UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-K





xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 2010





oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from __________ to __________





Commission File Number 0-25844





TAITRON COMPONENTS INCORPORATED


(Exact name of registrant as specified in its charter)




California

95-4249240(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)





28040 West Harrison Parkway, Valencia, California  91355


(Address of principal executive offices)  (Zip Code)





Registrant’s telephone number, including area code:  (661) 257-6060





Securities registered under Section 12(b) of the Act:




Title of Each Class

Name of Exchange on which RegisteredClass A common stock, par value $.001 per share

The NASDAQ Capital Stock Market




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





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.      Yes  ̈   No x





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  ̈   No x





Indicate by check mark whether the registrant (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   ̈





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





Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K.    ̈





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See the definitions of “larger accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):




Large accelerated filer   ̈

Accelerated filer   ̈Non-accelerated filer   ̈ (Do not check if a smaller reporting company)

Smaller reporting company  x


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





The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2010 (based on the closing price of $1.19 per share) was approximately $4,200,000.





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




Class

Outstanding on March 15, 2011Class A common stock, $.001 par value

4,777,144Class B common stock, $.001 par value

762,612


DOCUMENTS INCORPORATED BY REFERENCE





Certain information required by Part III of Form 10-K is incorporated by reference to the Registrant’s Proxy Statement for the 2011 Annual Stockholders Meeting for the year ended December 31, 2010, which will be filed with the Securities and Exchange Commission.







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TAITRON COMPONENTS INCORPORATED2010 FORM 10-K ANNUAL REPORTDecember 31, 2010INDEXPagePART IItem 1.
Business
3Item 1A.
Risk Factors
10Item 1B.
Unresolved Staff Comments
10Item 2.
Properties
10Item 3.
Legal Proceedings
10Item 4.
Reserved
10PART IIItem 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
10Item 6.
Selected Financial Data
11Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
11Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
14Item 8.
Financial Statements and Supplementary Data
14Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
30Item 9A.
Controls and Procedures
30Item 9B.
Other Information
31PART IIIItem 10.
Directors, Executive Officer and Corporate Governance
31Item 11.
Executive Compensation
31Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
31Item 13.
Certain Relationships, Related Transactions and Director Independence
31Item 14.
Principal Accounting Fees and Services
31PART IVItem 15.
Exhibits and Financial Statement Schedules
32Signatures

33


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 Index


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS





This Annual Report on Form 10-K contains 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.  Forward-looking statements represent our expectations or beliefs concerning future events, including the following: any statements regarding future sales, costs and expenses and gross profit percentages; any statements regarding the continuation of historical trends; any statements regarding expected capital expenditures; and any statements regarding the sufficiency of our cash balances and cash generated from operating and financing activities for future liquidity and capital resource needs, and are usually denoted by words or phrases such as “believes,” “plans,” “should,” “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.





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.     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 semiconductorsthrough small electronic devices.  We also offer value-added engineering and turn-key services, focusing on providing contract electronic manufacturers (CEMs) and original equipment manufacturers (OEMs) with ODM services for their multi-year turn-key projects.  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.





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 brand “TCI” through manufacturing partners.  At December 31, 2010, our inventory consisted of over 14,000 different products manufactured by more than 100 different suppliers.  In 2010 and 2009, we offered approximately 9 different ODM products that are manufactured to specifications developed as a result of our ODM services.  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 manufacturer partners, 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.





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.





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 Index


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 48% and 44% of our total sales for the years ended December 31, 2010 and 2009, respectively.  During 2010 and 2009, we purchased $2,800,000 and $1,400,000, respectively, 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.





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 service providers to penetrate the worldwide market. By designing private brand products to OEM 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:





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 Index





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 7 – “Management’s Discussion and Analysis - Liquidity and Capital Resources”.





Private Brand 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” brand.  These private label products, or ODM Components, are manufactured according to our specifications under a special contract agreement with manufacturing 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 53% 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 are required to provide point of sales (POS) reports which identify the distributor’s customers and we provide these 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 5 selective distributors.  We intend to maintain only a few preferred distributors in each geographical region.





Relationships with Suppliers.  Stock rotation and price protection privileges are beneficial to distributors because they enable distributors to reduce inventory cost or rotate inventory they are unable to sell, thus reducing the risks and costs associated with over-purchasing or obsolescence.  Price protection mitigates the risks of falling prices of components held in inventory.  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.





