufacturers who provide warranties
for their products that are common in the industry.

           The Company's distribution originates from a 24,500 square foot owned
facility and a 30,000 square foot leased facility, both located in Santa
Clarita, California. The Company utilizes a computerized inventory
control/tracking system which enables the Company to quickly access its
inventory levels and trace product shipments. See Item 2 "PROPERTIES."

CUSTOMERS

           The Company markets its products to distributors, CEMs and OEMs. The
Company believes that its strategic purchasing policies allow the Company to
provide medium and smaller distributors, OCMs and OEMs competitive prices while
still maintaining an adequate profit margin. As a rule, the Company does not
impose minimum order limitations on its customers, which enables smaller
customers to avoid the cost of carrying large inventories. See "BUSINESS -
Strategy."

           During 1997, the Company distributed its products to over 2,000
customers. For the years ended December 31, 1997, 1996 and 1995, no one customer
accounted for more than 3.3%, 3.6% and 4.3%, respectively, of the Company's net
sales. The Company does not believe that the loss of any one customer would have
a material adverse effect on its business.

           Historically, distributors have accounted for a much larger
percentage of the Company's net sales than CEMs and OEMs. However, over time,
as the Company has expanded its customer base, the Company's customer
breakdown has become somewhat more balanced, with distributors accounting for
approximately 60% and CEMs and OEMs accounting for approximately 40% of the
Company's net sales in 1997.

           The Company historically has not required its distributor
customers to provide any point of sale reporting and therefore the Company
does not know the breakdown of industries into which its products are sold.
However, based on its sales to CEMs and OEMs, the Company believes that no
one industry accounted for a majority of the applications of the products
which it sold in 1997, 1996 or 1995.

           Taitron offers sales support to its customers through its sales
department and a network of 16 independent sales representatives. Inventory
support provided to customers includes carrying inventory for their specific
needs and providing free samples of the products the Company distributes.

            The Company also offers its customers a limited range of value added
services, such as wire or 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 the Company's business or results
of operations.

           The Company believes that exceptional customer service and customer
relations are key elements of its success, and trains its sales force to provide
prompt, efficient and courteous service to all customers. See "BUSINESS - Sales
and Marketing." The Company has the ability to ship most orders the same day
they are placed and, historically, most of its customers' orders have been
shipped within the requested delivery schedule.

      As the Company's customers grow in size, the Company may lose its larger
customers to its suppliers and as the electronics distribution industry
consolidates some of the Company's customers may be acquired by competitors. See
"BUSINESS Cautionary Statements and Risk Factors - COMPETITION."


                                       6

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SALES AND MARKETING

           The Company's sales department is currently located at its
facility in Santa Clarita, California. The sales department is organized into
three separate groups designed to handle the needs of the customer. Each
group is managed by a Vice President of Sales. Each Vice President is given a
substantial amount of discretion in developing sales strategies within his or
her group. Group 1 salespeople complete the orders of customers whose orders
are usually more routine and assist more experienced Group 2 salespeople.
Group 2 salespeople focus on solidifying relationships with and providing
support to existing key CEMs and OEMs and key distributors who have more
complex needs. Group 3 salespeople are based in the sales region in which
they have responsibility for potential OEM accounts and to establish and
solidify the relationship with OEM's and to evaluate the performance of the
Company's network of independent sales representatives. Group 3 salespeople
will develop potential CEM and OEM accounts with independent sales
representatives who will be compensated for the new business growth.
Salespeople are generally compensated by a combination of salary and
incentives based upon the profits obtained from their sales. Salespeople may
also be given responsibilities as brand and/or product managers and are given
additional compensation for these duties. Each Vice President of sales is
compensated by a combination of salary and incentives based upon the overall
performance of his or her group, including the group's profitability.

The Company has recognized that there is a rapidly growing market for discrete
components in South America. To take advantage of this opportunity, Taitron
opened a branch office in Sao Paulo, Brazil in May 1995. South American sales
were $438,000 in 1997, $391,000 in 1996 and $144,000 in 1995.

           The independent sales representatives have played an important role
in developing the Company's client base, especially with respect to OEMs. Many
OEMs want their suppliers to have a local presence and the Company's network of
independent sales representatives are responsive to these needs. The independent
sales representatives are primarily responsible for face-to-face meetings with
the Company's customers, and for developing new customers. The Company's
independent sales representatives are each given responsibility for a specific
geographical territory. Historically, sales representatives were paid a
commission of 5% on all sales made in their territory, regardless of whether
they were involved in the sales process. Beginning in the first quarter of 1998,
sales representatives will not be compensated for sales made to other
distributors. The Company believes that this commission policy will re-direct
independent sales representatives attention to CEMs and OEMs and therefore
increase the Company's market share with end users. The Company and its
independent sales representatives also jointly advertise and participate in
trade shows.

           At March 1, 1998, the Company's sales and marketing department
consisted of 21 employees, including 4 that are located outside of Santa
Clarita, California, and the Company utilized 16 independent sales
representatives to develop new OEM customers and to provide a more direct link
to existing OEM customers.

           The Company provides customers with catalogs that are specially
designed to aid customers in quickly finding the types and brands of discrete
semiconductors and optoelectronic devices that they need.

           To attract new customers, the Company has advertised in national
industry publications such as ELECTRONIC BUYER'S NEWS, ELECTRONIC BUSINESS,
ELECTRONIC SOURCE BOOK, PURCHASING and, in Canada, ELECTRONIC PRODUCTS AND
TECHNOLOGY. The Company also participates in regional and national trade shows
and jointly advertises with suppliers, customers and independent sales
representatives.


                                       7

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SUPPLIERS

           The Company believes that it is important to develop and maintain
good relationships with its suppliers. Historically, the Company did not have
long-term supply, distribution or franchise agreements with its suppliers, but
instead cultivated strong working relationships with each of its suppliers.
However, during 1997 the Company did enter into franchise agreements with
certain of its suppliers. Such franchise agreements have terms from one to two
years. See "BUSINESS - Cautionary Statements and Risk Factors - RELATIONSHIP
WITH SUPPLIERS."

           In order to facilitate good relationships with its suppliers, the
Company typically will carry a complete line of each supplier's discrete
products. The Company also supports its suppliers by increasing their
visibility through advertising and participation in regional and national
trade shows. The Company generally orders components far in advance, helping
suppliers plan production, and it generally does not require stock-rotation
or return privileges, all of which are costly to the supplier. The Company
requests and will accept price protection from its suppliers, but does not
demand formal price protection agreements from its suppliers. See "BUSINESS -
Cautionary Statements and Risk Factors - NEED TO MAINTAIN LARGE INVENTORY;
PRICE FLUCTUATIONS" and "BUSINESS - Strategy."

           The Company purchases components from over 60 different suppliers,
including Everlight Electronics Co., Ltd., Fairchild Semiconductor Corporation,
Frontier Electronics Co., Ltd., General Semiconductor, Inc. Hi-Sincerity
Microelectronics, Pan - Jit Semiconductor Inc., QT Optoelectronics, Samsung
Semiconductors Inc., TEMIC Semiconductors and United Parts Mart. The Company is
continually attempting to build relationships with suppliers and from time to
time adds new suppliers in an attempt to provide its customers with a better
product mix. Also, the Company's relationships with suppliers have been
terminated from time to time. The possibility exists that the loss of one or
more supplier distribution relationships might have a material adverse effect on
the Company and its results of operations. See "BUSINESS - Cautionary Statements
and Risk Factors - RELATIONSHIP WITH SUPPLIERS."

           For the year ended December 31, 1997, the Company's four largest
suppliers, General Semiconductor, Inc., Samsung Semiconductors, Inc., TEMIC
Semiconductors and United Parts Mart accounted for approximately 63.1% of the
Company's net purchases. However, the Company does not regard any one
supplier as essential to its operations, since equivalent replacements for
most of the products the Company markets are either available from one or
more of the Company's other suppliers or are available from various other
sources at competitive prices. The Company believes that, even if it loses
its direct relationship with a supplier, there exist alternative sources for
a supplier's product. No assurance can be given that the loss or a
significant disruption in the relationship with one or more of the Company's
suppliers would not have a material adverse effect on the Company's business
and results of operations. See "BUSINESS - Cautionary Statements and Risk
Factors - RELATIONSHIP WITH SUPPLIERS."

COMPETITION

           The Company operates in a highly competitive environment. The Company
faces competition from numerous local, regional and national distributors (both
in purchasing and selling inventory) and electronic component manufacturers,
including some of its own suppliers. Many of the Company's competitors are more
established and have greater name recognition and financial and marketing
resources than the Company. The Company believes that competition in the
electronic industry is based on breadth of product lines, product availability,
choice of suppliers, customer service, competitive pricing and product
knowledge, as well as value-added services. The Company believes it competes
effectively with respect to breadth and availability of inventory, response
time, pricing and product knowledge. To the Company's knowledge, no other
national distributor focuses its business on discrete semiconductors to the same
extent as does the Company. Generally, large component manufacturers and large
distributors do not focus their internal selling efforts on small to medium
sized OEMs and distributors, which constitute the vast majority of the Company's
customers; however, as the Company's 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 decreased
selling prices. See "BUSINESS Cautionary Statements and Risk Factors -
COMPETITION" and "BUSINESS - Semiconductor Distribution Channels."

MANAGEMENT INFORMATION SYSTEMS

           The Company has made a significant investment in computer hardware,
software and personnel. The MIS department is responsible for software and
hardware upgrades, maintenance of current software and related databases, and
designing custom systems. The Company believes that its MIS department is
crucial to the Company's success


                                       8

<PAGE>

and believes in continually upgrading its hardware and software. To that end,
management has acquired and is in the final stage of implementing an Oracle
Applications System. The Company believes that this system has the capabilities
to serve the Company for future anticipated needs including capabilities of
net working with remote locations.

FOREIGN TRADE REGULATION

           Most of the products distributed by the Company are manufactured in
the Far East, including Taiwan, Japan, China, 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 the Company's business and results of
operations.

