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

                                   FORM 10-KSB

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

                   For the fiscal year ended December 31, 2006

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

                         Commission File Number 0-25844

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

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

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

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

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act: Class A common
                                                               stock, par value
                                                               $.001 per share
                                                               (Title of Class)

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

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|

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

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

Registrant's revenues for its most recent fiscal year: $9,559,000

The aggregate market value of the voting common equity held by non-affiliates of
the registrant as of March 1, 2007 was approximately $9.4 million based upon the
closing price of $2.51 per share.

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

                 Class                              Outstanding on March 1, 2007
-------------------------------------               ----------------------------
Class A common stock, $.001 par value                         4,765,144
Class B common stock, $.001 par value                           762,612

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

                       DOCUMENTS INCORPORATED BY REFERENCE

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


                                      -1-
<PAGE>

FORWARD-LOOKING STATEMENTS

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

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

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS.

General

      We are a national  distributor  of brand name  electronic  components  and
supplier of original designed and manufactured (ODM) electronic components ("ODM
Components"),  with our product offerings  ranging from discrete  semiconductors
through small electronic  devices.  Prior to 2003, we were primarily  focused on
the  distribution  of  transistors,  diodes and other  discrete  semiconductors,
optoelectronic   devices  and  passive   components.   Commencing  in  2003,  we
implemented a strategy to expand our business into  value-added  engineering and
turn-key   services,   focusing  on  providing   existing  contract   electronic
manufacturers  (CEMs) and original equipment  manufacturers (OEMs) with original
design and manufacturing  (ODM) services for their multi-year turn-key projects.
Our  ODM  services,   and  the   distribution   of  products   manufactured   to
specifications  developed  as a  result  of our ODM  services  ("ODM  Products")
accounted for 25% of our revenue during our fiscal year ended December 31, 2006.

      We have developed a reputation for  maintaining  in-depth  inventories and
knowledge of the products in our markets. Our "superstore"  strategy consists of
carrying a large  quantity  and variety of  components  in inventory to meet the
rapid  delivery  requirements  of our  customers.  To  differentiate  from other
distributors,  we also offer ODM Components,  which are manufactured  electronic
components based on our own engineering  specifications  under the private label
brands "TCI" or "PSD" through  outsourcing.  At December 31, 2006, our inventory
consisted  of over  14,000  different  products  manufactured  by more  than 100
different suppliers.  In 2006, we offered approximately 45 that are ODM Products
to specifications developed as a result of our ODM services. We are incorporated
in California,  and were originally formed in 1989. We maintain a majority-owned
subsidiary  in Mexico and three  divisions in each of Taiwan,  Brazil and China.
Our  Mexico  and  Brazil  locations  are for  regional  distribution,  sales and
marketing  purposes  and our  Taiwan  and  China  locations  are for  supporting
inventory  sourcing and purchases and  coordinating  the  manufacture of our ODM
Components and ODM Products.  Our China location also serves as the  engineering
center  responsible  for making  component  datasheets and test  specifications,
arranging  pre-production  and mass production at our outsourced  manufacturers,
preparing samples, monitoring quality of shipments,  performing failure analysis
reports, and designing circuits with partners for ODM projects.

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

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


                                      -2-
<PAGE>

      We continue to be  impacted by the severe  decline in demand for  discrete
semiconductors  from the U.S. market,  which began in late 2000. As a result, we
have  experienced  declining  sales is such  components  since  early  2001.  In
response to this declining demand, we placed emphasis on increasing our sales to
existing customers through further expansion of the number of different types of
discrete  components  and other  integrated  circuits  in our  inventory  and by
attracting  additional  contract  electronic   manufacturers  (CEMs),   original
equipment   manufacturers  (OEMs)  and  electronics  distributor  customers.  In
addition,  over  the  last  three  years  we  have  developed  our  ODM  service
capabilities and added products  developed through  partnership  agreements with
offshore  solution  providers  (OEMs and CEMs).  We also plan to begin  offering
commodity  integrated  circuits  (ICs) as an extension  of our current  discrete
semiconductor lines in 2007.

Discrete Semiconductors and Commodity Integrated Circuits

      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 several million  transistors and other elements in a single package,  and
usually are designed to perform  complex  tasks.  However,  the commodity ICs, a
combination  of a limited  number of  discrete  and  passive  components  in one
package,  are far less sophisticated than other integrated  circuits and perform
simple tasks in circuits similar to discrete components.

      While other integrated circuits may garner more public exposure,  discrete
semiconductors  and  commodity  ICs, the ancestral  root of today's  complicated
integrated  circuits,  have been a core element of electric  equipment  for more
than 30  years.  Discrete  semiconductors  and  commodity  ICs are found in most
consumer,  computer,  communication,   automotive,   instrumentation,   medical,
industrial and military electrical and electronic applications.

      Discrete semiconductors and commodity ICs represent only a small subset of
the   different   types  of   semiconductors   currently   available.   Discrete
semiconductors  and commodity ICs 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 other, more complex, integrated circuits.

Optoelectronic Devices and Passive Components

      In addition to discrete  semiconductors,  we offer optoelectronic  devices
such as LED's,  infrared sensors and opto couplers,  along with passive devices,
such as resistors,  capacitors  and inductors  which are  electronic  components
manufactured with  non-semiconductor  materials.  We market these optoelectronic
devices  and  passive  components  through the same  channels,  as the  discrete
semiconductors.  Sales of these  optoelectronic  devices and passive  components
were 41% and 45% of our total  sales for the years ended  December  31, 2006 and
2005, respectively.  During 2006, we purchased $2,553,000 of inventory for these
components, to facilitate our market for these products.

Electronics Distribution Channels

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

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

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


                                      -3-
<PAGE>

ODM Service Industry

      ODM service  providers have experienced  rapid change and growth over most
of  the  past  decade  as  an  increasing   number  of  OEMs  outsourced   their
manufacturing requirements.  In mid-2001, the domestic market of this industry's
revenue  declined  as a  result  of  significant  cut  backs  in its  customers'
production  requirements,  which was consistent with the overall global economic
downturn.  Nonetheless,  OEMs have  continued to turn to outsourcing in order to
reduce  product cost;  achieve  accelerated  time-to-market  and  time-to-volume
production;  access  advanced  design and  manufacturing  technologies;  improve
inventory  management and purchasing power; and reduce their capital  investment
in  manufacturing  resources.  This  enables  OEMs to  concentrate  on what they
believe to be their core  strengths,  such as new  product  definition,  design,
marketing  and sales.  We believe  further  growth  opportunities  exist for ODM
providers to penetrate the  worldwide  electronics.  By designing  private brand
products  to ODM  customers  in the US,  we are able to expand  export  sales to
overseas CEM customers.

"Superstore" Strategy

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

      Reliable  One Stop  Shopping:  Large  Inventory.  We believe that our most
important  competitive  advantage  is the depth of our  inventory.  Unlike other
distributors who carry only the  best-selling  discrete  components,  we offer a
large selection of different name-brand discrete semiconductors,  optoelectronic
devices and passive  components.  Because of its large  inventory,  we often can
fill a significant  portion,  or all, of a customer's order from stock. Also, we
have  been  able to fill most of our  customers'  orders  within 24 hours and in
compliance  with  their  requested  delivery  schedules.  However,  we are  also
focusing on lowering our inventory levels to balance the weakened demand we have
experienced  for our  products  over  the past  several  years.  With  immediate
availability  of a wide selection of products and brands,  we believe that sales
may grow if the market rebounds. See Part II, Item 6 - "Management's  Discussion
and Analysis - Liquidity and Capital Resources".

      Private  Brands and Custom Made Parts.  To assure the best  quality of the
product with the most competitive  price, we choose the best product lines among
existing  suppliers and market it under the "TCI" or "PSD" brand.  These private
label  products,   or  ODM  Components,   are  manufactured   according  to  our
specifications  under a special contract  agreement with  outsourcing  partners.
Custom  made  parts  are  also   available   by  following   either   customer's
specification  or specially made engineering  specification.  We believe the ODM
Components business is more stable and profitable than the traditional commodity
type business. The export sales are driven primarily from private brand products
designed in the US by OEMs who later  outsource the production to their overseas
CEMs.

      Support Small Distributors,  CEMs and OEMs. We focus our marketing efforts
on small contract  manufacturers,  distributors,  CEMs and OEMs who generally do
not have direct access to suppliers because of their limited  purchasing volumes
and,  therefore,   usually  have  to  purchase  their  requirements  from  large
distributors, often with substantial markups.

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

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

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


                                      -4-
<PAGE>

      Relationships   with  Suppliers.   Stock  rotation  and  price  protection
privileges are beneficial to  distributors  because they enable  distributors to
reduce inventory cost or rotate inventory they are unable to sell, thus reducing
the risks and costs  associated  with  over-purchasing  or  obsolescence.  Price
protection  mitigates  the  risks  of  falling  prices  of  components  held  in
inventory.  We believe  that we have been able to gain a  competitive  advantage
over other distributors by sometimes foregoing or not demanding these privileges
(and thus assuming the risk for over-purchasing,  product obsolescence and price
fluctuations)  in  order  to  obtain  better  pricing.  See  Part  II,  Item 6 -
"Management's Discussion and Analysis - Cautionary Statements and Risk Factors -
Need  to  Maintain  Large  Inventory;   Price   Fluctuations"  and  "Business  -
Suppliers".