Vendor Managed Inventory (VMI).  As a part of our warehouse management 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 offer value-added ODM services to our existing OEM and CEM customers utilizing our engineering design center in Shanghai, China.  The sales of our ODM Products and services were $1,330,000 and $845,000 in 2010 and 2009, respectively.  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.  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 Products sales by the end of 2012.





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 Index





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 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, 2010, our inventory consisted of over 14,000 different products manufactured by more than 100 different suppliers.





In 2010 and 2009, we purchased electronic component products from approximately 40 different suppliers, including Everlight Electronics Co, Ltd., Samsung Electro-Mechanics Co., Vishay Americas Inc. and Zowie Technology Corporation.





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.





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 Index





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 - “Properties.”





ODM Products





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 - “Properties.”





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 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 2010, we distributed our discrete electronic component products to approximately 500 customers.  Two customers accounted for 12% and 8% of net sales during 2010 and 13% and 8% of net sales during 2009.





In 2010, sales of brand name electronic component products and our ODM Components together represented approximately 83% of our net sales, while sales of our ODM Products represented the remaining 17% of our net sales.  Distributors represented approximately 32% and both CEMs and OEMs together represented approximately 47% of our net sales of electronic component products.  The remaining 21% 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 our products are sold by our distributor customers.  However, based on our sales to CEMs and OEMs, we believe that no particular industry accounted for a majority of the applications of our discrete electronic component products sold in 2010 or 2009.





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, and some of our customers may be acquired by competitors.





Sales and Marketing Channels





As of March 2, 2011, our sales and marketing department consisted of 18 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.





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 Index


We have sales channels into Central America through our majority-owned subsidiary in Mexico City, Mexico.  Central American sales were $607,000 and $667,000 in 2010 and 2009, respectively.





We have sales channels into Asia through our branch offices in Shanghai, China and Taipei, Taiwan.  Sales to Asian customers were $311,000 and $157,000 in 2010 and 2009, respectively.





We also have sales channels into South America through our branch office in Sao Paulo, Brazil.  South American sales were $351,000 and $231,000 in 2010 and 2009, respectively.





Independent sales representatives have played an important role in developing our client base, especially with respect to OEMs.  Many OEMs want their suppliers to have a local presence and our network of independent sales representatives is responsive to those needs.  Independent sales representatives are primarily responsible for face-to-face meetings with our customers, and for developing new customers.  Independent sales representatives are each given responsibility for a specific geographic territory.  Typically, sales representatives are only compensated for sales made to CEMs, OEMs and preferred distributors.  We believe that this commission policy directs independent sales representatives’ attention to those end users with potential to increase market share.  Along with our independent sales representatives, we jointly advertise and participate in trade shows.  We utilized 6 independent sales representatives during 2010.





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.





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, 2011 were approximately $1,750,000.  In addition, we have distribution agreements with certain suppliers which provide stock-rotation, price protection and stock buy back terms.





In 2010, we purchased components from approximately 43 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.





For the year ended December 31, 2010, the following name brands, Samsung Electro-Mechanics Co., Princeton Technology, Everlight Electronics Co, Ltd. and Vishay Americas Inc. accounted for approximately 37% 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.





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.





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 Index





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 4.3% and 2.8% of our total sales in 2010 and 2009, 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.





Employees





As of March 2, 2011, our company consisted of 37 employees, all of whom are employed on a full time basis.  None of our employees are covered by a collective bargaining agreement and we consider our relations with employees to be good.





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





- 9 -
 Index


We maintain a website (http://www.taitroncomponents.com), but 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-K.  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 1A.  RISK FACTORS.                                    Not applicable.





ITEM 1B.  UNRESOLVED STAFF COMMENTS.     Not applicable.





ITEM 2.     PROPERTIES.





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 have the following properties: (1) we own 4,500 square feet of office space in Shanghai, China - this property is being used as Company’s project design and engineering center and partially as rental property for lease to others, (2) we own 15,000 square feet of office and distribution space through our subsidiary in Mexico, (3) we own 2,500 square feet of office space in Taipei, Taiwan, (4) we leased 350 square feet of office space for sales and marketing functions in Sao Paulo, Brazil, and (5) we lease 500 square feet of office space in Englewood Cliffs, New Jersey, USA for our east coast sales and marketing functions.  We believe these existing facilities are adequate for the foreseeable future and have no plans to renovate or expand them.





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.     [Removed and Reserved]








PART II





ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.