           Many of the Company's suppliers have their manufacturing facilities
in countries whose economies are experiencing financial problems. Mounting trade
deficits have sent interest rates soaring and local currencies plunging. The US
dollar's rise compared with Asian currencies may reduce exports to Asia in the
future. 1997 sales to Asian customers was not material to the Company.
Management believes that the decline in Asian currencies may actually benefit
the Company in the short-term by providing opportunities for the Company to
purchase products at lower prices.

           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. The Company 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 its 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 United States 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 the Company's
business. The Company's 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 the Company does not
believe that any of these factors adversely impact its business at present,
there can be no assurance 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 have a material adverse impact on the Company's business and results of
operations. See "BUSINESS - Cautionary Statements and Risk Factors - FOREIGN
TRADE REGULATION."

EMPLOYEES

           At March 1, 1998, the Company had a total of 55 employees, 50
full-time employees and 5 full-time workers from temporary employment agencies.
None of the Company's employees are covered by a collective bargaining
agreement, and the Company considers its relations with its employees to be
excellent.


                                       9

<PAGE>

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:

           DEPENDENCE UPON KEY PERSONNEL. The Company is highly dependent upon
the services of Stewart Wang, its Chief Executive Officer and President. The
success of the Company 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 the Company. In addition, the Company's work
force includes executives and employees with significant knowledge and
experience in the electronics distribution industry. The Company's future
success will be strongly influenced by its ability to continue to recruit, train
and retain a skilled work force. While the Company believes that it would be
able to locate suitable replacements for its executives or other personnel if
their services were lost to the Company, there can be no assurance that the
Company would be able to do so on terms acceptable to the Company. In
particular, the location and hiring of a suitable replacement for Mr. Wang could
be very difficult. The Company has purchased and currently intends to maintain a
key-man life insurance policy on Mr. Wang's life with benefits of $2,000,000
payable to the Company in the event of Mr. Wang's death. The benefits received
under this policy might not be sufficient to compensate the Company for the loss
of Mr. Wang's services should a suitable replacement not be employed.

           RELATIONSHIP WITH SUPPLIERS. Typically, the Company does not have
written long-term supply, distribution or franchise agreements with any of its
suppliers. Although the Company believes that it has established close working
relationships with its principal suppliers, the Company's success will depend,
in large part, on maintaining these relationships and developing new supplier
relationships for its existing and future product lines. Because of the lack of
long-term contracts, there can be no assurance that the Company will be able to
maintain these relationships. For example, in 1992, ITT Semiconductors, which
was then one of the Company's principal suppliers, consolidated its United
States distribution network into a limited number of distribution channels and
the Company was not among the distributors chosen. The Company believes that,
even if it loses its direct relationship with a supplier, there exist
alternative sources for products. No assurance can be given that the loss or a
significant disruption in the relationship with one or more of the Company's
suppliers would not have a material adverse effect on the Company's business and
results of operations.

           NEED TO MAINTAIN LARGE INVENTORY; PRICE FLUCTUATIONS. To adequately
service its customers, the Company believes that it is necessary to maintain a
large inventory of its product offerings, and the Company generally attempts to
maintain approximately ten months inventory of most products in its catalogs.
The Company's inventory level is higher than this due to its decision to
increase inventory levels and intensify its long standing purchasing strategy by
making opportunistic purchases of suppliers' uncommitted capacity, at favorable
pricing. The Company is focusing its efforts to maintain or gradually reduce its
inventory. As a result of the Company's strategic inventory purchasing policies,
under which the Company, in order to obtain preferential pricing, waives the
rights to suppliers' inventory protection agreements such as inventory return
rights and accepts limited rights to suppliers price protection arrangements,
the Company bears the risk of decreases in the prices charged by its suppliers
and decreases in the prices of products held in its inventory or covered by
purchase commitments. If prices of components held in inventory by the Company
decline or if new technology is developed that displaces products distributed by
the Company and held in inventory, the Company's business could be materially
adversely affected. See "BUSINESS - Strategy."

           PRODUCT MIX; PRODUCT MARGINS. The Company's gross profit margins have
decreased since 1995, principally due to a weaker product demand and competitive
pricing pressures within the electronics industry. The Company's gross profit
margins are subject to a number of factors, including product demand, the
ability of the Company to purchase inventory at favorable prices and the
Company's favorable sales mix, all of which could adversely impact margins.
Generally optoelectronic devices and passive components have a lower gross
margin than other products that the Company sells. See Part II Item 7 -
"MANAGEMENT'S DISCUSSION AND ANALYSIS - Results of Operations."

           AVAILABILITY OF COMPONENTS. The semiconductor component business has
from time to time experienced

                                       10
<PAGE>

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 demand or place their
customers on "allocation," reducing the number of units sold to each
customer. While the Company believes that, due to the depth of its inventory,
it has not been adversely affected by recent shortages in certain discrete
components, no assurance can be given that future shortages will not
adversely impact the Company. See "BUSINESS - Suppliers."

           FOREIGN TRADE REGULATION. A significant number of the products
distributed by the Company are manufactured in Taiwan, China, 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 United States 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 the Company's
business. The Company's 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 the Company does not
believe that any of these factors adversely impact its business at present,
there can be no assurance 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. See "BUSINESS - Suppliers" and "BUSINESS - Foreign Trade
Regulation."

           MANAGEMENT OF GROWTH. The Company's ability to effectively manage
future growth, if any, will require it to continue to implement and improve
its operational, financial and management information systems and to train,
motivate and manage a larger number of employees. There can be no assurance
that the Company will be able to preserve the revenue growth experienced in
prior years, continue its profitable operations or manage future growth
successfully. As an example, sales decreased from 1995 to 1996 principally as
a result of the soft market demand for discrete semiconductors. See Part II
Item 7 - "MANAGEMENT'S DISCUSSION AND ANALYSIS - Results of Operations."

           COMPETITION. The Company faces intense competition, both in its
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 those of the Company. Many competing distributors also
carry product lines which the Company does not carry. Generally, large component
manufacturers and large distributors do not focus their direct selling efforts
on small to medium sized OEMs and distributors, which constitute the vast
majority of the Company's customers. However, as the Company's 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. There can be no assurance that the
Company will be able to continue to compete effectively with existing or
potential competitors. See "BUSINESS - Competition."


                                       11

<PAGE>

           CONTROL BY CLASS B COMMON STOCK SHAREHOLDER; POSSIBLE DEPRESSIVE
EFFECT ON THE PRICE OF THE CLASS A COMMON Stock. Stewart Wang, the Company's
Chief Executive Officer and President, beneficially owns all of the Class B
Common Stock of the Company, which carries ten votes per share, and he thus
controls approximately 58% of the voting power of the Company's Common Stock. As
a result, Mr. Wang is able to control the Company and its operations, including
the election of at least a majority of the Company's Board of Directors and the
policies of the Company. Also, any time while the Company has at least 800
shareholders who beneficially own shares of the Company's Common Stock, the
Company's Articles of Incorporation provide for the automatic elimination of
cumulative voting, which would allow Mr. Wang to elect all of the Directors. The
disproportionate vote afforded the Class B Common Stock could also serve to
discourage potential acquirers from seeking to acquire control of the Company
through the purchase of the Class A Common Stock, which might have a depressive
effect on the price of the Class A Common Stock.

           PRODUCT RETURNS. The Company maintains a "no hassle" return policy.
On a case-by-case basis, the Company accepts returns of products from its
customers, without restocking charges, where they can demonstrate an acceptable
cause for the return. Requests by a distributor to return products purchased for
its own inventory are generally not included under this policy. With respect to
OCMs and OEMs, acceptable causes are generally limited to loss of orders for
products in which the components were to be incorporated and errors in
specifications of the OCMs and OEMs orders to the Company (e.g. when the OCM or
OEM erroneously orders the wrong product). The Company will also, on a
case-by-case basis, accept returns of products upon payment of a restocking fee,
which generally is set at 15% of the sales price. The Company will not accept
returns of any products which were special ordered by a customer, or which are
otherwise not generally included in the Company's inventory. During the fiscal
years ended December 31, 1997, 1996 and 1995, sales returns aggregated
$1,110,000, $1,536,000 and $1,307,000, or 3.3%, 5.1% and 3.7% of net sales,
respectively. Historically, most allowable returns occur during the first two
months following shipment. While the Company maintains reserves for product
returns which it considers to be adequate, the possibility exists that the
Company could experience returns in any period at a rate significantly in excess
of historical levels, which could materially and adversely impact the Company's
results of operations for that period. See Part II Item 7 - "MANAGEMENT'S
DISCUSSION AND ANALYSIS - Results of Operations" and "BUSINESS - Customers."

           CYCLICAL NATURE OF ELECTRONICS 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
components, as well as electronic distributors such as the Company. In addition,
the life-cycle of existing electronic products and the timing of new product
development and introduction can affect demand for electronic components. Any
downturns in the electronics distribution industry, or the electronics industry
in general, could adversely affect the Company's business and results of
operations. See "BUSINESS - Semiconductor Distribution Channels."

           NO EARTHQUAKE INSURANCE. The Company's principal executive offices
are located in a Company-owned facility in Santa Clarita, California - an area
which experienced significant damage in the 1994 Northridge, California
earthquake. During 1994, the Company expended approximately $145,000 in repair
costs and renovations to its facility resulting from that earthquake, none of
which were covered by insurance. The Company believes that it is economically a
better decision to self insure against any future earthquake losses than to pay
the expensive earthquake insurance premiums.


                                       12

<PAGE>

ITEM 2.  PROPERTIES.

           The Company's executive offices and warehouse facilities, covering
approximately 24,500 square feet, are located in Santa Clarita, California. The
Company owns this property subject to a mortgage held by a bank with an
outstanding principal balance of $494,000 as of December 31, 1997 and due on
December 1, 2013 (the "Mortgage"). Pursuant to the Mortgage, the Company is
obligated to make monthly payments of $4,390, which includes interest at 6.359%
per annum. Payments by the Company under the Mortgage are currently
unconditionally guaranteed by both the Chairman of the Board of the Company and
the President of the Company. Neither of the officers has any intention of
guaranteeing obligations of the Company in the future. During 1997, the Company
invested $519,000 in its Taiwan office, principally for acquisition of office
and warehouse space that is owned by the Company and not subject to any debt.