      Third Party Warehouse. Paying a percentage of the transaction, some of our
principals  use our  warehouse  to hold  their  inventory  and to ship to  their
customers  in North  America.  Our  ability of  tracking  the  products  and the
convenience of the real-time web order entry make the third party warehouse more
attractive to many  component  manufacturers  overseas.  We believe this service
will enhance our market position as the discrete components superstore.

      Vendor managed Inventory (VMI). As a part of our WMS system,  VMI not only
allocates the forecasted  inventory by the contract but also guarantees the same
day shipment for customers who frequently  change their shipping schedule driven
by MRP demand.  The VMI system is fully operational from the web by VMI managers
who could either be our sales representatives, customers or employees.

Service Strategy and ODM Products

      We have historically  offered our customers a limited range of value-added
services  such as cutting and forming,  quality  monitoring  and product  source
tracing.  Beginning in 2003, we significantly  expanded our value-added services
by offering our existing OEM and CEM  customers  outsourced  product  design and
manufacturing  assembly  services.  Our ODM (original design and  manufacturing)
services  have grown since 2003 and sales of our ODM products and services  were
$2,354,000 and $985,000 in 2006 and 2005, respectively.  In order to support our
ODM service offerings, we opened an engineering design center in Shanghai, China
in 2005.  Strategic allies such as Princeton Technology  Corporation,  a company
controlled by one of our directors,  and Teamforce Co. Ltd.,  both  Taiwan-based
companies,  assist us with this program. We plan to joint venture with Teamforce
Co. Ltd. to set up an ODM product design and manufacturing plant in China by the
end of 2007. As a franchise  distributor of Princeton Technology  Corporation in
the US, we receive  engineering support using their products in our ODM projects
in order to lower costs and to shorten the design cycle. Our goal is to have 50%
component sales and 50% ODM service and products sales by the end of 2010.

      Offering  application  engineering  service to current customers,  we were
often involved in reviewing their bill of materials (BOMs) and circuit diagrams.
Based  upon their  credit  history,  type of the  products,  production  volume,
profitability  of the  industry  and  circuit  schematics,  we  offer  different
solutions for quality improvement, additional functions and cost savings through
the re-design processes such as component  replacement,  digital circuit instead
of analog circuit,  microprocessor instead of logic circuit,  integrated circuit
instead  of  discrete  components.  Our  preference  is to  target  at  low  but
increasing volume, high margin, stable demand, profitable and specialty products
and  financially  stable  customers who know how to market their  products.  Our
strengths are microprocessor  programming,  power supply, power management,  LED
message  sign,  RF  transmission  and  receiving,  encoder and  decoder,  remote
controller, DC motor control and power amplifier. In many cases, we were able to
take the  advantage of our  component  distribution  capability by using current
stock to reduce lead time and  choosing  the low cost  components  we  currently
sell. We depend on our outsourcing  partners in mold design,  plastic injection,
metal stamping, wire hardness and final assembly. We ask between 15% to 30% down
payment before  accepting a purchasing  order and offer  customers 30 to 60 days
payment terms. All purchasing  orders must have a firm delivery schedule under a
non-cancelable and non-returnable (NCNR) agreement.  To reduce the manufacturing
and handling cost, we arrange  production of the same model once a year and keep
product in our warehouse to be released according to the predetermined schedule.

      We utilize  our  existing  inventory  management  system  and  established
distribution  relationships to facilitate the  manufacturing and distribution of
such  products.  Our ODM  Service  complements  our  "Superstore"  strategy  and
facilitates  additional utilization of electronic components for the manufacture
of our ODM Products.

Products

      Electronic Components - Discrete

      We market a wide variety of discrete semiconductors,  including rectifiers
(or power  diodes),  diodes,  transistors,  optoelectronic  devices  and passive
components, to other electronic distributors,  contract electronic manufacturers
and original equipment manufacturers, who incorporate them in their products. At
December 31, 2006,  our inventory  consisted of over


                                      -5-
<PAGE>

14,000 different products manufactured by more than 100 different suppliers.

      In  2006,  we  purchased   electronic  component  products  from  over  40
suppliers,  including Everlight Electronics Co, Ltd., Samsung  Electro-Mechanics
Co., Vishay Americas Inc. and Zowie Technology Corporation.  See Part II, Item 6
- "Management's Discussion and Analysis - Cautionary Statements and Risk Factors
- Suppliers", "Business - Customers" and "Business - Suppliers".

      Discrete   semiconductors   are  categorized  based  on  various  factors,
including current handling capacity,  construction,  packaging,  fabrication and
function. The products we sell include:

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

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

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

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

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

      The products distributed by us are mature products that are used in a wide
range of commercial and industrial  products and  industries.  We believe that a
majority of the products we distribute are used in applications where integrated
circuits are not viable  alternatives.  However,  we cannot assure you that over
time the functions for which our discrete  electronic  components  are used will
not eventually be displaced by integrated circuits.

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

      Our  distribution  of  electronic  components  originates  from our 50,000
square-foot facility located in Valencia,  California. We utilize a computerized
inventory  control/tracking  system which enables us to quickly access inventory
levels and trace product shipments. See Item 2 - "Description of Property."

      ODM Products

      Most of the ODM  Products  are custom  made and are  marketed  in specific
industries such as wild animal feeders, timers for DC motor, public street light
controllers,  battery  testers,  universal  remote  control  devices and battery
chargers.

      Our  distribution of ODM Products  originates from our 50,000  square-foot
facility located in Valencia,  California.  We utilize a computerized  inventory
control/tracking  system which enables us to quickly access inventory levels and
trace product shipments. See Item 2 - "Description of Property."

Customers

      We  market  our  products  to  distributors,  CEMs and  OEMs,  and our ODM
Services to CEMs and OEMs.  We believe that our  strategic  purchasing  policies
allow  us to  provide  smaller  and  medium-sized  distributors,  CEMs  and OEMs
competitive


                                      -6-
<PAGE>

prices on discrete  electronic  components while  maintaining an adequate profit
margin.  As a rule,  we do not impose  minimum order  limitations,  which enable
customers  to avoid the cost of  carrying  large  inventories.  See  "Business -
Strategy."

      During 2006, we distributed its discrete electronic  component products to
approximately  680 customers.  During the year ended December 31, 2006 and 2005,
we had one customer  accounting  for 22% and 8% of our net sales,  respectively.
Other than this  customer,  for the years ended  December 31, 2006 and 2005,  no
other customer accounted for more than 4.2% and 5.4%,  respectively,  of our net
sales.

      In 2006,  sales of brand name  electronic  component  products and our ODM
Components together represented  approximately 75% of our net sales, while sales
of our ODM Products represented the remaining 25% of our net sales. Distributors
represented  approximately  41% and  both  CEMs and  OEMs  together  represented
approximately  40% of our  net  sales  of  electronic  component  products.  The
remaining 19% of our electronic component sales were made to other exporters and
overseas customers.

      We historically have not required our distributor customers to provide any
point of sale reporting and therefore we do not know the different industries in
which its products are sold by our distributor customers.  However, based on our
sales to CEMs and OEMs, we believe that no any single  industry  accounted for a
majority of the applications of our discrete electronic  component products sold
in 2006 or 2005.

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

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

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

Sales and Marketing Channels

      As of March 1, 2007,  our sales and marketing  department  consisted of 11
employees.  We have  centralized our sales order processing and customer service
department into our headquarters at Valencia,  California.  However, we retained
outside sales account managers in the states of Massachusetts  and Georgia.  Our
inside sales and customer  service  departments  are divided into regional sales
territories  throughout  North America.  The outside sales account  managers are
also  responsible  for developing  new CEM and OEM accounts,  as well as working
locally with our independent sales representatives and preferred distributors.

      We also supply products to national  distributors who share our franchised
lines. These national distributors usually have many office locations throughout
the United States and are larger than us. We serve the national  distributors by
providing  easy access to discrete  products  that they choose not to stock,  as
well as  supporting  their  needs in  inventory  shortage  situations.  Sales to
national distributors were $24,000 in 2006 and $51,000 in 2005.

      We have sales  channels into Central  America  through our  majority-owned
subsidiary  in Mexico City,  Mexico.  Central  American  sales were $842,000 and
$625,000 in 2006 and 2005, respectively.

      We have sales  channels into Asia through our branch  offices in Shanghai,
China and Taipei, Taiwan. Sales to Asian customers were $362,000 and $439,000 in
2006 and 2005, respectively.

      We also have sales  channels into South America  through our branch office
in Sao Paulo,  Brazil.  South  American sales were $422,000 and $351,000 in 2006
and 2005, respectively.

      Independent  sales  representatives  have  played  an  important  role  in
developing  our client base,  especially  with  respect to OEMs.  Many OEMs want
their  suppliers to have a local presence and our network of  independent  sales
representatives is responsive to those needs.  Independent sales representatives
are primarily responsible for face-to-face meetings with our


                                      -7-
<PAGE>

customers,  and for developing new customers.  Independent sales representatives
are each given  responsibility for a specific geographic  territory.  Typically,
sales  representatives  are only  compensated  for sales made to CEMs,  OEMs and
preferred   distributors.   We  believe  that  this  commission  policy  directs
independent sales  representatives'  attention to those end users with potential
to increase market share. Along with our independent sales  representatives,  we
jointly  advertise  and  participate  in trade shows.  We utilized 8 independent
sales representatives during 2006.