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 closing sale prices for our common stock, as reported by Nasdaq:




High


LowFiscal Year Ended December 31, 2009:First Quarter

$
1.04


$
0.71Second Quarter


0.96



0.70Third Quarter


1.39



0.76Fourth Quarter


1.45



1.09Fiscal Year Ended December 31, 2010:First Quarter

$
1.68


$
1.30Second Quarter


1.64



1.10Third Quarter


1.15



1.00Fourth Quarter


1.62



1.00Year Ended December 31, 2011:First Quarter (through March 1, 2011)

$
1.61


$
1.30





On March 1, 2011, the last sale price of the Class A common stock as reported by Nasdaq was $1.61 per share.





Holders.As of March 1, 2011, there were 30 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, which are not traded.





- 10 -
 Index





Dividends and Dividend Policy.    During 2010, the Company did not declare any dividends, nor do we expect to do so in the near future.  On June 2, 2009, the Board of Directors declared an annual cash dividend of $0.05 per share of Class A and Class B common stock, payable to shareholders of record at the close of business on June 15, 2009.  The total dividend amount paid for the year ended December 31, 2009 was $276,000.





We are not aware of any contractual or similar restrictions that limit our ability to pay dividends, currently or in the future.  See “Management’s Discussion and Analysis - Results of Operations; Liquidity and Capital Resources.”





Securities authorized for issuance under equity compensation plans.





Equity Compensation Plan InformationNumber of securities to be issued upon exercise of outstanding options, warrants and rights


Weighted-average exercise price of outstanding options, warrants and rights


Number of securities remaining available for future issuance under equity compensation plans (excluding securities refliected in column (a))Plan Category

(a)


(b)


(c)Equity compensation plans approved by security holders


366,500


$
1.62



881,500Equity compensation plans not approved by security holders


-



-



-Total


366,500


$
1.62



881,500





Recent Sales of Unregistered Sales of Equity Securities.     None.





Purchases of Equity Securities by the Issuer and Affiliated Purchasers.     None.





ITEM 6.     SELECTED FINANCIAL DATA.Not Applicable.





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





The following discussion should be read in conjunction with the consolidated financial statements, including the related notes, appearing in Item 8 of this Annual Report on Form 10-K.  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.





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 8 of this Annual Report on Form 10-K in accordance 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, 2010 and 2009 aggregated $26,000 and $24,000, respectively.  The allowance for sales returns and doubtful accounts at December 31, 2010 and 2009 aggregated $96,000 and $89,000, respectively.  We review the actual sales returns and bad debts for our customers and establish an estimate of future returns and allowance for doubtful accounts.





Inventory - Inventory, consisting principally of products held for resale, is recorded at the lower of cost (determined using the first in-first out method) or estimated market value.  We had inventory balances in the amount of $12,414,000 and $12,307,000 at December 31, 2010 and 2009, respectively, which is presented net of valuation allowances of $3,700,000 and $3,615,000 at December 31, 2010 and 2009, respectively.  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.





- 11 -
 Index


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 $1,906,000 allowance against our net deferred tax assets.





As a result of the implementation of certain provisions of ASC 740, IncomeTaxes (“ASC 740”), which clarifies the accounting and disclosure for uncertainty in tax positions, as defined, ASC 740 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes.  We adopted the provisions of ASC 740 as of January 1, 2007, and have analyzed filing positions in each of the federal and state jurisdictions where required to file income tax returns, as well as all open tax years in these jurisdictions.  We have identified the U.S. federal and California as our "major" tax jurisdictions.  Generally, we remain subject to Internal Revenue Service examination of our 2007 through 2009 U.S. federal income tax returns, and remain subject to California Franchise Tax Board examination of our 2006 through 2009 California Franchise Tax Returns.  However, we have certain tax attribute carryforwards which will remain subject to review and adjustment by the relevant tax authorities until the statute of limitations closes with respect to the year in which such attributes are utilized.





We believe that our income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material change to our financial position.  Therefore, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740.  In addition, we did not record a cumulative effect adjustment related to the adoption of ASC 740.  Our policy for recording interest and penalties associated with income-based tax audits is to record such items as a component of income taxes.





Recent Accounting Policies





Please see Note 1 of our financial statements that describe the impact, if any, from the adoption of Recent Accounting Pronouncements.





Overview





We distribute discrete semiconductors, commodity Integrated Circuits (ICs), 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 in 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).





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, we have included a non-cash provision of approximately $600,000 during 2010 to increase our inventory reserves for price declines, non-RoHS compliant components and slow-moving and excess inventory.





- 12 -
 Index


In accordance with generally accepted accounting principles, we have classified inventory as a current asset in our December 31, 2010, consolidated financial statements representing approximately 75% of current assets and 57% 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.