           In May, 1996, the Company increased its warehouse space by entering
into a two year lease, with an option for one additional year, for warehouse
space of approximately 30,000 square feet located in Santa Clarita, California.
All of the space is currently occupied by the Company. In January 1998, the
Company exercised its option extending the lease to June 1999. The monthly
rental expense is $12,500.

           The Company currently anticipates that it will need to relocate
its executive offices and warehouse operations to a larger facility sometime
in the next several years. The Company will begin planning for such a move
when it experiences enough growth to warrant the additional expense and
disruption to the business. The Company currently does not anticipate that
the costs to lease the new facilities will be material to its overall
financial condition or results of operations. However, the actual relocation
and lease costs will be dependent upon real estate market conditions existing
at the time of the move. Following this move, the Company anticipates that it
will attempt to either sell or lease its current facilities. While the
Company believes that the disposition or leasing of its current facilities
should not adversely impact its results of operations, there is a possibility
that the Company could realize a loss with respect thereto.

                                       13

<PAGE>

ITEM 3.  LEGAL PROCEEDINGS.

           In September 1997, the Company filed a lawsuit in Los Angeles
Superior Court against Taiwan Semiconductor Co. Ltd. ("TSCL"), TSC America, Inc.
("TSC") an officer of these companies and a former employee of the Company. The
lawsuit arises out of alleged unethical and illegal business practices including
unauthorized use of certain of the Company's trade secrets. The Company is
seeking monetary damages in the amount of $5 million. In September 1997, TSCL
and TSC filed a cross-complaint against the Company and one of its officers,
alleging unauthorized use of certain of TSCL's trade secrets. The
cross-complaint seeks $10 million in damages.

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

           No matters were submitted to a vote of the security holders of the
Company during the fourth quarter of 1997.

                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

           Since April 19, 1995, the Company's Class A Common Stock has been
traded on the Nasdaq National Market under the symbol "TAIT". The following
table sets forth the range of high and low sale prices per share for the Class A
Common Stock as quoted on the Nasdaq National Market, for the periods indicated

<TABLE>
<CAPTION>

                                                                    High              Low
                                                                    ----              ---
       <S>                                                         <C>             <C>
       Year Ended December 31, 1995
       Second Quarter (from April 19, 1995)                         9 1/2              6
       Third Quarter                                                 12                8
       Fourth Quarter                                               9 1/4            6 1/4

       Year Ended December 31, 1996
       First Quarter                                                  8                6
       Second Quarter                                               7 1/4            4 7/8
       Third Quarter                                                5 3/4            2 7/8
       Fourth Quarter                                               4 1/4            2 1/16

       Year Ended December 31, 1997
       First Quarter                                                3 7/8           2 25/64
       Second Quarter                                               3 7/8           2 35/64
       Third Quarter                                                4 1/8            2 7/8
       Fourth Quarter                                               4 1/4            2 1/2

       Year Ended December 31, 1998                                 3 1/8            2 1/8
       First Quarter (through March 18, 1998)

</TABLE>

           At March 18, 1998, there were approximately 102 holders of record of
the Company's Common Stock. The Company estimates that there are approximately
1,815 beneficial owners of its Class A Common stock.

           The Company has not paid cash dividends on its Common Stock. The
present policy of the Company is to retain earnings to finance the development
of its operations. See "MANAGEMENT'S DISCUSSION AND ANALYSIS - Results of
Operations; Liquidity and Capital Resources."

           In December 1996, the Company announced a program to repurchase
shares of its Class A common stock. As of March 18, 1998, the Company had
repurchased 580,913 shares of its Class A common stock in open market purchases.


                                       14

<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

           The following table presents certain selected consolidated financial
and operating data for the Company as of and for each of the years in the five
year period ended December 31, 1997. The selected consolidated financial and
operating data in the table should be read in conjunction with the Company's
Financial Statements and the notes thereto included elsewhere herein and in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations.

STATEMENTS OF INCOME AND PER SHARE DATA:

(In thousands, except per share data)

<TABLE>
<CAPTION>

                                                           YEAR ENDED DECEMBER 31,
                                             ---------------------------------------------------
                                              1997       1996       1995       1994       1993
                                             -------    -------    -------    -------    -------
<S>                                          <C>        <C>        <C>        <C>        <C>
Net sales                                    $33,945    $30,128    $35,936    $24,588    $15,554
Cost of goods sold                            24,293     20,744     23,303     17,220     11,690
                                             -------    -------    -------    -------    -------
Gross profit                                   9,652      9,384     12,633      7,368      3,864

Selling, general and administrative
expenses                                       5,641      4,870      5,424      3,879      2,465
                                             -------    -------    -------    -------    -------
Operating earnings                             4,011      4,514      7,209      3,489      1,399

Income tax expense                             1,220      1,424      2,807      1,229        437
                                             -------    -------    -------    -------    -------
Net earnings                                 $ 1,850    $ 2,158    $ 4,304    $ 1,775    $   672
                                             -------    -------    -------    -------    -------
                                             -------    -------    -------    -------    -------
Earnings per share                           $   .28    $   .31    $   .68    $   .41    $   .16
                                             -------    -------    -------    -------    -------
                                             -------    -------    -------    -------    -------
Weighted average common shares
 outstanding (1)                               6,644      6,930      6,297      4,287      4,166
                                             -------    -------    -------    -------    -------
                                             -------    -------    -------    -------    -------
BALANCE SHEET DATA:

Working capital (1)                          $24,784    $25,311    $20,438    $ 5,883    $ 3,457
Total assets (1)                              44,985     42,315     36,380     18,494     10,983
Total debt (1)                                16,444     13,510        527      6,561      4,237
Stockholder's equity (1)                      24,371     24,113     21,955      6,342      3,762

</TABLE>

(1) On April 19, 1995, the Company sold 2,530,000 shares of Class A common stock
at $5.25 per share in connection with its initial public offering. The
$11.3 million net proceeds from this offering were used to pay off the bank
line of credit, to retire long-term debt and to expand inventory.


                                       15

<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

The Company distributes a wide variety of transistors, diodes and other
semiconductors and optoelectronic devices to other electronic distributors,
contract electronic manufacturers (CEMs) and original equipment manufacturers
(OEMs) who incorporate them in their products.

The following table sets forth, for the periods indicated, certain operating
amounts and ratios:

<TABLE>
<CAPTION>

                                                      YEARS ENDED DECEMBER 31,
                                                  ---------------------------------
                                                   1997         1996         1995
                                                  -------      -------      -------
                                                       (dollars in thousands)
<S>                                               <C>          <C>          <C>
Net sales                                         $33,945      $30,128      $35,936

Cost of goods sold                                 24,293       20,744       23,303
       % of net sales                               71.6%        68.9%        64.8%

Gross profit                                        9,652        9,384       12,633
       % of net sales                               28.4%        31.1%        35.2%

Selling, general and administrative expenses        5,641        4,870        5,424
       % of net sales                               16.6%        16.2%        15.1%

Operating earnings                                  4,011        4,514        7,209
       % of net sales                               11.8%        15.0%        20.1%

Income tax expense                                  1,220        1,424        2,807
       Effective tax rate as a % of earnings
       before income taxes                          39.7%        39.8%        39.5%

Net earnings                                        1,850        2,158        4,304
       % of net sales                                5.5%         7.2%        12.0%

</TABLE>

YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996

           Net sales for the year ended December 31, 1997 increased $3,817,000
or 12.7% to $33,945,000 from $30,128,000 from the year ended December 31, 1996.
The increase in net sales during 1997 was attributable principally to an
increase in the volume of products sold of $6.1 million, partially offset by net
price reductions of approximately $3.2 million. The Company also experienced an
increase in export sales volume of approximately $1.0 million and a $426,000
reduction in sales returns and allowances from customers. The increase in net
sales was principally a result of sales made to new customers during 1997.

           Cost of goods sold increased by $3,549,000 to $24,293,000 for the
year ended December 31, 1997, an increase of 17.1% from the year ended
December 31, 1996. Early in 1996, the demand for discrete semiconductors was
greater than the supply. The intense competition for available supply of
discrete semiconductors caused the Company to purchase products for prices
that were higher than normal market conditions. As the high priced inventory
was sold in late 1996 and all of 1997, it caused cost of goods sold to
increase as a percentage of sales. Gross profit on net sales increased by
$268,000 to $9,652,000 for the year ended December 31, 1997 from $9,384,000
from the year ended December 31, 1996, and decreased, as a percentage of net
sales, to 28.4% from 31.1%.

           Gross profit as a percentage of net sales decreased to 28.4% for the
year ended December 31, 1997 from


                                       16

<PAGE>

31.1% for the year ended December 31, 1996 principally as a result of lower
selling prices due to the competitive market place and as a result of higher
export sales which usually have a lower profit margin than domestic sales.

           Selling, general and administrative expenses increased by $771,000 or
15.8% in 1997 as compared to 1996. The increase was attributable to increased
payroll costs principally as a result of the geographic expansion of its direct
sales force and the addition of sales support staff. The increase in net sales
resulted in an increase in commissions paid to both sales employees and
independent sales representatives. In addition, management decided to take a
one-time impairment charge in connection with the abandonment of the Company's
prior computer software system in the amount of $163,000. Selling, general and
administrative expenses, as a percentage of net sales, increased to 16.6% for
the year ended December 31, 1997 compared to 16.2% for the year ended December
31, 1996

           Operating earnings decreased by $503,000 or 11.1% between the years
ended December 31, 1997 and 1996, and decreased as a percentage of net sales to
11.8% from 15.0%. Operating earnings decreased principally as a result of
increased cost of sales and increases in selling, general and administrative
expenses as described above.

           Interest expense, net for the year ended December 31, 1997 increased
$14,000 compared to the year ended December 31, 1996. Net interest expense as a
percentage of net sales, decreased to 2.8% for the year ended December 31, 1997
compared to 3.1% for the year ended December 31, 1996. During 1997, interest
expense resulted from borrowings incurred to finance increased inventory levels,
trade receivables, computer software, office space and equipment in the Taiwan
office and to finance the repurchase of 487,113 shares of the Company's Class A
Common Stock.