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

Suppliers

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

      In order to facilitate good relationships with our suppliers, we typically
will carry a complete line of each supplier's discrete products. We also support
our  suppliers  by  increasing   their   visibility   through   advertising  and
participation   in  regional  and  national  trade  shows.  We  generally  order
components far in advance, helping suppliers plan their production.  Outstanding
commitments  to  purchase  inventory  from  suppliers  as of March 1,  2007 were
approximately  $1,300,000.  In addition,  we have  distribution  agreements with
certain suppliers which provide  stock-rotation,  price protection and stock buy
back  terms.  See Part II,  Item 6 -  "Management's  Discussion  and  Analysis -
Cautionary Statements and Risk Factors - Need to Maintain Large Inventory; Price
Fluctuations" and "Business - Strategy".

      In  2006,  we  purchased  components  from  over 42  different  suppliers,
including  Samsung   Electro-Mechanics  Co.,  Everlight  Electronics  Co,  Ltd.,
Princeton  Technology,  Vishay Americas Inc. and Zowie  Technology  Corporation.
While we are continually  attempting to build  relationships  with suppliers and
from time to time add new suppliers in an attempt to provide our customers  with
a better  product  mix,  the  possibility  exists that our  relationship  with a
supplier may be terminated.  See Part II, Item 6 - "Management's  Discussion and
Analysis  -  Cautionary   Statements  and  Risk  Factors  -  Relationship   with
Suppliers".

      For the year ended December 31, 2006,  the following name brands,  Samsung
Electro-Mechanics Co., Princeton Technology,  Everlight Electronics Co, Ltd. and
Vishay Americas Inc.  accounted for  approximately  18% of our net purchases for
name brand distributed components. However, we do not regard any one supplier as
essential  to our  operations,  since  equivalent  replacements  for most of the
products we market are either  available from one or more of our other suppliers
or are available  from various other sources at competitive  prices.  We believe
that,  even  if we lose a  direct  relationship  with a  supplier,  there  exist
alternative  sources  for  another  supplier's  products.  See Part II, Item 6 -
"Management's Discussion and Analysis - Cautionary Statements and Risk Factors -
Relationship with Suppliers."

      In  connection  with our ODM services,  we have built special  partnership
agreements  with few  selected  system  integration  companies  in China.  These
agreements  ensure the quality of the  products  and services and also provide a
warranty on the finished  products.  Most of the projects involve multiple years
of  cooperation  among  components  suppliers,  overseas  partners  and  the end
customers in the US, and therefore,  increase business  stability and reduce the
financial risk of excess inventory.

Competition

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


                                      -8-
<PAGE>

      The ODM services we provide are available from many independent sources as
well as from the in-house  manufacturing  capabilities  of current and potential
customers.  Our  competitors  may be more  established  in the industry and have
substantially greater financial,  manufacturing,  or marketing resources than we
do. We believe that the principal  competitive  factors in our targeted  markets
are engineering capabilities,  product quality, flexibility, cost and timeliness
in responding to design and schedule  changes,  reliability  in meeting  product
delivery  schedules,   pricing,   technological  sophistication  and  geographic
location.  In addition,  in recent years,  original  design  manufacturers  that
provide design and manufacturing  services to OEMs have significantly  increased
their  share  of  outsourced  manufacturing  services  provided  to  OEMs in the
consumer  electronic  product market.  Competition from ODMs may increase if our
business in these markets grows or if ODMs expand further into these markets.

Management Information Systems

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

Warehouse Management System

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

Foreign Trade Regulation

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

      Sales to Asian customers were 3.8% and 5.2% of our total sales in 2006 and
2005, respectively.

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

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

Employees

      At March 1, 2007, we had 31 employees,  all of whom are employed on a full
time  basis.  None of our  employees  are  covered  by a  collective  bargaining
agreement and we consider our relations with employees to be good.


                                      -9-
<PAGE>

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

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

ITEM 2. DESCRIPTION OF PROPERTY.

      We own our headquarters and main distribution facility which is located in
approximately  50,000  square  feet at 28040 West  Harrison  Parkway,  Valencia,
California.  We believe this facility is adequately covered by insurance (except
earthquake coverage).  We also own 15,000 square feet of office and distribution
space through our  subsidiary in Mexico and 2,500 square feet of office space in
Taipei,  Taiwan  (currently  leased to an unrelated  tenant).  We believe  these
existing facilities are adequate for the foreseeable future and have no plans to
renovate or expand them.

      On September  21, 2006,  we entered into a real estate  purchase  contract
related to the  acquisition of  approximately  4,500 square feet of office space
(consisting  of 2 separate  units on the same floor) in  Shanghai,  China with a
total purchase price of $1,230,000. The overall office building project is under
construction  and is estimated to be completed  and ready for  occupancy by June
2007.  This  investment  will be used as rental property for lease to others and
for the Company's  project  design and  engineering  center.  Currently,  we are
leasing  1,400 square feet of other  office space in Shanghai,  China on monthly
lease terms that will be terminated  when we move into the new office space upon
ready for occupancy.

      In  addition,  we lease  350  square  feet of  office  space for sales and
marketing functions in Brazil, expiring annually each year in May.

ITEM 3. LEGAL PROCEEDINGS.

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

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

      None.

                                     PART II

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

Market Information

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

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

      Year Ended December 31, 2006:
      First Quarter                                          $2.49       $1.75
      Second Quarter                                          2.50        1.86
      Third Quarter                                           2.13        1.80
      Fourth Quarter                                          2.50        1.86

      Year Ended December 31, 2007:


                                      -10-
<PAGE>

      First Quarter (through March 1, 2007)                  $3.19       $2.10

      On March 1,  2007,  the last  sale  price of the  Class A common  stock as
reported by Nasdaq was $2.51 per share.

Holders

      As of March 1,  2007,  there  were 41  registered  holders  of our Class A
common stock (not including  those holders whose shares of common stock are held
in street name) and one holder of our Class B common stock.

Dividends and Dividend Policy

      On January 10, 2007 we declared an annual cash dividend of $0.10 per share
of Class A Common Stock and Class B Common  Stock,  paid on January 31, 2007, to
shareholders  of  record at the close of  business  on  January  22,  2007.  The
dividend  was  declared in  connection  with our decision to establish an annual
cash dividend of up to $0.10 per share on Class A and Class B Common Stock for a
period of five years.  The payment of future cash dividends  under the policy is
subject to the  continuing  determination  that the  policy  remains in the best
interest of our  shareholders  and complies with laws and any  agreements we may
enter into  applicable to the  declaration  and payment of cash  dividends.  The
maintenance of the dividend policy will depend on factors that we deem relevant,
including our cash earnings,  financial  condition and cash  requirements in any
given year. Our ability to declare  dividends  could be affected by a variety of
factors affecting cash flow, including required capital expenditures,  increased
or  unanticipated  expenses,  additional  borrowings  and  future  issuances  of
securities.  See "Management's  Discussion and Analysis - Results of Operations;
Liquidity and Capital Resources."

Recent Sales of Unregistered Securities

      We have not issued or sold any of our  securities  during fiscal 2006 that
were not registered under the Securities Act of 1933.

Repurchase of Equity Securities

      We have not repurchased any shares during fiscal 2006 and through March 1,
2007.

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

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

Critical Accounting Policies and Estimates

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

      Revenue  Recognition  - We recognize  revenue when we have  evidence of an
arrangement,  a  determinable  fee,  and when  collection  is  considered  to be
probable  and  products  are  delivered,   This  occurs  upon  shipment  of  the
merchandise,  which is when legal  transfer of title occurs.  Reserves for sales
allowances and customer returns are established based upon historical experience
and our estimates of future returns.  Sales returns for the years ended December
31, 2006 and 2005 aggregated $131,000 and $90,000,  respectively.  The allowance
for sales returns and doubtful accounts at December 31, 2006 aggregated $76,000.
We review the actual sales returns and bad debts for our customers and establish
an estimate of future returns and allowance for doubtful accounts.


                                      -11-
<PAGE>

      Inventory - Inventory, consisting principally of products held for resale,
is  recorded  at the lower of cost  (determined  using the  first  in-first  out
method) or estimated  market value.  We had inventory  balances in the amount of
$15,693,000 at December 31, 2006, which is presented net of valuation allowances
of  $1,154,000.   We  evaluate   inventories  to  identify  excess,   high-cost,
slow-moving or other factors  rendering  inventories as  unmarketable  at normal
profit margins.  Due to the large number of  transactions  and the complexity of
managing and maintaining a large inventory of product  offerings,  estimates are
made regarding adjustments to the cost of inventories.  If our assumptions about
future  demand  change,  or market  conditions  are less  favorable  than  those
projected,  additional  write-downs of inventories may be required. In any case,
actual amounts could be different from those estimated.