Our gross profit margins are subject to a number of factors, including product demand, the relative strength of the U.S. dollar, provisions for inventory reserves, our ability to purchase inventory at favorable prices and our sales product mix.





Results of Operations




The Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009




Net sales were $7,189,000 and $5,540,000 in 2010 and 2009, respectively, representing an increase of $1,649,000 or 29.8%.  The increase in net sales was primarily due to a domestic increase in demand for our component products.





Gross margins were $2,197,000 and $1,365,000 in 2010 and 2009, respectively, which represented 30.6% and 24.6% of net sales for those periods.  The increase of $832,000 was primarily attributed to the increase of sales.





Selling, general and administrative expenses were $2,641,000 and $2,441,000 in 2010 and 2009, respectively, which represented 36.7% and 44.1% of net sales for those periods.  The increase of $200,000 was primarily due to increases in salaries and benefits expenses by $265,000, offset by decreases in professional fees by $63,000.





Operating losses were $444,000 and $1,076,000 in 2010 and 2009, respectively, which represented 6.2% and 19.4% of net sales for those periods.  Operating losses decreased primarily as a result of higher gross margins discussed above related to our provision for inventory reserves.





Net interest expense was $44,000 and $9,000 for 2010 and 2009, respectively.  The increase was due to higher debt levels during the year.





Income tax provision was $7,000 and $2,000 in 2010 and 2009, respectively.  Our tax provision is primarily based upon our state income tax liabilities.





We incurred net losses of $363,000 and $961,000 in 2010 and 2009, respectively, which represented 5.1% and 17.4% of net sales for those periods.  The losses are primarily due to lower margins discussed above and related to provisions for our inventory reserves.





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, 2010 and 2009 were as follows:




Year ended December 31,2010


2009Operating activities

$
(99,000
)

$
1,244,000Investing activities


(65,000
)


(45,000
)Financing activities


500,000



(197,000
)





Cash flows used in operating activities decreased to $99,000 during 2010, as compared to $1,244,000 provided by in the prior year.  The decrease in cash provided by operations was primarily attributed to accounts receivable and inventory increasing by $206,000 and $107,000, respectively, during 2010, as compared to decreasing by $338,000 and $896,000, respectively, during 2009.





Cash flows used in investing activities increased to $65,000 during 2010, as compared to $45,000 in the prior year.  Our 2010 investing outflows primarily came from acquisitions of property and equipment by $65,000, compared with $45,000 in 2009.





- 13 -
 Index


Cash flows provided by financing activities were $500,000 in 2010 as compared to $197,000 used in the prior year.  Our 2010 financing came from our Secured Credit Facility – related party, see Note 5 of the Notes to the Consolidated Financial Statements.





We believe that funds generated from operations, existing cash balances and short-term 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, 2010, inventory represented approximately 75% of current assets and 57% 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.





ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable.





ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.




INDEX TO CONSOLIDATED FINANCIAL STATEMENTSPageReport of Independent Registered Public Accounting Firm
15Consolidated Balance Sheets at December 31, 2010 and 2009
16Consolidated Statements of Operations for the Years Ended December 31, 2010 and 2009
17Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2010 and 2009
18Consolidated Statements of Shareholder's Equity for the Years Ended December 31, 2010 and 2009
19Consolidated Statements of Cash Flows for the Years Ended December 31, 2010 and 2009
20Notes to Consolidated Financial Statements
21


- 14 -
 Index




Report Of Independent Registered Public Accounting Firm




The Board of Directors and ShareholdersTaitron Components Incorporated:




We have audited the accompanying consolidated balance sheets of Taitron Components Incorporated (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the years ended December 31, 2010 and 2009.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated 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 consolidated 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 consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Taitron Components Incorporated as of December 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.











/s/ ANTON & CHIA, LLP





Newport Beach, California


March 31, 2011


- 15 -
 Index





TAITRON COMPONENTS INCORPORATED




Consolidated Balance Sheets




December 31,


December 31,2010


2009AssetsCurrent assets:Cash and cash equivalents

$
3,095,000


$
2,768,000Restricted cash (Note 2)


200,000



100,000Trade accounts receivable, net of allowance for doubtful accounts of $96,000 and $89,000, respectively


827,000



621,000Inventory, net of reserve for obsolescence of $3,700,000, and $3,615,000, respectively


12,414,000



12,307,000Prepaid expenses and other current assets


91,000



245,000Total current assets


16,627,000



16,041,000Property and equipment, net (Note 3)


4,977,000



5,135,000Other assets (Note 4)