           Income taxes were $1,220,000 for the year ended December 31, 1997,
resulting in an effective tax rate of 39.7%, compared to $1,424,000 for the year
ended December 31, 1996, an effective tax rate of 39.8%.

           The Company had net earnings of $1,850,000 for the year ended
December 31, 1997 as compared with net earnings of $2,158,000 for the year ended
December 31, 1996, a decrease of $308,000 or 14.3% for the reasons discussed
above. Net earnings as a percentage of net sales decreased to 5.5% from 7.2%.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995

           Net sales for the year ended December 31, 1996 were $30,128,000
compared with net sales for the year ended December 31, 1995 of $35,936,000,
a decrease of $5,808,000 or 16.2%. This decrease in net sales during 1996 was
attributable principally to a decline in the Company's domestic sales volume
of approximately $3,719,000. Net price reductions accounted for approximately
$757,000 of the net sales decrease and had a negative impact on gross profit.
For most of 1995, the demand for discrete semiconductors was greater than the
supply. The intense competition for the available supply of discrete
semiconductors allowed the Company to sell its products for prices that were
higher than normal market conditions. A decrease in export sales of
$1,197,000 also contributed to the decline in net sales. The Company has
continued to add new customers during 1996, but at a slower rate than during
1995. The decline in net sales was principally a result of an industry wide
decline in demand for discrete semiconductors.

           Cost of goods sold decreased by $2,559,000 to $20,744,000 for the
year ended December 31, 1996, a decrease of 11.0% from the year ended December
31, 1995. Consistent with the decrease in net sales, the Company was able to
reduce the cost of goods sold, although at a lesser rate than the decrease in
sales due to the cost incurred in earlier periods to acquire the products sold
during 1996. Gross profit on net sales decreased by $3,249,000 to $9,384,000 for
the year ended December 31, 1996 from $12,633,000 for the same period in 1995,
and decreased as a percentage of net sales to 31.1% from 35.2%.

           Selling, general and administrative expenses decreased by $554,000
or 10.2% for 1996 compared to 1995. These expenses, as a percentage of net
sales, increased to 16.2% for the year ended December 31, 1996 compared to
15.1% for the year ended December 31, 1995. The Company was able to reduce
selling, general and administrative expenses during 1996, principally by
eliminating non-essential expenditures and not replacing employees who left
the Company.

           Operating earnings decreased by $2,695,000 or 37.4% between the
years ended December 31, 1996, and

                                       17

<PAGE>

1995, and decreased as a percentage of net sales to 15.0% from 20.1%.
Operating earnings decreased principally as a result of decreases in both
domestic and export sales and market price reductions. The decrease in
revenue was offset somewhat by a reduction in cost of goods sold and selling,
general and administrative expenses.

           Interest expense for the year ended December 31, 1996 increased
$652,000 compared to the year ended December 31, 1995. This increase is
primarily due to increased borrowings made to finance the increase in
inventory during the year ended December 31, 1996 compared to the year ended
December 31, 1995.

           Income taxes were $1,424,000 for the year ended December 31, 1996,
representing an effective tax rate of 39.8%, compared to $2,807,000 for the
year ended December 31, 1995, an effective tax rate of 39.5%.

           The Company had net earnings of $2,158,000 for the year ended
December 31, 1996 as compared with net earnings of $4,304,000 for the year
ended December 31, 1995, a decrease of $2,146,000 or 49.9% for the reasons
discussed above. Net earnings as a percentage of net sales decreased to 7.2%
from 12.0%.

SUPPLY AND DEMAND ISSUES

           The year 1995 was exceptionally good for the Company and other
discrete suppliers. For most of 1995, the demand for discrete semiconductors,
in general, was greater than the supply. The intense competition for the
available supply of discrete semiconductors pushed the prices higher than in
normal market conditions. The Company, from time to time, could not fulfill
some sales orders because of the limited supply of certain of these products.

           The supply shortage of discrete semiconductors in 1995 caused many
customers to order more than their needs to prevent future shortages and
suppliers expanded their capacity to meet the strong market demands. However,
with a weak market demand in the later part of 1996, many distributors and
end-users had built-up excessive inventories and as a result, the majority of
Taitron's customers were struggling with inventory adjustments and
corrections. To help customers readjust their inventories, Taitron
strategically decided to accept more returns and order cancellations than it
normally would.

           In 1996, suppliers increased capacity and the weak demand left
suppliers with large amounts of uncommitted products. During 1996 and
continuing into 1997, the Company decided to take advantage of this situation
by intensifying its long standing purchasing strategy by making opportunistic
purchases of suppliers' uncommitted capacity, at favorable pricing. The
Company believes this strategy of opportunistic purchasing will posture the
Company to be price competitive, while still maintaining acceptable profit
margins.

           As a result, the Company's inventory has increased significantly
during 1996 and continuing into 1997, leading to the leasing of additional
warehouse space in 1996 and full utilization of the space in 1997. The
Company's inventory level peaked in May 1996 at $39.2 million and has
subsequently reduced to $35.8 million at December 31, 1997. The Company is
focusing its efforts to maintain or gradually reduce its inventory while
maintaining adequate stock to accommodate the Company's future growth, if
any, when demand increases. In order to finance these strategic purchases,
the revolving debt increased to $14.5 million in June 1996 and has
subsequently been reduced to $13.0 million at December 31, 1997.

           Taitron's competitive edge is its ability to fill customer orders
immediately from stock held in inventory. Thus, management has structured
inventory levels in such a way as to poise the Company to take advantage of a
recovery in the discrete semiconductor market. At the same time, if the
market recovery is slow in taking place, inventory levels should not impose
an unwarranted financial burden on the Company's earnings.


                                       18

<PAGE>

           Management believes, that the strategies it has followed with its
customers and suppliers have cemented its relationships which will benefit
the Company in the future. The Company's core strategy has been to maintain a
substantial inventory of discrete semiconductors purchased at prices
generally lower than those commonly available to its competitors. The Company
has been able to offer its products to customers at competitive prices and
offers other incentives to customers, such as its no hassle returns policy,
which distinguishes the Company from most of its competitors.

           Several of the matters discussed under Supply and Demand Issues
contain forward looking statements that involve risks and uncertainties with
respect to growth and relationships with suppliers. Many factors could cause
actual results to differ materially from these statements. See "BUSINESS -
Cautionary Statements and Risk Factors - RELATIONSHIP WITH SUPPLIERS."

LIQUIDITY AND CAPITAL RESOURCES

           Since 1993, the Company has satisfied its liquidity requirements
principally through cash generated from short-term commercial loans and the
sale of equity securities, including the initial public offering of its
common stock in April 1995. The Company's cash flows provided by (used in)
operating, financing and investing activities for the years ended December 31,
1997, 1996 and 1995 were as follows:

<TABLE>
<CAPTION>

                                                                         YEAR ENDED DECEMBER 31,
                                                                             (In thousands)
                                                                   -----------------------------------
                                                                    1997          1996          1995
                                                                   ------       --------       -------
<S>                                                                <C>          <C>            <C>
Operating activities..........................................     $ (478)      $(13,658)      $(4,010)
Investing activities..........................................       (998)          (171)         (179)
Financing activities..........................................      1,398         12,984         5,275

</TABLE>

           In positioning itself as a "discrete components superstore," the
Company has been required to significantly increase its inventory levels. As
a consequence, inventory has grown from $27.8 million at December 31, 1995 to
$35.8 million at December 31, 1997.

           The discrete semiconductor products distributed by the Company are
mature products, used in a wide range of commercial and industrial products
and industries. As a result, the Company has never experienced any material
amounts of product obsolescence. The Company also attempts to control its
inventory risks by matching large customer orders with simultaneous orders to
suppliers. Nonetheless, the high levels of inventory carried by the Company
increase the risks of price fluctuations and product obsolescence.

           Investment activities consisted of the purchase of property and
equipment, principally computer equipment. Investment in computer equipment
was $85,000, $135,000 and $424,000 for the years ended December 31, 1995,
1996 and 1997. During 1997, the Company invested $519,000 in its Taiwan
office, principally for acquisition of office and warehouse space. The
Company expects to invest an additional amount of approximately $200,000 per
year over the next several years in hardware and software for maintaining and
improving its new Oracle Applications System, which is scheduled to be
operational in the second quarter of 1998. See "BUSINESS - Management
Information Systems."

           On April 19, 1995, the Company completed its initial public
offering of 2,530,000 shares of its Class A Common Stock. The net proceeds of
approximately $11.3 million were used during 1995 to retire bank debt in the
amount of $5.4 million, to repay $670,000 in long-term mortgage debt, to
expand inventory and for general corporate purposes.

           In May 1996, the Company issued a Convertible Subordinated Note
(the Note) for $3,000,000, with interest at 8% payable annually and the
principal is due May 2001. The Note is convertible into the Company's Class A
Common Stock at the conversion price of $5.25 per share. These securities
have not been registered under the Securities Act of 1933, as amended (the
Act), and the Company issued these securities in reliance upon exemption from
registration provided by Regulation S of the Act.


                                       19

<PAGE>

           In May 1997, the Company replaced its $15 million revolving line
of credit that had been in place since March 1996. The new revolving line of
credit provides the Company with up to $16 million for operating purposes and
up to an additional $4 million for business acquisition purposes. Both
facilities mature on June 2, 1999. The agreement governing these credit
facilities contains covenants that require the Company to be in compliance
with certain financial ratios.

           The Company believes that funds generated from operations and the
revolving line of credit will be sufficient to finance its working capital
and capital expenditures requirements for the foreseeable future.

YEAR 2000 ISSUES

           The Company has conducted a comprehensive review of its computer
systems to identify the systems that could be affected by the "Year 2000"
issue and is developing an implementation plan to resolve the issue. The Year
2000 problem is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather the 2000. This could result in a major system failure or
miscalculations. The Company presently believes that, with modifications to
existing software and converting to an Oracle Applications System (which is
Year 2000 compliant), the Year 2000 problem will not pose significant
operational problems for the Company's computer systems as so modified and
converted.