      Our worldwide operations are subject to local laws and regulations. As
such, of particular interest is the European Union ("EU") directive relating to
the Restriction of Certain Hazardous Substance ("RoHS"). On July 1, 2006, this
directive restricted the distribution of products within the EU containing
certain substances, including lead. At the present time, much of our inventory
contains substances prohibited by the RoHS directive. Further, many of our
suppliers are not yet supplying RoHS compliant products. The legislation is
effective and some of our inventory has become obsolete. Management has
estimated the impact of the legislation and have written down or reserved for
related inventories based on amounts expected to be realized given all available
current information. Actual amounts realized from the ultimate disposition of
related inventories could be different from those estimated.

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

$721,000 allowance against our net deferred tax assets.

      Recent Accounting Policies

      In March 2006, the Financial  Accounting  Standards  Board ("FASB") issued
Statement of Financial  Accounting  Standards  ("SFAS") No.156,  "Accounting for
Servicing of Financial  Assets,"  ("SFAS No. 156"),  which amends SFAS No. 140,"
Accounting for Transfers and Servicing of Financial  Assets and  Extinguishments
of  Liabilities."  SFAS No.  156  permits  an  entity  to  choose  either of the
following subsequent measurement methods for each class of separately recognized
servicing assets and servicing liabilities:  (1) Amortization Method or (2) Fair
Value  Measurement  Method.  SFAS No. 156 is effective as of the beginning of an
entity's  first fiscal year that begins after  September  15, 2006 and we do not
expect that the  pronouncement  will have a significant  impact on our financial
statements.

      In  June  2006,  the  FASB  issued  SFAS  Board   Interpretation  No.  48,
"Accounting  for  Uncertainty  in  Income  Taxes  - an  Interpretation  of  FASB
statement No. 109" ("FIN 48"), which clarifies the accounting for uncertainty in
income taxes  recognized in an enterprise's  financial  statements in accordance
with FASB No. 109. The  interpretation  prescribes a  recognition  threshold and
measurement attribute for the financial statement recognition and measurement of
a  tax  position  taken  or  expected  to  be  taken  in  a  tax  return.   This
interpretation also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition. FIN 48
is  effective  for fiscal  years  beginning  after  December  15,  2006.  We are
currently reviewing the effect, if any, that this new pronouncement will have on
our financial statements.

      In   September   2006,   the  FASB  issued  SFAS  No.  157,   "Fair  Value
Measurements."  This statement  defines fair value,  establishes a framework for
measuring fair value in generally accepted  accounting  principles,  and expands
disclosure  about fair value  measurements.  This statement does not require any
new  fair  value  measurements.   This  statement  is  effective  for  financial
statements  issued for fiscal years  beginning  after  November  15,  2007,  and
interim  periods  within those fiscal  years.  We are  currently  reviewing  the
effect,  if  any,  that  this  new  pronouncement  will  have  on our  financial
statements.

      In September  2006, the FASB issued SFAS No. 158,  "Employers'  Accounting
for Defined  Benefit  Pension and Other  Postretirement  Plans - an amendment of
FASB Statements No. 87, 88, 106 and 123(R)." This statement  improves  financial
reporting by requiring an employer to recognize the  overfunded  or  underfunded
status of a defined  benefit  postretirement  plan (other than a  multi-employer
plan) as an asset or  liability in its  statement  of financial  position and to
recognize  changes in that funded  status in the year in which the changes occur
through comprehensive income of a business entity or changes in unrestricted net
assets for a not-for-profit organization.  We do not expect the adoption of this
pronouncement to have a material impact on our financial statements.


                                      -12-
<PAGE>

Overview

      We distribute discrete semiconductors,  optoelectronic devices and passive
components to other electronic distributors, CEMs and OEMs, who incorporate them
in their products and supply ODM products for our customer's multi-year turn-key
projects.

      We continue to be  impacted by the severe  decline in demand for  discrete
semiconductors  from the U.S. market,  which began in late 2000. As a result, we
have  experienced  declining  sales is such  components  since  early  2001.  In
response to this declining demand, we placed emphasis on increasing our sales to
existing customers through further expansion of the number of different types of
discrete  components  and other  integrated  circuits  in our  inventory  and by
attracting  additional  contract  electronic   manufacturers  (CEMs),   original
equipment   manufacturers  (OEMs)  and  electronics  distributor  customers.  In
addition,  over  the  last  three  years  we  have  developed  our  ODM  service
capabilities and added products  developed through  partnership  agreements with
offshore solution providers (OEMs and CEMs).  Looking forward,  we plan to offer
commodity  Integrated  Circuits  (ICs)  as  an  extension  of  current  discrete
semiconductor lines in 2007.

      Our core strategy  still includes  maintaining a substantial  inventory of
electronic  components that allows us to fill customer orders  immediately  from
stock held in inventory. However, since demand remained weak throughout 2006, we
continue to focus on lowering  our  inventory  balances and changing our product
mix.  As a  result,  net  inventory  levels  decreased  throughout  the  year by
$988,000,  including a non-cash provision of approximately  $480,000 during 2006
to  increase  our  inventory   reserves  for  price  declines  and   slow-moving
components.  This provision is mainly used to increase our inventory  reserve in
anticipation of future inventory value fluctuation and excess inventory.

      In accordance  with  Generally  Accepted  Accounting  Principles,  we have
classified  inventory as a current asset in our December 31, 2006,  consolidated
financial statements representing approximately 79% of current assets and 62% of
total  assets.  However,  if all or a  substantial  portion of the inventory was
required to be  immediately  liquidated,  the inventory  would not be as readily
marketable or liquid as other items  included or classified as a current  asset,
such as cash.  We cannot  assure you that demand in the  discrete  semiconductor
market will increase and that market conditions will improve.  Therefore,  it is
possible that further declines in our carrying values of inventory may result.

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

Results of Operations

The Year Ended December 31, 2006 Compared to the Year Ended December 31, 2005

      Net sales for the year ended  December 31, 2006 increased by $1,159,000 or
13.8% to $9,559,000 from $8,400,000 in the prior year. The overall increase came
from our ODM product sales by $1,370,000 or 139% compared with the prior year.

      Gross margins were 29.2% for the year ended December 31, 2006, compared to
27.5% for prior year.  The increase was primarily  attributed to our ODM product
sales,  which earn a higher  average  margin  relative to our component  product
sales.

      Selling,  general and  administrative  expenses  increased  by $296,000 or
11.4% for 2006 as  compared  to the  prior  year.  The  increase  was  primarily
attributed  to  our  salaries  and  benefits  costs  by  $127,000,  repairs  and
maintenance expenses by $60,000 and trade commission fees by $50,000. On January
1, 2006,  we adopted  Statement of Financial  Accounting  Standards  No.  123(R)
"Share-Based  Payment" and recognized  $17,000 of stock-based  compensation as a
result of this new accounting pronouncement.

      Operating loss was $100,000 or 1.05% of net sales for 2006, as compared to
$289,000 loss in the prior year.  Operating loss decreased primarily as a result
of higher gross margins discussed above.

      Net  interest  income was  $68,000  for 2006 as  compared  to $12,000  net
interest  expense in the prior year.  The interest  income was due to investment
income earned from cash on hand.

      Income tax  provision  was $1,000 for 2006, as compared to $14,000 for the
prior year.  Our tax  provision  is  primarily  based upon our state  income tax
liabilities for both 2006 and 2005.

      We incurred net losses of $29,000 for 2006 as compared  with net losses of
$205,000  for the prior year,  a decrease  of  $176,000 or 85.9%.  Net loss as a
percentage of net sales decreased to 0.3% from 2.44%.


                                      -13-
<PAGE>

Liquidity and Capital Resources

      We  historically  have satisfied our liquidity  requirements  through cash
generated from operations,  short-term commercial loans, subordinated promissory
notes and issuance of equity  securities.  A summary of our cash flows resulting
from our  operating,  investing  and  financing  activities  for the years ended
December 31, 2006 and 2005 were as follows:

                                                        Year Ended December 31,
                                                       -------------------------
                                                           2006         2005
                                                           ----         ----
Operating activities.................................  $ 1,538,000   $1,798,000
Investing activities.................................   (1,432,000)     (31,000)
Financing activities.................................      622,000     (324,000)

      Cash flows provided by operating activities decreased to $1,538,000 during
2006, as compared to $1,798,000 in the prior year.

      Cash flows used in investing  activities  increased to  $1,432,000  during
2006,  as compared  to $31,000 in the prior year.  The  increase  was  primarily
attributed to the deposit of $1,230,000 for the real estate purchase contract of
office space in Shanghai, China in September 2006 and $125,000 for upgrading our
computer server equipment and Oracle ERP software in the third quarter of 2006.

      Cash flows  provided  by  financing  activities  was  $622,000  in 2006 as
compared cash used in financing  activities  of $324,000 in the prior year.  The
increase was primarily attributed to borrowing $620,000, or approximately 50% of
the  $1,230,000  deposit on real estate  purchase  contract  for office space in
Shanghai,  China in September  2006 and repayments on notes payable in the prior
year.

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

      Inventory is included and  classified as a current  asset.  As of December
31, 2006, inventory  represented  approximately 79% of current assets and 62% of
total assets.  However,  it is likely to take over one year for the inventory to
turn and  therefore is likely not to be saleable  within a one-year  time frame.
Hence,  inventory  would not be as readily  marketable  or liquid as other items
included in current assets, such as cash.