ASIAN ECONOMIC ISSUES

           Many of the Company's suppliers have their manufacturing
facilities in countries who's economies are experiencing financial problems.
Mounting trade deficits have sent interest rates soaring and local currencies
plunging. The US dollar's rise compared with Asian currencies may reduce
exports to Asia in the future. During 1997, the Company sold $1.9 million or
5.6% of net sales to Asian customers and most of the products purchased by
the Company are manufactured in Asia. Management believes that the decline in
Asian currencies may actually benefit the Company in the short-term by
providing an opportunity for the Company to purchase products at lower prices.


                                       20

<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial statements as of December 31, 1997, 1996 and 1995 and for the years
then ended and the Independent Auditors' Report are included on pages F-1 to
F-14 of this Annual Report on Form 10-K.

                         INDEX TO FINANCIAL STATEMENTS
                        TAITRON COMPONENTS INCORPORATED

<TABLE>
<CAPTION>

                                                                                                   Page
                                                                                                   ----
<S>                                                                                                <C>
Independent Auditors' Report........................................................................F-1
Balance Sheets at December 31, 1997 and 1996........................................................F-2
Statements of Earnings for the Years Ended December 31, 1997, 1996 and 1995.........................F-3
Statements of Shareholders' Equity for the Years Ended December 31, 1997, 1996 and 1995.............F-4
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995.......................F-5
Notes to Financial Statements for the Years Ended December 31, 1997, 1996 and 1995..................F-6

</TABLE>


                                       21

<PAGE>

                         INDEPENDENT AUDITORS' REPORT



The Board of Directors
Taitron Components Incorporated:


We have audited the accompanying balance sheets of Taitron Components
Incorporated as of December 31, 1997 and 1996 and the related statements of
earnings, shareholders' equity and cash flows for each of the years in the
three year period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Taitron Components
Incorporated as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the years in the three year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.



Los Angeles, California
February 11, 1998


                                       F-1

<PAGE>

                        TAITRON COMPONENTS INCORPORATED

                                Balance Sheets

                          December 31, 1997 and 1996

<TABLE>
<CAPTION>

                                                             1997                 1996
                                                          -----------          -----------
<S>                                                       <C>                  <C>
                     ASSETS
Current assets:
   Cash and cash equivalents                              $   163,000          $   300,000
   Trade accounts receivable, net                           5,398,000            4,109,000
   Inventory, net                                          35,757,000           35,168,000
   Prepaid expenses                                           169,000              221,000
   Other current assets                                       436,000              222,000
                                                          -----------          -----------
           Total current assets                            41,923,000           40,020,000

Property and equipment, net                                 2,309,000            1,660,000

Deferred income taxes                                         716,000              612,000

Other assets                                                   37,000               23,000
                                                          -----------          -----------
           Total assets                                   $44,985,000          $42,315,000
                                                          -----------          -----------
                                                          -----------          -----------

           LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Current portion of long-term debt                      $12,969,000          $10,017,000
   Trade accounts payable                                   3,235,000            3,737,000
   Accrued liabilities                                        935,000              955,000
                                                          -----------          -----------
           Total current liabilities                       17,139,000           14,709,000

Long-term debt, less current portion                        3,475,000            3,493,000
                                                          -----------          -----------
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; 5,685,062 and
     6,167,341 shares issued and outstanding at
     December 31, 1997 and 1996, respectively                   5,000                6,000
   Class B common stock, $.001 par value.
     Authorized, issued and outstanding 762,612
     shares at December 31, 1997 and 1996                       1,000                1,000
   Additional paid-in capital                              12,997,000           14,531,000
   Foreign currency translation adjustment                    (57,000)              -
   Retained earnings                                       11,425,000            9,575,000
                                                          -----------          -----------
           Total shareholders' equity                      24,371,000           24,113,000
                                                          -----------          -----------
           Total liabilities and shareholders' equity     $44,985,000          $42,315,000
                                                          -----------          -----------
                                                          -----------          -----------

</TABLE>

See accompanying notes to financial statements.


                                       F-2

<PAGE>

                        TAITRON COMPONENTS INCORPORATED

                            Statements of Earnings

                 Years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>

                                                    1997             1996             1995
                                                 -----------      -----------      -----------
<S>                                              <C>              <C>              <C>
Net sales                                        $33,945,000      $30,128,000      $35,936,000
Cost of goods sold                                24,293,000       20,744,000       23,303,000
                                                 -----------      -----------      -----------
           Gross profit                            9,652,000        9,384,000       12,633,000

Selling, general and administrative expenses       5,641,000        4,870,000        5,424,000
                                                 -----------      -----------      -----------
           Operating earnings                      4,011,000        4,514,000        7,209,000

Interest expense, net                                956,000          942,000          128,000
Other income                                         (15,000)         (10,000)         (30,000)
                                                 -----------      -----------      -----------
           Earnings before income taxes            3,070,000        3,582,000        7,111,000

Income tax expense                                 1,220,000        1,424,000        2,807,000
                                                 -----------      -----------      -----------
           Net earnings                          $ 1,850,000      $ 2,158,000      $ 4,304,000
                                                 -----------      -----------      -----------
                                                 -----------      -----------      -----------
Earnings Per Share:
           Basic                                 $       .28      $       .31      $       .68
                                                 -----------      -----------      -----------
                                                 -----------      -----------      -----------
           Diluted                               $       .27      $       .31      $       .68
                                                 -----------      -----------      -----------
                                                 -----------      -----------      -----------
Weighted Average Common Shares Outstanding:
           Basic                                   6,643,975        6,929,953        6,297,453
                                                 -----------      -----------      -----------
                                                 -----------      -----------      -----------
           Diluted                                 6,732,856        7,003,883        6,365,779
                                                 -----------      -----------      -----------
                                                 -----------      -----------      -----------

</TABLE>

See accompanying notes to financial statements.


                                       F-3
<PAGE>

                        TAITRON COMPONENTS INCORPORATED

                       Statement of Shareholders' Equity

                 Years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>

                                                 COMMON STOCK            CLASS A COMMON STOCK    CLASS B COMMON STOCK
                                          --------------------------     --------------------    --------------------
                                            SHARES         AMOUNT         SHARES      AMOUNT     SHARES        AMOUNT
                                          ----------     -----------     ---------   --------    -------       ------
<S>                                       <C>            <C>             <C>         <C>         <C>           <C>
Balances at December 31, 1994              4,399,953     $ 3,229,000         -       $   -          -          $  -

Issuances of common stock                      -              -          2,530,000     3,000        -             -

Reclassification of common stock          (4,399,953)     (3,229,000)    4,399,953     4,000        -             -

Exchange of Class A for
  Class B common stock                         -              -           (762,612)   (1,000)    762,612        1,000

Net earnings                                   -              -              -           -          -          $1,000
                                          ----------     -----------     ---------   --------    -------       ------
Balances at December 31, 1995                  -              -          6,167,341   $ 6,000     762,612       $1,000

Net earnings                                   -              -              -           -          -             -
                                          ----------     -----------     ---------   --------    -------       ------
Balances at December 31, 1996                  -              -          6,167,341   $ 6,000     762,612       $1,000

Exercise of stock options                      -              -              4,834       -          -             -

Repurchase of common stock                     -              -           (487,113)   (1,000)       -             -

Tax effect of disqualifying disposition
  of stock options                             -              -              -           -          -             -

Net earnings                                   -              -              -           -          -             -

Foreign currency translation adjustment        -              -              -           -          -             -
                                          ----------     -----------     ---------   --------    -------       ------
Balances at December 31, 1997                  -         $    -          5,685,062   $ 5,000     762,612       $1,000
                                          ----------     -----------     ---------   --------    -------       ------
                                          ----------     -----------     ---------   --------    -------       ------

                                                                           FOREIGN
                                                                           CURRENCY         TOTAL
                                            ADDITIONAL       RETAINED     TRANSLATION    SHAREHOLDERS'
                                          PAID-IN CAPITAL    EARNINGS     ADJUSTMENT        EQUITY
                                          ---------------   -----------   -----------    -------------
<S>                                       <C>               <C>           <C>            <C>
Balances at December 31, 1994               $    -          $ 3,113,000   $   -          $ 6,342,000

Issuances of common stock                    11,306,000          -            -           11,309,000

Reclassification of common stock              3,225,000          -            -               -

Exchange of Class A for
  Class B common stock                           -               -            -               -

Net earnings                                     -            4,304,000       -            4,304,000
                                          ---------------   -----------   -----------    -------------
Balances at December 31, 1995               $14,531,000     $ 7,417,000       -          $21,955,000

Net earnings                                     -            2,158,000       -            2,158,000
                                          ---------------   -----------   -----------    -------------
Balances at December 31, 1996               $14,531,000     $ 9,575,000       -          $24,113,000

Exercise of stock options                        11,000          -            -               11,000

Repurchase of common stock                   (1,548,000)         -            -           (1,549,000)

Tax effect of disqualifying disposition
  of stock options                                3,000          -            -                3,000

Net earnings                                     -            1,850,000       -            1,850,000

Foreign currency translation adjustment          -               -         (57,000)          (57,000)
                                          ---------------   -----------   -----------    -------------
Balances at December 31, 1997               $12,997,000     $11,425,000   $(57,000)      $24,371,000
                                          ---------------   -----------   -----------    -------------
                                          ---------------   -----------   -----------    -------------

</TABLE>

See accompanying notes to financial statements.