Off-Balance Sheet Arrangements

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

Cautionary Statements and Risk Factors

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

      If environmental laws and regulations restrict the ability to distribute
our products, our inventory may become obsolete and unsaleable. Our worldwide
operations are subject to local laws and regulations, compliance with which may
require substantial expense. As such, of particular interest is the European
Union ("EU") directive relating to the Restriction of Certain Hazardous
Substance ("RoHS"). Effective July 1, 2006, this directive restricted the
distribution of products within the EU containing certain substances, including
lead. At the present time, much of our inventory contains substances prohibited
by the RoHS directive. Further, many of our suppliers are not yet supplying RoHS
compliant products. The legislation is effective and some of our inventory has
become obsolete. Management has estimated the impact of the legislation and have
written down or reserved for related inventories based on amounts expected to be
realized given all available current information. Actual amounts realized from
the ultimate disposition of related inventories could be different from those
estimated.

      If we fail to retain key  personnel  our  operations  could suffer and our
stock price  could be  negatively  impacted.  We are highly  dependent  upon the
services of Stewart Wang, our Chief Executive Officer and President. Our success
to date has been largely  dependent  upon the efforts and  abilities of Mr. Wang
and the loss of Mr. Wang's services for any reason could have a


                                      -14-
<PAGE>

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

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

      We may not  receive  the full value of our  inventory  if we are forced to
liquidate  within a limited  time  period.  Inventory,  according  to  Generally
Accepted Accounting Principles, is included and classified as a current asset in
our December 31, 2006 consolidated  financial  statements.  However, if all or a
substantial portion of the inventory was required to be immediately  liquidated,
the  inventory  would not be as  readily  marketable  or  liquid as other  items
included or classified as a current  asset,  such as cash.  Further,  we may not
realize the full carrying value of our reported inventories.

      Our  revenues and  operating  results have been and may again be adversely
affected  by  downturns  or  other  changes  in the  general  economy  or in the
semiconductor industry. The electronics  distribution industry has been affected
historically by general economic  downturns,  which have had an adverse economic
effect upon  manufacturers  and  end-users  of discrete  components,  as well as
electronic  distributors  such as us. In addition,  the  life-cycle  of existing
electronic  products and the timing of new product  development and introduction
can affect  demand  for  electronic  components.  Downturns  in the  electronics
distribution  industry, or the electronics industry in general,  could adversely
affect our business and results of operations.

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

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

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


                                      -15-
<PAGE>

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

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

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

      If our  customers  return  products at a rate  significantly  in excess of
historical  levels,  our  reserves  for  returns  may  not  be  adequate.  On  a
case-by-case  basis,  we accept returns of products from our customers,  without
restocking  charges,  when  they can  demonstrate  an  acceptable  cause for the
return.  Requests by a  distributor  to return  products  purchased  for its own
inventory  generally  are not  included  under this policy.  We also will,  on a
case-by-case basis, accept returns of products upon payment of a restocking fee,
which  generally  is set at 15% to 30% of the sales  price.  We will not  accept
returns  of any  products  that  were  special-ordered  by a  customer,  or that
otherwise are not generally  included in our inventory.  During the fiscal years
ended December 31, 2006 and 2005, sales returns aggregated $131,000 and $90,000,
or 1.3%  and  1.1% of net  sales,  respectively.  Historically,  most  allowable
returns occur during the first two months following shipment.  While we maintain
reserves for product  returns which we consider to be adequate,  the possibility
exists that we could experience returns in any period at a rate significantly in
excess of historical  levels,  which could  materially and adversely  impact our
results of operations for that period.

ITEM 7. FINANCIAL STATEMENTS.

                          INDEX TO FINANCIAL STATEMENTS
                         TAITRON COMPONENTS INCORPORATED

                                                                            Page

Report of Independent Registered Public Accounting Firm ...................   17
Consolidated Balance Sheet at December 31, 2006 ...........................   18
Consolidated Statements of Operations for the Years
  Ended December 31, 2006 and 2005 ........................................   19
Consolidated Statements of Shareholders' Equity for
  the Years Ended December 31, 2006 and 2005 ..............................   20
Consolidated Statements of Cash Flows for the Years
  Ended December 31, 2006 and 2005 ........................................   21
Notes to Consolidated Financial Statements .............................   22-28


                                      -16-
<PAGE>

Report Of Independent Registered Public Accounting Firm
The Board of Directors
Taitron Components Incorporated:

We  have  audited  the  accompanying   consolidated  balance  sheet  of  Taitron
Components Incorporated (the "Company") as of December 31, 2006, and the related
consolidated  statements of operations,  shareholders' equity and cash flows for
each of the two years in the period ended December 31, 2006. These  consolidated
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the consolidated financial position of Taitron Components
Incorporated  as of  December  31,  2006,  and the  consolidated  results of its
operations  and its cash  flows  for each of the two years in the  period  ended
December 31, 2006, in conformity with accounting  principles  generally accepted
in the United States of America.

As described in Note 1 of the consolidated  financial statements,  on January 1,
2006, the Company adopted  Statement of Financial  Accounting  Standards No. 123
(revised 2004) "Shared-Based Payment".

                                                         /s/ Haskell & White LLP

Irvine, California
April 2, 2007


                                      -17-
<PAGE>

                         TAITRON COMPONENTS INCORPORATED

                           Consolidated Balance Sheet

                                December 31, 2006

                       Assets

Current assets:
    Cash and cash equivalents                                        $ 2,727,000
    Trade accounts receivable, net                                     1,247,000
    Inventory, net                                                    15,693,000
    Prepaid expenses and other current assets                            105,000
                                                                     -----------
             Total current assets                                     19,772,000

Property and equipment, net                                            4,396,000
Other assets                                                           1,326,000
                                                                     -----------
             Total assets                                            $25,494,000
                                                                     ===========

        Liabilities and Shareholders' Equity

Current liabilities:
    Trade accounts payable                                           $ 1,220,000
    Accrued liabilities                                                  380,000
    Current portion of long-term debt                                     89,000
                                                                     -----------
             Total current liabilities                                 1,689,000

Long-term debt, less current portion                                     509,000
                                                                     -----------
             Total liabilities                                         2,198,000
                                                                     -----------

Commitments and contingencies (Notes 3, 6 and 9)

Shareholders' equity:
    Preferred stock, $.001 par value
      Authorized 5,000,000 shares; None issued
      or outstanding                                                          --
    Class A common stock, $.001 par value
      Authorized 20,000,000 shares;
      4,716,811 shares issued and outstanding                              5,000

    Class B common stock, $.001 par value
      Authorized, issued and outstanding
      762,612 shares                                                       1,000
    Additional paid-in capital                                        10,457,000
    Accumulated other comprehensive income                                20,000
    Retained earnings                                                 12,813,000
                                                                     -----------
             Total shareholders' equity                               23,296,000
                                                                     -----------
             Total liabilities and shareholders' equity              $25,494,000
                                                                     ===========

See accompanying notes to consolidated financial statements.


                                      -18-
<PAGE>

                         TAITRON COMPONENTS INCORPORATED

                      Consolidated Statements of Operations

                             Year ended December 31,

                                                        2006            2005
                                                     -----------    -----------
Net sales                                            $ 9,559,000    $ 8,400,000
Cost of goods sold                                     6,766,000      6,092,000
                                                     -----------    -----------
           Gross profit                                2,793,000      2,308,000

Selling, general and administrative expenses           2,893,000      2,597,000
                                                     -----------    -----------
           Operating loss                               (100,000)      (289,000)

Interest income (expense), net                            68,000        (12,000)
Other income, net                                          4,000        110,000
                                                     -----------    -----------
           Loss before income taxes                      (28,000)      (191,000)

Income tax provision                                      (1,000)       (14,000)
                                                     -----------    -----------
           Net loss                                  $   (29,000)   $  (205,000)
                                                     ===========    ===========

Loss per share:  Basic & Diluted:                    $      (.01)   $      (.04)
                                                     ===========    ===========
Weighted average common shares outstanding:
           Basic & Diluted                             5,477,016      5,462,153
                                                     ===========    ===========

See accompanying notes to consolidated financial statements.


                                      -19-
<PAGE>

                         TAITRON COMPONENTS INCORPORATED
                 Consolidated Statements of Shareholders' Equity
                        Two years ended December 31, 2006
<TABLE>
<CAPTION>
                                                                                          Accumulated
                         Class A common stock    Class B common stock                        Other                       Total
                        ---------------------    --------------------    Additional      Comprehensive    Retained    Shareholders'
                         Shares       Amount      Shares      Amount   Paid-in capital   Income (Loss)    Earnings       Equity
                         ------       ------      ------      ------   ---------------   -------------   --------        ------

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


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

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

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

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


Issuances of
  common stock            16,666         --         --          --            24,000            --             --            24,000

Amortization of stock
  based compensation          --         --         --          --            17,000            --             --            17,000

Comprehensive income:
  Foreign currency
    translation
    adjustment                --         --         --          --              --            37,000           --            37,000
  Net loss                    --         --         --          --              --              --          (29,000)        (29,000)
                       ---------      -------    -------      ------    ------------      ----------    -----------   -------------
    Comprehensive
      income                  --         --         --          --              --              --             --             8,000
                       ---------      -------    -------      ------    ------------      ----------    -----------   -------------
Balances at
  December 31, 2006    4,716,811      $ 5,000    762,612      $1,000    $ 10,457,000      $   20,000    $12,813,000   $  23,296,000
                       =========      =======    =======      ======    ============      ==========    ===========   =============
</TABLE>

See accompanying notes to consolidated financial statements.


                                      -20-
<PAGE>

                         TAITRON COMPONENTS INCORPORATED

                      Consolidated Statements of Cash Flows

                             Year ended December 31,

<TABLE>
<CAPTION>
                                                                                                     2006                   2005
                                                                                                  -----------           -----------
<S>                                                                                               <C>                   <C>
Cash flows from operating activities:
    Net loss                                                                                      $   (29,000)          $  (205,000)
                                                                                                  -----------           -----------
    Adjustments to reconcile net loss to net cash
       provided by operating activities:
         Depreciation and amortization                                                                234,000               236,000
         Provision for inventory reserve                                                              480,000               486,000
         Provision for sales returns and doubtful accounts                                            131,000                90,000
         Stock based compensation                                                                      17,000                    --
         Changes in assets and liabilities:
            Trade accounts receivable                                                                 174,000              (543,000)
            Inventory                                                                                 508,000             1,086,000
            Prepaid expenses and other current assets                                                  46,000               266,000
            Other assets                                                                              (18,000)              (14,000)
            Trade accounts payable                                                                    200,000               214,000
            Accrued liabilities                                                                      (205,000)              182,000
                                                                                                  -----------           -----------
                Total adjustments                                                                   1,567,000             2,003,000
                                                                                                  -----------           -----------
                Net cash provided by operating activities                                           1,538,000             1,798,000
                                                                                                  -----------           -----------

Cash flows from investing activities:
    Acquisition of property and equipment                                                            (202,000)              (31,000)
    Deposit on real estate acquisition under construction                                          (1,230,000)                   --
                                                                                                  -----------           -----------
                Net cash used in investing activities                                              (1,432,000)              (31,000)
                                                                                                  -----------           -----------

Cash flows from financing activities:
    Borrowing (payments) on notes payable                                                             598,000            (1,326,000)
    Decrease of restricted cash                                                                            --             1,000,000
    Exercise of Class A common stock options                                                           24,000                 2,000
                                                                                                  -----------           -----------
                Net cash provided by (used in) financing activities                                   622,000              (324,000)
                                                                                                  -----------           -----------
Impact of exchange rates on cash                                                                       37,000               (20,000)
                                                                                                  -----------           -----------
                Net increase in cash and cash equivalents                                             765,000             1,423,000
Cash and cash equivalents, beginning of year                                                        1,962,000               539,000
                                                                                                  -----------           -----------
Cash and cash equivalents, end of year                                                            $ 2,727,000           $ 1,962,000
                                                                                                  ===========           ===========

Supplemental disclosures of cash flow information:
    Cash paid for interest                                                                        $    11,000           $    48,000
                                                                                                  ===========           ===========
    Cash paid for income taxes, net                                                               $    13,000           $    10,000
                                                                                                  ===========           ===========
</TABLE>

See accompanying notes to consolidated financial statements.


                                      -21-
<PAGE>

                         TAITRON COMPONENTS INCORPORATED

                   Notes to Consolidated Financial Statements

Note 1 - Summary of Significant Accounting Policies

      Description of Business

      Taitron Components Incorporated ("Taitron" or the "Company") is a national
      distributor of brand name  electronic  components and supplier of original
      designed and manufactured  (ODM) electronic  components ("ODM Components")
      based on our own  engineering  specifications  under private label brands,
      with product offerings ranging from discrete  semiconductors through small
      electronic devices. The Company also provides value-added  engineering and
      turn-key  services,  focused on  providing  existing  contract  electronic
      manufacturers  (CEMs) and  original  equipment  manufacturers  (OEMs) with
      original  design and  manufacturing  (ODM)  services for their  multi-year
      turn-key  projects ("ODM  Products").  In order to meet the rapid delivery
      requirements  of its  customers  for  electronic  components,  the Company
      maintains a significant inventory.

      Principles of Consolidation

      The consolidated  financial statements include the accounts of the Company
      and its 60%  majority-owned  subsidiary,  Taitron Components Mexico, SA de
      CV. All  significant  intercompany  transactions  and  balances  have been
      eliminated  in  consolidation.  The  ownership  interests  of the minority
      investors  in Taitron  Components  Mexico,  SA de CV are  recorded  in the
      accompanying consolidated balance sheet as minority interests,  which have
      a balance of  $107,000 as of  December  31,  2006,  and are  presented  in
      accrued liabilities.

      Concentration of Risk

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

      The ability to remain  competitive with respect to the pricing of imported
      components could be adversely  affected by increases in tariffs or duties,
      changes  in trade  treaties,  strikes  in air or sea  transportation,  and
      possible future U.S. legislation with respect to pricing and import quotas
      on products  from  foreign  countries.  For example,  it is possible  that
      political  or  economic  developments  in China,  or with  respect  to the
      relationship of the United States with China, could have an adverse effect
      on the Company's  business.  The Company's  ability to remain  competitive
      could also be affected by other government actions related to, among other
      things,  anti-dumping legislation and international currency fluctuations.
      While the Company  does not believe  that any of these  factors  adversely
      impact its business at present,  the Company  cannot assure you that these
      factors will not  materially  adversely  affect the Company in the future.
      Any  significant  disruption  in the  delivery  of  merchandise  from  the
      Company's  suppliers,  substantially  all of whom are foreign,  could also
      have a material  adverse  impact on the Company's  business and results of
      operations.  Management  estimates that over 90% of the Company's products
      were produced in Asia.

      Samsung Electro-Mechanics Co. and Everlight Electronics Co, Ltd., together
      accounted for  approximately  25.9% and 31% of all Taitron's net purchases
      for 2006 and 2005, respectively.  However, Taitron does not regard any one
      supplier as essential to its operations, since equivalent replacements for
      most of the products Taitron markets are either available from one or more
      of Taitron's  other  suppliers or are available from various other sources
      at competitive prices.  Taitron believes that, even if it loses its direct
      relationship  with a  supplier,  there  exist  alternative  sources  for a
      supplier's products.

      During the year ended December 31, 2006 and 2005, Taitron had one customer
      accounting for 22% and 8% of our net sales, respectively.  Other than this
      customer,  for the  years  ended  December  31,  2006 and  2005,  no other
      customer accounted for more than 4.2% and 5.4%,  respectively,  of our net
      sales.


                                      -22-
<PAGE>

      Cash and Cash Equivalents

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

      The Company maintains cash balances in multiple accounts at several banks.
      Accounts at the various financial  institutions are insured by the Federal
      Deposit Insurance  Corporation up to $100,000 in the aggregate.  From time
      to time,  the  Company  has  uninsured  amounts  on  deposit  in excess of
      insurable limits.  Management does not believe that there is a significant
      credit  risk with  respect to the  non-performance  of these  institutions
      based on their respective creditworthiness and liquidity.

      Revenue Recognition

      The Company recognizes  revenue when it has evidence of an arrangement,  a
      determinable  fee, and when  collection  is  considered to be probable and
      products  are  delivered.  This occurs upon  shipment of the  merchandise,
      which  is  when  legal  transfer  of  title  occurs.  Reserves  for  sales
      allowances  and customer  returns are  established  based upon  historical
      experience and management's estimates of future returns. Sales returns for
      the  years  ended  December  31,  2006 and 2005  aggregated  $131,000  and
      $90,000, respectively.

      Allowance for Sales Returns and Doubtful Accounts

      On a case-by-case  basis, the Company accepts returns of products from its
      customers,  without  restocking  charges,  when  they can  demonstrate  an
      acceptable  cause for the  return.  Requests  by a  distributor  to return
      products purchased for its own inventory  generally are not included under
      this policy. The Company will, on a case-by-case  basis, accept returns of
      products upon payment of a restocking  fee,  which is generally 10% to 30%
      of the net  sales  price.  The  Company  will not  accept  returns  of any
      products that were special-ordered by a customer or that otherwise are not
      generally  included in our inventory.  The allowance for sales returns and
      doubtful accounts at December 31, 2006 aggregated $76,000.

      Inventory

      Inventory,  consisting  principally of products held for resale, is stated
      at the lower of cost, using the first-in, first-out method, or market. The
      amount presented in the accompanying  consolidated balance sheet is net of
      valuation  allowances of $1,154,000 at December 31, 2006. The Company uses
      a systematic methodology that includes regular evaluations of inventory to
      identify  costs in excess of the lower of cost or market  and  slow-moving
      inventory.

      Depreciation and Amortization

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

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

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

      Stock-Based Compensation

      In March 1995, the Company  established the 1995 Stock Incentive Plan (the
      "1995 Plan") that expired in March 2005. In September  2006,  the Company'
      2005  Stock  Incentive  Plan  (the  "2005  Plan")  was  approved  by state
      regulators,  which  authorizes  the  issuance  of up to  1,000,000  shares
      pursuant to options or awards  granted under the plan.  We granted  70,000
      shares under the 2005 Plan on December 2, 2006.