                                       F-4
<PAGE>

                        TAITRON COMPONENTS INCORPORATED

                           Statements of Cash Flows

                 Years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>

                                                                       1997             1996             1995
                                                                   ------------     ------------     ------------
<S>                                                                <C>              <C>              <C>
Cash flows from operating activities:
    Net earnings                                                   $  1,850,000     $  2,158,000     $  4,304,000
                                                                   ------------     ------------     ------------
    Adjustments to reconcile net earnings to net cash used in
      operating activities:
         Depreciation and amortization                                  348,000          139,000          162,000
         Deferred income taxes                                         (104,000)        (212,000)        (270,000)
         Changes in assets and liabilities:
            Trade accounts receivable                                (1,288,000)       1,252,000       (1,055,000)
            Inventory                                                  (589,000)      (7,416,000)     (15,492,000)
            Prepaid expenses and other current assets                   (42,000)        (351,000)          16,000
            Other assets                                                (14,000)         (22,000)          18,000
            Trade accounts payable                                     (502,000)      (9,125,000)       8,992,000
            Accrued liabilities                                        (139,000)         (81,000)        (685,000)
            Other                                                         2,000           -                -
                                                                   ------------     ------------     ------------
                 Total adjustments                                   (2,328,000)     (15,816,000)      (8,314,000)
                                                                   ------------     ------------     ------------
                 Net cash used in operating activities                 (478,000)     (13,658,000)      (4,010,000)
                                                                   ------------     ------------     ------------
Cash flows from investing activities -  acquisition of property
    and equipment                                                      (998,000)        (171,000)        (179,000)
                                                                   ------------     ------------     ------------
Cash flows from financing activities:
    Net borrowings (repayments) on long-term debt                    12,950,000       13,000,000       (5,364,000)
    Proceeds from exercise of stock options                              11,000           -                -
    Tax effect of disqualifying dispositions of stock options             3,000           -                -
    Payments on long-term debt                                      (10,017,000)         (16,000)        (670,000)
    Proceeds from stock issuances                                        -                -            11,309,000
    Repurchase of Company stock                                      (1,549,000)          -                -
                                                                   ------------     ------------     ------------
                 Net cash provided by financing activities            1,398,000       12,984,000        5,275,000
                                                                   ------------     ------------     ------------
Impact of changes in exchange rates on cash                             (59,000)          -                -

                 Net increase (decrease) in cash and cash
                   equivalents                                         (137,000)        (845,000)       1,086,000

Cash and cash equivalents, beginning of year                            300,000        1,145,000           59,000
                                                                   ------------     ------------     ------------
Cash and cash equivalents, end of year                             $    163,000     $    300,000     $  1,145,000
                                                                   ------------     ------------     ------------
                                                                   ------------     ------------     ------------

Supplemental disclosures of cash flow information:
    Cash paid for interest                                         $  1,008,000     $    758,000     $    296,000
    Cash paid for income taxes                                     $  1,410,000     $  1,710,000     $  3,886,000
                                                                   ------------     ------------     ------------
                                                                   ------------     ------------     ------------

</TABLE>

See accompanying notes to financial statements.

                                       F-5
<PAGE>

                         TAITRON COMPONENTS INCORPORATED

                         Notes to Financial Statements


(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 electronics manufacturers (CEMs) and to original equipment
     manufacturers (OEM's), who incorporate these devices in their products. In
     order to meet the rapid delivery requirements of its customers, the Company
     maintains a significant inventory of discrete components.

     CONCENTRATION OF RISK

     A significant number of the products distributed by the Company are
     manufactured in Taiwan, China, 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 United States 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 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,
     there can be no assurance 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 60% of the Company's products are
     produced in Asia.

     CASH AND CASH EQUIVALENTS

     Cash equivalents of $1,000 and $32,000 at December 31, 1997 and 1996,
     respectively, consist of highly liquid investments with an original
     maturity of 90 days or less. The Company considers all highly liquid
     investments with an original maturity of 90 days or less to be cash
     equivalents. Management of the Company maintains a relatively low cash
     balance as cash is used to buy inventory and to repay debt in order to
     reduce interest cost.

     REVENUE RECOGNITION

     Revenue is recognized upon shipment of the merchandise. Reserves for
     sales allowances and customer returns are established based upon
     historical experience and management's estimates as shipments are made.
     Sales returns for the years ended December 31, 1997, 1996 and 1995
     aggregated $1,110,000, $1,536,000 and $1,307,000, respectively.

                                       F-6
<PAGE>

     ALLOWANCE FOR SALES RETURNS AND DOUBTFUL ACCOUNTS

     The allowance for sales returns and doubtful accounts was $135,000 at
     December 31, 1997 and 1996.

     INVENTORY

     Inventory, consisting principally of products held for resale, is stated
     at the lower of cost or market, using the first-in, first-out method.
     The value presented in the accompanying financial statements is net of
     valuation allowances of $1,291,000 and $988,000 at December 31, 1997 and
     1996, respectively.

     DEPRECIATION AND AMORTIZATION

     Depreciation and amortization of property and equipment are computed
     principally on the accelerated and the straight-line methods using lives
     from 5 to 7 years for furniture, machinery and equipment and 31.5 years
     for building and building improvements.

     IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF

     The Company adopted the provisions of Statement of Financial Accounting
     Standards (SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
     ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, on January 1, 1996.
     This Statement requires that long-lived assets and certain identifiable
     intangibles be 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 such 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. Adoption of this
     Statement did not have a material impact on the Company's financial
     position, results of operations, or liquidity.

     STOCK OPTION PLAN

     Prior to January 1, 1996, the Company accounted for its stock option
     plan in accordance with the provisions of Accounting Principles Board
     ("APB") Opinion No.25, "Accounting for Stock Issued to Employees," and
     related interpretations. As such, compensation expense would be recorded
     on the date of grant only if the current market price of the underlying
     stock exceeded the exercise price. On January 1, 1996, the Company
     adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which
     permits entities to recognize as expense over the vesting period the
     fair value of all stock-based awards on the date of grant.
     Alternatively, SFAS No. 123 allows entities to continue to apply the
     provisions of APB Opinion No. 25 and provide pro forma net income and
     pro forma earnings per share disclosures 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.

     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 such temporary differences are expected to be recovered or
     settled. Under SFAS No. 109, 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.

                                       F-7
<PAGE>

     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.
     The fair value of long-term debt approximates its carrying value as the
     interest rates are comparable to rates currently offered to the Company
     for similar debt instruments with similar maturities. All financial
     instruments are held for purposes other than trading.

     NET EARNINGS PER SHARE

     On December 31, 1997, the Company adopted the provisions of SFAS No.
     128, "Earnings Per Share" which replaces the presentation of primary
     earnings per share with a presentation of basic earnings per share and
     replaces the presentation of fully diluted earnings per share with
     diluted earnings per share. Basic earnings per share is computed by
     dividing net income available to common shareholders by the
     weighted-average number of common shares outstanding during the period.
     Diluted earnings per share reflects the potential dilution that could
     occur if securities or other contracts to issue common stock were
     exercised or converted into common stock or resulted in the issuance of
     common stock that then shared in the earnings of the Company. Diluted
     earnings per share is computed similarly to fully diluted earnings per
     share pursuant to APB Opinion No. 15. Earnings per share for the years
     ended December 31, 1996 and 1995 have been restated to comply with SFAS
     No. 128.

     FOREIGN CURRENCY TRANSLATION

     The financial statements of the Company's division in Taiwan, which was
     established in 1997, are translated into United States dollars. 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. Gains and losses
     resulting from realized foreign currency transactions (transactions
     denominated in a currency other than the entities' functional currency)
     are included in operations. Such transactional gains and losses are
     immaterial to the consolidated financial statements for 1997.

     RECLASSIFICATIONS

     Certain amounts in the 1996 and 1995 financial statements have been
     reclassified to conform to the 1997 financial statement presentation.

     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 generally accepted accounting principles.
     Actual results could differ from these estimates.

(2)  PROPERTY AND EQUIPMENT

     Property and equipment, at cost, is summarized as follows:
<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                       ------------------------
                                                          1997          1996
                                                       ----------    ----------
     <S>                                               <C>           <C>
     Land                                              $  474,000    $  361,000
     Building and improvements                          1,479,000     1,139,000
     Furniture and equipment                              514,000       393,000
     Computer and test equipment                          570,000       309,000
                                                       ----------    ----------
                                                        3,037,000     2,202,000
     Less accumulated depreciation and amortization       728,000       542,000
                                                       ----------    ----------
                                                       $2,309,000    $1,660,000
                                                       ----------    ----------
                                                       ----------    ----------
</TABLE>
                                       F-8
<PAGE>

(3)  LONG-TERM DEBT

     Long-term debt at December 31, 1997 and 1996 consists of the following:

<TABLE>
<CAPTION>

                                                                                         1997            1996
                                                                                      -----------     -----------
     <S>                                                                              <C>             <C>
     Second trust deed loan payable in monthly installments of $4,390, bearing
      interest at the rate of 6.359% per annum, due December 1, 2013 and
      guaranteed by certain officers of the Company                                 $   494,000     $   510,000
   Revolving line of credit, providing maximum borrowings of $20 million and
      $15 million at December 31, 1997 and 1996, respectively. The line expires
      June 1999                                                                      12,950,000      10,000,000
   8% convertible subordinated debenture interest due May 18, 2001                    3,000,000       3,000,000
                                                                                    -----------     -----------
                                                                                     16,444,000      13,510,000
   Less current portion                                                              12,969,000      10,017,000
                                                                                    -----------     -----------
                                                                                    $ 3,475,000     $ 3,493,000
                                                                                    -----------     -----------
                                                                                    -----------     -----------
</TABLE>

     Minimum future payments of long-term debt are summarized as follows:

<TABLE>
<CAPTION>
           <S>                              <C>
           Year ending December 31:
             1998                           $    19,000
             1999                            12,970,000
             2000                                21,000
             2001                             3,022,000
             2002                                24,000
             Thereafter                         388,000
                                            -----------
                                            $16,444,000
                                            -----------
                                            -----------
</TABLE>

     UNSECURED REVOLVING LINE OF CREDIT

     On May 6, 1997, the Company replaced its $15 million revolving line of
     credit with a new revolving line of credit facility which provides the
     Company with up to $16 million for operating purposes and up to an
     additional $4 million for business acquisition purposes, which matures
     on June 2, 1999. The agreement governing these credit facilities
     contains covenants that require the Company to be in compliance with
     certain financial ratios. Borrowings on the line of credit are secured
     by substantially all of the Company's assets.