      Effective  January 1, 2006,  the  Company  adopted  SFAS No. 123  (revised
      2004),  "Share-Based  Payment"  (SFAS 123R).  SFAS 123R  requires that the
      Company account for all stock-based compensation using a fair-value method


                                      -23-
<PAGE>

      and  recognize the fair value of each award as an expense over the service
      period.  The  adoption of SFAS 123R for the year ended  December  31, 2006
      increased stock-based  compensation expense by $17,000. For the year ended
      December 31, 2005 and earlier  years,  the Company  accounted for employee
      stock-based  compensation  using the intrinsic value method of APB Opinion
      No. 25 and  followed  the  disclosure  requirements  of SFAS No.  123,  as
      amended by SFAS 148.

      The  Company  elected to adopt SFAS 123R using the  "modified  prospective
      application."  Under that method,  compensation  expense includes the fair
      value of new awards,  modified awards and any unvested awards  outstanding
      at January 1, 2006.  However,  the consolidated  financial  statements for
      periods  prior to the  adoption  of SFAS  123R have not been  restated  to
      reflect the fair value method of accounting for stock-based  compensation,
      but rather disclosed the cost in accordance with APB 25.

      The following  table  illustrates  the effect on net loss and net loss per
      share as if  compensation  expense for all awards of stock-based  employee
      compensation  had  been  determined  under  the  fair  value-based  method
      prescribed by SFAS 123 for periods prior to the adoption of SFAS 123R:

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

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

      Income Taxes

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

      Financial Instruments

      The  estimated  fair  values  of  cash  and  cash  equivalents,   accounts
      receivable,  accounts payable,  and accrued liabilities  approximate their
      carrying  value because of the short-term  maturity of these  instruments.
      The estimated fair value of long-term debt approximates its carrying value
      because the interest rate associated  with the instrument  fluctuates with
      market conditions.  All financial  instruments are held for purposes other
      than trading.

      Net Loss Per Share

      Basic loss per share is computed by dividing net loss  available to common
      shareholders by the weighted  average number of common shares  outstanding
      during the period. Common equivalent shares, consisting primarily of stock
      options, of approximately 446,000 and 534,000 for the years ended December
      31, 2006 and 2005,  respectively,  are excluded  from the  computation  of
      diluted loss per share as their effect is anti-dilutive.

      Foreign Currency Translation

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


                                      -24-
<PAGE>

      Use of Estimates

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

      Recent Accounting Pronouncements

      In March 2006, the Financial  Accounting  Standards  Board ("FASB") issued
      Statement of Financial Accounting  Standards ("SFAS") No.156,  "Accounting
      for Servicing of Financial  Assets,"  ("SFAS No. 156"),  which amends SFAS
      No. 140,"  Accounting for Transfers and Servicing of Financial  Assets and
      Extinguishments  of Liabilities." SFAS No. 156 permits an entity to choose
      either of the following  subsequent  measurement methods for each class of
      separately  recognized  servicing  assets and servicing  liabilities:  (1)
      Amortization  Method or (2) Fair Value Measurement Method. SFAS No. 156 is
      effective as of the beginning of an entity's first fiscal year that begins
      after  September  15,  2006  and the  Company  does  not  expect  that the
      pronouncement will have a significant impact on its financial statements.

      In  June  2006,  the  FASB  issued  SFAS  Board   Interpretation  No.  48,
      "Accounting  for Uncertainty in Income Taxes - an  Interpretation  of FASB
      statement  No.  109"  ("FIN  48"),  which  clarifies  the  accounting  for
      uncertainty  in  income  taxes  recognized  in an  enterprise's  financial
      statements in accordance with FASB No. 109. The interpretation  prescribes
      a  recognition  threshold  and  measurement  attribute  for the  financial
      statement  recognition and measurement of a tax position taken or expected
      to be taken in a tax return. This interpretation also provides guidance on
      derecognition,  classification,  interest  and  penalties,  accounting  in
      interim  periods,  disclosure,  and  transition.  FIN 48 is effective  for
      fiscal years  beginning  after December 15, 2006.  Management is currently
      reviewing the effect, if any, that this new pronouncement will have on its
      financial statements.

      In   September   2006,   the  FASB  issued  SFAS  No.  157,   "Fair  Value
      Measurements." This statement defines fair value,  establishes a framework
      for measuring fair value in generally accepted accounting principles,  and
      expands disclosure about fair value measurements.  This statement does not
      require any new fair value  measurements.  This statement is effective for
      financial  statements issued for fiscal years beginning after November 15,
      2007,  and interim  periods  within  those  fiscal  years.  Management  is
      currently  reviewing the effect, if any, that this new pronouncement  will
      have on its financial statements.

      In September  2006, the FASB issued SFAS No. 158,  "Employers'  Accounting
      for Defined Benefit Pension and Other  Postretirement Plans - an amendment
      of FASB  Statements No. 87, 88, 106 and 123(R)." This  statement  improves
      financial  reporting by requiring an employer to recognize the  overfunded
      or underfunded status of a defined benefit postretirement plan (other than
      a  multi-employer  plan) as an  asset or  liability  in its  statement  of
      financial  position and to recognize  changes in that funded status in the
      year in which the changes occur through comprehensive income of a business
      entity  or  changes  in  unrestricted  net  assets  for  a  not-for-profit
      organization.   The  Company   does  not  expect  the   adoption  of  this
      pronouncement to have a material impact on its financial statements.

Note 2 - Property and Equipment

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

                                                             12/31/2006
                                                            -----------

        Land                                                $ 1,294,000
        Buildings and improvements                            3,706,000
        Furniture and equipment                                 934,000
        Computer software and equipment                       2,297,000
                                                            -----------
            Total Property and Equipment                      8,231,000
        Less: Accumulated depreciation and amortization      (3,835,000)
                                                            -----------
             Property and Equipment, net                    $ 4,396,000
                                                            ===========


                                      -25-
<PAGE>

Note 3 - Note Payable

                                                              12/31/06
                                                              --------
        Bank loan collateralized by real property,
        payable in fixed monthly principal
        installments of $7,381, plus interest at the
        rate of one year LIBOR + 1.8% per annum, due
        September 20, 2013.                                   $598,000

             Less current portion                              (89,000)
                                                              --------
        Long-term debt, less current portion                  $509,000
                                                              ========

      On September 21, 2006, the Company  borrowed  $620,000 in connection  with
      its deposit on a real estate purchase  contract related to the acquisition
      of  approximately  4,500  square  feet of office  space  (consisting  of 2
      separate units on the same floor) in Shanghai, China with a total purchase
      price  of  $1,230,000.  The  overall  office  building  project  is  under
      construction and is estimated to be completed in June 2007. The investment
      will be used as rental  property for lease to others and for the Company's
      project design and engineering center.

Note 4 - Shareholders' Equity

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

      There are 20,000,000  shares of authorized Class A common stock, par value
      $.001 per share,  with 4,716,811 issued and outstanding as of December 31,
      2006. Each holder of Class A common stock is entitled to one vote for each
      share held.

      There are 762,612  shares of authorized  Class B common  stock,  par value
      $.001 per share, with 762,612 shares issued and outstanding as of December
      31, 2006. Each holder of Class B common stock is entitled to ten votes for
      each share held. The shares of Class B common stock are convertible at any
      time at the election of the  shareholder  into one share of Class A common
      stock,  subject to certain  adjustments.  The  Company's  Chief  Executive
      Officer  is the sole  beneficial  owner of all the  outstanding  shares of
      Class B common stock.

      During 2006 and 2005,  the Company  did not  repurchase  any shares of its
      Class A common stock.  However, the Company issued 16,666 shares of common
      stock upon the exercise of stock options (Note 7).

Note 5 - Income Taxes

      Income tax provision is summarized as follows:

                                                 Year Ended December 31,
                                                 -----------------------
                                                    2006        2005
                                                  --------    --------
        Current:
            Federal                               $     --    $     --
            State                                    1,000      14,000
                                                  --------    --------
                                                     1,000      14,000
                                                  --------    --------
        Deferred:
            Federal                                     --     (40,000)
            State                                   (1,000)    (12,000)
            Increase in valuation allowance          1,000      52,000
                                                  --------    --------
                                                        --          --
                                                  --------    --------
        Income tax provision                      $  1,000    $ 14,000
                                                  ========    ========


                                      -26-
<PAGE>

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

                                                        Year Ended December 31,
                                                        -----------------------
                                                          2006           2005
                                                        --------       --------
"Expected" income tax expense (benefit)                 $ (1,000)      $(59,000)
State tax expense, net of Federal benefit                  1,000          5,000
Foreign (income) loss                                     (2,000)        (2,000)
Increase in valuation allowance                            1,000         52,000
Other                                                      2,000         18,000
                                                        --------       --------
Income tax provision                                    $  1,000       $ 14,000
                                                        ========       ========

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

Deferred tax assets:                                     12/31/2006
                                                         ----------

            Inventory reserves                           $ 494,000
            Section 263a adjustment                         89,000
            Allowances for bad debts and returns            28,000
            Accrued expenses                                17,000
            Asset valuation reserve                         56,000
            State net operating loss carry forward          79,000
            Other                                           32,000
                                                         ---------

            Total deferred tax assets                      795,000
            Valuation allowance                           (721,000)

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

      The   Company  has  a  net   operating   loss   carryforward   aggregating
      approximately  $742,000  for state tax purposes  that expires in 2015.  In
      assessing  the  realizability  of  the  deferred  tax  assets,  management
      considers  whether it is more likely than not that some  portion or all of
      the  deferred tax assets will not be realized.  Management  considers  the
      scheduled reversal of deferred tax assets, the level of historical taxable
      income  and tax  planning  strategies  in  making  the  assessment  of the
      realizability of deferred tax assets.