     Both the old and new revolving lines of credit contain security
     agreements which essentially cover all assets of the Company and bear
     interest at the bank's prime rate (8.5% at December 31, 1997 and 1996)
     or at the option of the Company, at LIBOR (weighted average 0f 5.65% and
     5.57% at December 31, 1997 and 1996 respectively) plus 1.375% after May 6,
     1997 and 1.5% prior to that date.

     CONVERTIBLE SUBORDINATED DEBENTURE

     In May 1996, the Company issued a Convertible Subordinated Debenture
     (the Note) for $3,000,000 with interest at 8% payable annually and the
     principal due May 2001. The Note is convertible into the Company's Class A
     Common Stock at the conversion price of $5.25 per share, the market
     price of the stock on the date of issuance. These securities have not
     been registered under the Securities Act of 1933, as amended (the Act),
     in the belief that the securities are exempt from such registration
     under Regulation S of the Act.

                                       F-9
<PAGE>

(4)  SHAREHOLDERS' EQUITY

     In March 1995, the Board of Directors authorized the filing of a
     registration statement for an initial public offering of the Company's
     common stock.  In connection with the initial public offering, the
     Company recorded a .891-for-1 reverse stock split of its common stock
     outstanding at December 31, 1994.  Accordingly, all references to the
     number of shares outstanding have been adjusted to give effect to the
     aforementioned reverse stock split.

     Additionally, the Company:

     -  Authorized the issuance of up to 5,000,000 shares of newly authorized
        preferred stock, par value $.001 per share. The terms of the shares
        are subject to the discretion of the Board of Directors.

     -  Authorized the issuance of up to 20,000,000 shares of newly
        authorized Class A common stock, par value $.001 per share. Each
        holder of Class A common stock is entitled to one vote for each share
        held.

     -  Authorized the issuance of 762,612 shares of newly created Class B
        common stock, par value $.001 per share. 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.

     -  Reclassified all of the shares of the Company's common stock
        outstanding at December 31, 1994 for an equal number of shares of
        Class A common stock.

     -  Authorized the exchange of all Class A common stock (762,612 shares)
        held by the Chief Executive Officer/Director for an equal number of
        shares of Class B common stock. This exchange was effected during
        1995.

     On April 19, 1995, the Company sold 2,530,000 shares of Class A common
     stock at $5.25 per share in connection with its initial public offering.
     The proceeds from this offering aggregated approximately $11.3 million,
     net of approximately $2 million of issuance costs, which proceeds were
     used to pay off the previous bank line of credit, to retire long-term
     debt, to expand inventory and for general corporate purposes.

     During 1997 the Company repurchased 487,113 shares of its Class A Common
     Stock on the open market for $1,549,000 in the aggregate and permanently
     retired such shares.

(5)  INCOME TAXES

     Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
                                             YEAR ENDED DECEMBER 31
                         ---------------------------------------------------------
                             1997                   1996                  1995
                         ------------           ------------          ------------
     <S>                 <C>                    <C>                   <C>
     Current:
         Federal         $  1,008,000           $  1,272,000          $  2,457,000
         State                316,000                392,000               620,000
                         ------------           ------------          ------------
                            1,324,000              1,664,000             3,077,000
     Deferred:
         Federal              (86,000)              (197,000)             (220,000)
         State                (18,000)               (43,000)              (50,000)
                         ------------           ------------          ------------
                             (104,000)              (240,000)             (270,000)
                         ------------           ------------          ------------
                         $  1,220,000           $  1,424,000          $  2,807,000
                         ------------           ------------          ------------
                         ------------           ------------          ------------
</TABLE>
     The actual income tax expense differs from the "expected" tax expense
     computed by applying the Federal corporate tax rate of 34% to earnings
     before income taxes as follows:

                                     F-10
<PAGE>

<TABLE>
<CAPTION>
                                                                                       YEAR ENDED DECEMBER 31
                                                                    -----------------------------------------------------------
                                                                         1997                    1996                   1995
                                                                    ------------             -----------           ------------
     <S>                                                            <C>                      <C>                   <C>
     "Expected" income tax expense                                  $  1,044,000             $ 1,218,000           $  2,418,000
     State tax expense, net of Federal benefit                           190,000                 220,000                376,000
     Other                                                               (14,000)                (14,000)                13,000
                                                                    ------------             -----------           ------------
                                                                    $  1,220,000             $ 1,424,000           $  2,807,000
                                                                    ------------             -----------           ------------
                                                                    ------------             -----------           ------------
</TABLE>

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

<TABLE>
<CAPTION>
                                                                               DECEMBER 31
                                                                  --------------------------------------
     DEFERRED TAX ASSETS:                                                1997                1996
                                                                  -----------------   ------------------
     <S>                                                          <C>                 <C>
     Depreciation                                                 $         -         $    14,000
     Inventory reserves                                               455,000             341,000
     Section 263a adjustment                                          150,000             142,000
     Allowances for bad debts and returns                              84,000              54,000
     Accrued expenses                                                  49,000              39,000
     Other                                                                  -              22,000
                                                                  -----------------   ------------------
     Total deferred tax assets                                        738,000             612,000
     Deferred tax liability - depreciation                            (22,000)                  -
                                                                  -----------------   ------------------
     Net deferred tax assets                                       $  716,000          $  612,000
                                                                  -----------------   ------------------
                                                                  -----------------   ------------------

</TABLE>

     Based upon the level of historical taxable earnings and projections of
     future taxable earnings over the periods in which the temporary
     differences are deductible, management has concluded that, as of
     December 31, 1997, it is more likely than not that the Company will
     realize the benefits of these deductible differences.


(6)  401(K) PROFIT SHARING PLAN


     In January 1995, the Company implemented a defined contribution 401(k)
     profit sharing plan pursuant to Section 401 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 provides for a matching contribution at the discretion of the
     Company which vests as defined by the plan. For the years ended December
     31, 1997, 1996 and 1995 employer matching contributions aggregated
     approximately $29,000, $30,000 and $24,000, respectively. The plan
     purchased 28,666 and 28,991 shares of the Company's common stock on the
     open market for cash consideration of approximately $97,000 and $135,000
     during the year ended December 31, 1997 and 1996, respectively.

                                     F-11
<PAGE>

(7)     STOCK OPTIONS AND WARRANTS

        In March 1995, the Company established the 1995 Stock Incentive Plan
        (the Plan) expiring in March, 2005. The Plan provides for the issuance
        of an aggregate of 440,000 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 may be
        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 may be 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 ratably over three years commencing one year from the
        date of grant and are subject to termination provisions as defined in
        the Plan. The Plan also provides 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
        such committee and each year thereafter. The exercise price of these
        options will be equal to the fair market value of the Company's Class A
        common stock at the date of grant.

        In November 1996, the Company gave each employee who held options issued
        during 1995 with exercise prices of $5.25 and $7.125 the right to
        receive, in place of such options, an amended option for half the shares
        covered by the original option but a with reduced exercise price of
        $2.25 (the market price on November 21, 1996).

        In connection with the Company's initial public offering, the Company
        issued warrants exercisable over a period of four years commencing April
        19, 1996 to purchase 220,000 shares of the Company's Class A common
        stock at a price of $6.30, which is 120% of the initial public offering
        price.

        In April 1995, the Company granted 6,600 stock appreciation rights to
        certain employees at an exercise price of $5.25. Compensation expense
        related to these rights was $3,800, $1,200 and $13,000 in 1997, 1996 and
        1995, respectively.

        The fair value of options, SAR's and warrants used to compute pro forma
        net income and earnings per share disclosures is the estimated present
        value at grant date using the Black-Scholes option-pricing model with
        the following weighted average assumptions for 1997, 1996 and 1995:
        Dividend yield of 2%; expected volatility of 40%; a risk free interest
        rate of approximately 6% and an expected holding period of five years.
        The incremental fair value of the modified options substituted for
        options issued during 1995, used to compute pro forma net income and
        earning per share disclosures was determined using the Black-Scholes
        option-pricing model with the following weighted average assumptions:
        dividend yield of 2%; expected volatility of 40%; a risk free interest
        rate of approximately 6%; and an expected holding period of 3.5 years,
        adjusted to reflect the remaining period to maturity of the modified
        options.

        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 SAR's and warrants. If the Company had elected
        to recognize compensation cost based on the fair value at the grant
        dates for awards under the Plan SAR's and warrants (including the
        modified awards), consistent with the method prescribed by SFAS No. 123,
        net earnings and earnings per share would have been changed to the pro
        forma amounts indicated below:
<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                                -----------------------
                                                        1997           1996          1995
                                                        ----           ----          ----
        <S>                          <C>             <C>            <C>           <C>
        Net earnings                 As reported     $1,850,000     $2,158,000    $4,304,000
                                     Pro forma       $1,482,000     $1,838,000    $3,302,000
        Diluted Earnings per share   As reported     $      .27     $      .31    $      .68

                                     Pro forma       $      .22     $      .26    $      .52
</TABLE>

                                        F-12
<PAGE>

        The disclosure of compensation cost under this pronouncement may not be
        representative of the effects on net earnings for future years. Stock
        option and SAR activity during the periods indicated is as follows:

<TABLE>
<CAPTION>

                                                                          WEIGHTED AVERAGE
                                                          NUMBER             EXERCISE
                                                        OF SHARES              PRICE
                                                       ------------       ----------------
<S>                                                    <C>                <C>

        Balance at December 31, 1994                            N/A                N/A
           Granted                                          345,600             $ 6.44
           Exercised                                              -                  -
           Forfeited                                        (16,300)              6.44
                                                       -------------         ----------
        Balance at December 31, 1995                        329,300               6.44
                                                       -------------         ----------
           Granted                                          162,050               2.34
           Exercised                                              -                  -
           Forfeited                                        (35,200)              6.44
           Canceled                                        (294,100)              6.44
                                                       -------------         ----------
        Balance at December 31, 1996                        162,050               2.34
                                                       -------------         ----------
           Granted                                          253,400               2.51
           Exercised                                         (4,834)              2.25
           Forfeited                                        (33,066)              2.50
           Canceled                                               -                  -
                                                       -------------         ----------
        Balance at December 31, 1997                        377,550              $2.44
                                                       -------------         ----------
                                                       -------------         ----------
</TABLE>

        The weighted average fair value of options granted in 1997, 1996 and
        1995 was $.94, $.76 and $3.15, respectively.

        At December 31, 1997, the range of exercise prices and weighted-average
        remaining contractual life of outstanding options was $2.25 to $3.25 and
        19 months, respectively.

        At December 31, 1997, 1996 and 1995, the number of options exercisable
        was 193,006, 49,017 and none, respectively, and weighted average
        exercise prices of those options were $2.36, $2.25 and $7.13,
        respectively.

(8)     NET EARNINGS PER SHARE

        On December 31, 1997, the Company adopted the provisions of SFAS
        No. 128, which requires the presentation of diluted and basic earnings
        per share (EPS). The following data show a reconciliation of the
        numerators and the denominators used in computing earnings per share and
        the weighted average number of shares of dilutive potential common
        stock.

<TABLE>
<CAPTION>
                                                                              YEAR ENDED DECEMBER 31,
                                                         -------------------------------------------------------------
                                                                  1997                  1996                    1995
                                                         ------------------    ------------------    -----------------
<S>                                                      <C>                   <C>                   <C>
        Net earnings available to common shareholders
             used in basic EPS                               $   1,850,000        $    2,158,000        $    4,304,000
                                                         ------------------    ------------------    -----------------
        Weighted average number of common shares
             used in basic EPS                                   6,643,975             6,929,953             6,297,453
                                                         ------------------    ------------------    -----------------
        Basic EPS                                                      .27                   .31                   .68
                                                         ------------------    ------------------    -----------------
        Effect of dilutive securities:
             Warrants                                                    -                     -                22,203
             Options                                                88,881                73,930                46,123
                                                         ------------------    ------------------    -----------------
        Weighted number of common shares and dilutive
             potential common shares used in diluted EPS         6,732,856             7,003,883             6,365,779
                                                         ------------------    ------------------    -----------------
                                                         ------------------    ------------------    -----------------
        Diluted  EPS                                         $         .27        $          .31        $          .68
                                                         ------------------    ------------------    -----------------
                                                         ------------------    ------------------    -----------------
</TABLE>

        Warrants on 220,000 shares of common stock were not included
        in computing diluted EPS for the years ended December 31, 1997, 1996
        and 1995 because their effects were antidilutive. Also, convertible
        subordinated debentures convertible into 571,429 shares of common
        stock were not included in computing diluted EPS for the years
        ended December 31, 1997 and 1996 because their effects were
        anti-dilutive.


                                     F-13

<PAGE>

 (9)    COMMITMENTS AND CONTINGENCIES

        The Company leases equipment under noncancelable operating leases
        expiring on various dates through 2000. In May 1996, the Company
        entered into a two year lease for additional warehouse space of
        approximately 30,000 square feet located in Santa Clarita, California
        which is now completely occupied by the Company. Rental expense for the
        years ended December 31, 1997, 1996 and 1995 aggregated $160,000,
        $112,000 and $46,000, respectively.

        Future minimum rental commitments under noncancelable operating leases
        are as follows:

<TABLE>
<CAPTION>
<S>                                                <C>
               Year ended December 31:
                 1998                                   $  157,000
                 1999                                       81,000
                 2000                                        1,000
                                                   ---------------------
                                                        $  239,000
                                                   ---------------------
                                                   ---------------------
</TABLE>


        At December 31, 1997 and 1996, the Company had approximately none and
        $300,000, respectively, in standby and commercial letters of credit
        outstanding under the revolving line of credit agreement with the bank
        (Note 3).


(10)    VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

        The following is the Company's schedule of activity in the valuation and
        qualifying accounts and reserves for the years ended December 31, 1997,
        1996 and 1995:

<TABLE>
<CAPTION>
                                      BALANCE AT    CHARGED TO                   BALANCE
                                      BEGINNING     COSTS AND                    AT END
                                       OF YEAR       EXPENSES     DEDUCTIONS     OF YEAR
                                      ----------   -----------   ------------  ----------
<S>                                   <C>          <C>           <C>           <C>
        Allowance for sales returns
           and doubtful accounts:
             1995                        70,000     1,394,000     1,326,000      138,000
             1996                       138,000     1,540,000     1,543,000      135,000
             1997                       135,000     1,169,000     1,169,000      135,000

        Inventory reserves:
             1995                       261,000       186,000             -      447,000
             1996                       447,000       541,000             -      988,000
             1997                       988,000       303,000             -    1,291,000

</TABLE>


                                      F-14

<PAGE>


ITEM 9.  CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURES


           None


                                   PART III



ITEM 10. DIRECTORS, AND EXECUTIVE OFFICERS OF THE REGISTRANT


           Information regarding directors and executive officers of
        the Company will appear in the Proxy Statement of the Annual Meeting of
        Shareholders under the caption "Election of Directors" and is
        incorporated herein by this reference. The Proxy Statement will be filed
        with the SEC within 120 days following December 31, 1997.


ITEM 11.  EXECUTIVE COMPENSATION


           Information regarding executive compensation will appear in
        the Proxy Statement for the Annual Meeting of Shareholders under the
        caption "Executive Compensation" and is incorporated herein by this
        reference.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
            MANAGEMENT


           Information regarding security ownership of certain
        beneficial owners and management will appear in the Proxy Statement for
        the Annual Meeting of Shareholders under the caption "Security Ownership
        of Certain Beneficial Owners and Management" and is incorporated herein
        by this reference.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


           Information regarding certain relationships and related
        transactions will appear in the Proxy Statement for the Annual Meeting
        of Shareholders under the caption "Certain Relationships and Related
        Transactions" and is incorporated herein by this reference.

                                   PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
           FORM 8-K


(a)   LIST THE FOLLOWING DOCUMENTS FILED AS PART OF THIS REPORT:

(1)   FINANCIAL STATEMENTS:

      Reference is made to the Financial Statements provided under Item 8 of
      this report.

(2)   FINANCIAL STATEMENT SCHEDULES:

      Reference is made to the Financial Data Schedule provided as Exhibit 27.


                                      22


<PAGE>

(3)     EXHIBITS:

        3.1   Articles of Incorporation of Taitron Components Incorporated
              (the Registrant).*

        3.2   Bylaws of the Registrant.*

        4.1   Specimen certificate evidencing Class A Common Stock of the
              Registrant.*

        4.2   Form of Underwriter's Warrant.*

       10.1   Form of Director and Officer Indemnification Agreement.*

       10.2   1995 Stock Incentive Plan.*

       10.3    Form of Employment Agreement, dated as of January 1, 1995, by and
               between the Registrant and Stewart Wang.*

       10.4    Loan and Security Agreement, dated May 5, 1994, between the
               Registrant and Union Bank.*

       10.5    Loan Agreement, dated October 15, 1993, by and between the
               Registrant and California Statewide Certified Development
               Corporation.*

       10.6    Wm Michaels Limited Regional Prototype Defined Contribution
               Plan and Trust

       10.7    Form of Sales Representative Agreement.*

       10.8    Loan Agreement, dated June 16, 1995, between Registrant and
               Union Bank.**

       10.9    Convertible Subordinated Note Agreement, dated May 18, 1996, by
               and between the Registrant and Tenrich Holdings.***

       10.10   Lease Agreement, dated May 29, 1996, by and between Scott
               Valencia Property Company as Lessor and Taitron Components
               Incorporated, as Lessee for property located at 27827 Ave. Scott,
               Santa Clarita, California 91355.***

       10.11   Amended Loan Agreement and Note, dated January 2, 1997, between
               Registrant and Union Bank. Amended Loan Agreement and Note, dated
               March 13, 1997, between Registrant and Union Bank. *****

       10.12   Business Loan Agreement and Addendum, dated May 6, 1997, between
               the Registrant and Comerica Bank - California.  ****

       10.13   Master Revolving Note and Addendum, dated May 6, 1997, between
               the Registrant and Comerica Bank - California.  ****

       10.14   Security Agreement, dated May 6, 1997, between the Registrant
               and Comerica Bank - California. ****

       23.1    Consent of KPMG Peat Marwick.

       24.1    Power of Attorney (see page 24 of this Annual Report on Form
               10-K).

       27      Financial Data Schedule
       ------------------------------------------------------------------------

                                        23

<PAGE>


        *     Incorporation by reference from Taitron Components Incorporated
              Registration Statement on Form SB-2, Registration No. 33-90294-LA.

        **    Incorporation by reference from Taitron Components Incorporated
              Form 10-KSB for the Fiscal year ended December 31, 1995.

        ***   Incorporated by reference from Taitron Components Incorporated
              Form 10-QSB for the quarter ended June 30, 1996.

        ****  Incorporated by reference from Taitron Components Incorporated
              Form 10-QSB for the quarter ended June 30, 1997.

       *****  Incorporated by reference from Taitron Components Incorporated
              Form 10-KSB for the fiscal year ended December 31, 1996.

(b)  REPORTS ON FORM 8-K:

              None


                                      24
<PAGE>


                                   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
                                            (Registrant)

                                            By   /s/ Stewart Wang
                                               ------------------------------
                                            Stewart Wang
                                            Its:  Chief Executive Officer

                                            Date:        March 27, 1998
                                                 ----------------------------


                                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.

<TABLE>
<CAPTION>

      Signature                      Title                                 Date
      ---------                      -----                                 ----
<S>                               <C>                                 <C>
/s/ Johnson Ku                    Chairman of the Board               March 27, 1998
---------------------------
Johnson Ku


/s/ Stewart Wang                  Chief Executive Officer, President  March 27, 1998
---------------------------       and Director
Stewart Wang                      (Principal Executive Officer)


/s/ David M. Batt                 Chief Financial Officer             March 27, 1998
---------------------------       and Secretary
David M. Batt                     (Principal Financial and Accounting
                                  Officer)

/s/ Richard Chiang                Director                            March 27, 1998
---------------------------
Richard Chiang


/s/ Winston Gu                    Director                            March 27, 1998
---------------------------
Winston Gu


/s/ Felix Sung                    Director                            March 27, 1998
---------------------------
Felix Sung

</TABLE>

                                      25