Note 6 - 401(k) Profit Sharing Plan

      In January 1995,  the Company  implemented a defined  contribution  profit
      sharing plan pursuant to Section 401(k) of the Internal  Revenue Code (the
      Code) covering all employees of the Company.  Participants  once eligible,
      as defined by the plan, may contribute up to the maximum allowed under the
      Code.  The plan also  provides  for safe  harbor  matching  contributions,
      vesting immediately, at the discretion of the Company. For the years ended
      December 31, 2006 and 2005,  employer  matching  contributions  aggregated
      approximately $36,000 and $8,000, respectively.

      The plan  invests  a portion  of its  assets  in the  common  stock of the
      Company. The plan held 77,491 shares of the Company's Class A common stock
      at December 31, 2006.

Note 7 - Stock Options

      In September 2006, the Company' 2005 Stock Incentive Plan (the "Plan") was
      approved  by state  regulators,  which  authorizes  the  issuance of up to
      1,000,000  shares  pursuant to options or awards  granted  under the plan.
      Under the Plan,  incentive stock and nonstatutory  options were granted at
      prices  equal to at least the fair market value of the  Company's  Class A
      common stock at the date of grant. Outstanding options vest in three equal
      annual  installments  beginning  one year  from the date of grant  and are
      subject to  termination  provisions as defined in the Plan. The fair value
      of options using the Black-Scholes option-pricing model with the following
      weighted average assumptions used for 2006: dividend yield of 2%; expected
      volatility of 33%; a risk free interest rate of approximately  4.4% and an


                                      -27-
<PAGE>

      expected holding period of five years; and for 2005: dividend yield of 0%;
      expected  volatility of 35%; a risk free interest rate of approximately 5%
      and an expected holding period of five years.

      As described  in Note 1, for the year ended  December 31, 2005 and earlier
      years, the Company accounted for employee  stock-based  compensation using
      the  intrinsic  value  method  of APB  Opinion  No.  25 and  followed  the
      disclosure requirements of SFAS No. 123, as amended by SFAS 148.

      Stock option activity during the periods indicated is as follows:

<TABLE>
<CAPTION>
                                                                                   Weighted Average    Aggregate     Weighted
                                                   Number      Weighted Average     Years Remaning     Intrinsic     Average
                                                  of Shares     Exercise Price     Contractual Term      Value      Fair Value
                                                  ---------     --------------     ----------------    ---------   ------------
<S>                                                 <C>               <C>                 <C>             <C>          <C>
Outstanding at December 31, 2004                   598,999          $1.81
   Exercised                                        (2,499)          1.06
   Forfeited                                       (70,334)          2.10
                                                   -------
Outstanding at December 31, 2005                   526,166           1.78
   Granted                                          70,000           2.52                9.93                         $0.72
   Exercised                                       (16,666)          1.41
   Forfeited                                       (77,500)          2.32
                                                   -------
Outstanding at December 31, 2006                   502,000          $1.82                5.28
                                                   =======
Exercisable at December 31, 2006                   410,332          $1.70                4.24           $296,000
                                                   =======
</TABLE>

      At December 31, 2006, the range of individual  weighted  average  exercise
      prices was $1.60 to $2.45.

Note 8 - Net Loss Per Share

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

                                                      2006             2005
                                                   -----------      -----------
Net loss available to common shareholders
  used in basic loss per share                     $   (29,000)     $  (205,000)

Weighted average number of common shares
  used in basic loss per share                       5,477,016        5,462,153
                                                   -----------      -----------

Basic loss per share                               $      (.01)     $      (.04)
                                                   ===========      ===========

Effect of dilutive securities:
  Options                                                   --               --
                                                   -----------      -----------
Weighted average number of common shares
  and dilutive potential common shares
  used in diluted loss per share                     5,477,016        5,462,153
                                                   ===========      ===========

Diluted loss per share                             $      (.01)     $      (.04)
                                                   ===========      ===========

Note 9 - Commitments and Contingencies

      Legal and Regulatory Proceedings

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

      Inventory Purchasing

      Outstanding  commitments to purchase  inventory from suppliers  aggregated
      $1,348,000 as of December 31, 2006.


                                      -28-
<PAGE>

      Software Upgrade

      The  Company is in  process of  upgrading  its  Oracle ERP  software  to a
      current   version  and  has  outstanding   commitments  for   professional
      consulting services that aggregated $68,000 as of December 31, 2006.

      Regulation

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

Note 10 - Geographic information

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

                                                              Long-lived
                                               Revenues         Assets
                                               --------         ------
         United States                        $7,626,000      $3,915,000
         Mexico                                  842,000         156,000
         Brazil                                  422,000              --
         China                                   185,000          16,000
         Taiwan                                  177,000         309,000

         Canada                                   56,000              --

         Other foreign countries                 251,000              --
                                              ----------      ----------
         Total                                $9,559,000      $4,396,000
                                              ----------      ----------

Note 11 - Subsequent Events

      On January 10, 2007 the Company  declared an annual cash dividend of $0.10
      per  share of Class A  Common  Stock  and  Class B Common  Stock,  paid on
      January 31, 2007,  to  shareholders  of record at the close of business on
      January  22,  2007.  The  dividend  was  declared in  connection  with the
      Company's decision to establish an annual cash dividend of up to $0.10 per
      share on Class A and Class B Common Stock for a period of five years.  The
      payment  of future  cash  dividends  under the  policy is  subject  to the
      continuing  determination  that the policy remains in the best interest of
      the Company's  shareholders  and complies with laws and any agreements the
      Company's may enter into applicable to the declaration and payment of cash
      dividends.  The  maintenance of the dividend policy will depend on factors
      that the Company deems  relevant,  including the Company's  cash earnings,
      financial condition and cash requirements in any given year. The Company's
      ability to declare  dividends  could be  affected  by a variety of factors
      affecting cash flow, including required capital expenditures, increased or
      unanticipated  expenses,  additional  borrowings  and future  issuances of
      securities.

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

            None

ITEM 8A. CONTROLS AND PROCEDURES.

            As of the end of the fiscal period  covered by this Annual Report on
      Form 10-KSB, an evaluation was performed under the Securities Exchange Act
      of  1934  under  the  supervision  and  with  the   participation  of  our
      management,  including  the Principal  Executive  and Principal  Financial
      Officer,  of  the  effectiveness  of  the  design  and  operation  of  our
      disclosure  controls  and  procedures.  Based  upon that  evaluation,  the
      Principal  Executive and Principal  Financial  Officer  concluded that our
      disclosure controls and procedures were effective.  During the three-month
      period ended  December 31,  2006,  no change in our internal  control over
      financial  reporting occurred that materially  affected,  or is reasonably
      likely  to  materially   affect,   our  internal  control  over  financial
      reporting.

ITEM 8B. OTHER INFORMATION.

            None


                                      -29-
<PAGE>

                                    PART III

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

            The  information  required  by Item 9,  with  the  exception  of the
      information  provided below concerning the Company's Code of Ethics,  will
      appear in the Proxy  Statement for the 2007 Annual Meeting of Shareholders
      (the  "Proxy  Statement")  under the  captions  "Election  of  Directors",
      "Compliance  with Section  16(a) -  Beneficial  Ownership  Reporting"  and
      "Report  of the  Audit  Committee"  and is  incorporated  herein  by  this
      reference.  The Proxy  Statement  will be filed  with the  Securities  and
      Exchange Commission within 120 days following December 31, 2006.

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

ITEM 10. EXECUTIVE COMPENSATION.

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

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

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

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

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

ITEM 13. EXHIBITS.

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

3.2       Bylaws. (1)

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

4.2       Form of Underwriter's Warrant. (1)

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

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

21.1**    List of Subsidiaries.

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

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

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

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

--------------------------------------------------------------------------------
*         Management contract or compensatory plan or arrangement.

**        Filed herewith.

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

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


                                      -30-
<PAGE>

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

      Information  regarding principal  accountant fees and services will appear
in the Proxy  Statement  for the 2007  Annual  Meeting  of  Shareholders  and is
incorporated herein by this reference.

                                   SIGNATURES

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

                                          Taitron Components Incorporated

Dated: April 2, 2007                      By: /s/ Stewart Wang
                                              ----------------------------------
                                              Stewart Wang
                                              Chief Executive Officer, President
                                              and Chief Financial Officer

                                POWER OF ATTORNEY

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

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

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

/s/ Johnson Ku            Chairman of the Board                    April 2, 2007
-----------------------
Johnson Ku

/s/ Stewart Wang          Chief Executive Officer, President,      April 2, 2007
-----------------------   Chief Financial Officer and Director
Stewart Wang              (Principal Executive, Financial and
                          Accounting Officer)

/s/ Richard Chiang        Director                                 April 2, 2007
-----------------------
Richard Chiang

/s/ Craig Miller          Director                                 April 2, 2007
-----------------------
Craig Miller

/s/ Felix Sung            Director                                 April 2, 2007
-----------------------
Felix Sung


                                      -31-