263,000



244,000Total assets

$
21,867,000


$
21,420,000Liabilities and Shareholders’ EquityCurrent liabilities:Trade accounts payable

$
871,000


$
615,000Accrued liabilities


351,000



303,000Current portion of long-term debt (Note 5)


1,500,000



-Total current liabilities


2,722,000



918,000Long-term debt (Note 5)


-



1,000,000Total liabilities


2,722,000



1,918,000Commitments and contingencies (Notes 6, 8 and 12)Shareholders’ equity:Preferred stock, $0.001 par value.  Authorized 5,000,000 shares;None issued or outstanding


-



-Class A common stock, $0.001 par value.  Authorized 20,000,000 shares; 4,777,144 shares issued and outstanding


5,000



5,000Class B common stock, $0.001 par value.  Authorized, issued and outstanding 762,612 shares


1,000



1,000Additional paid-in capital


10,605,000



10,594,000Accumulated other comprehensive income


87,000



96,000Retained earnings


8,244,000



8,587,000Minority interest in subsidiary


203,000



219,000Total shareholders’ equity


19,145,000



19,502,000Total liabilities and shareholders’ equity

$
21,867,000


$
21,420,000


See accompanying notes to consolidated financial statements.


- 16 -
 Index


TAITRON COMPONENTS INCORPORATED





Consolidated Statements of Operations




Year Ended December 31,2010


2009Net sales

$
7,189,000


$
5,540,000Cost of goods sold


4,992,000



4,175,000Gross profit


2,197,000



1,365,000Selling, general and administrative expenses


2,641,000



2,441,000Operating loss


(444,000
)


(1,076,000
)Interest expense, net


(44,000
)


(9,000
)Other income, net


132,000



126,000Loss before income taxes


(356,000
)


(959,000
)Income tax provision


(7,000
)


(2,000
)Net loss


(363,000
)


(961,000
)Net loss attributable to noncontrolling interest in subsidiary


(20,000
)


(32,000
)Net loss attributable to Taitron Components Inc.

$
(343,000
)

$
(929,000
)Net loss per share:  Basic & Diluted

$
(0.07
)

$
(0.17
)Weighted average common shares outstanding:  Basic & Diluted


5,539,756



5,539,756


See accompanying notes to consolidated financial statements.




- 17 -
 Index


TAITRON COMPONENTS INCORPORATED




Consolidated Statements of Comprehensive Income (Loss)




Year Ended December 31,2010


2009Net loss

$
(363,000
)

$
(961,000
)Other Comprehensive (loss)income:Foreign currency translation adjustment


(9,000
)


4,000Comprehensive loss


(372,000
)


(957,000
)Comprehensive loss attributable to noncontrolling interest in subsididary


(16,000
)


(30,000
)Comprehensive loss attributable to Taitron Components Inc.

$
(356,000
)

$
(927,000
)


See accompanying notes to consolidated financial statements.




- 18 -
 Index


TAITRON COMPONENTS INCORPORATED




Consolidated Statements of Shareholders’ Equity




Two years ended December 31, 2010




Class A common stock


Class B common stock


Additional Paid-in


Accumulated

Other

Comprehensive


Retained


Minority Interest


Total

Shareholders’Shares


Amount


Shares


Amount


capital


Income (Loss)


Earnings


in Sub


EquityBalances at December 31, 2008


4,777,144


$
5,000



762,612


$
1,000


$
10,569,000


$
92,000


$
9,792,000


$
251,000


$
20,710,000Minority interest in subsidary


-



-



-



-



-



-



-



(32,000
)


(32,000
)Amortization of stock based compensation


-



-



-



-



25,000



-



-



-



25,000Dividend payments


-



-



-



-



-



-



(276,000
)


-



(276,000
)Comprehensive loss:Foreign currency translation adjustment


-



-



-



-



-



4,000



-



-



4,000Net loss


-



-



-



-



-



-



(929,000
)


-



(929,000
)Balances at December 31, 2009


4,777,144


$
5,000



762,612


$
1,000


$
10,594,000


$
96,000


$
8,587,000


$
219,000


$
20,427,000Minority interest in subsidary


-



-







-



-



-



-



(16,000
)


(16,000
)Amortization of stock based compensation


-



-



-



-



11,000



-



-



-



11,000Comprehensive loss:Foreign currency translation adjustment


-



-



-



-



-



(9,000
)


-



-



(9,000
)Net loss


-



-



-



-



-



-



(343,000
)


-



(343,000
)Balances at December 31, 2010


4,777,144


$
5,000



762,612


$
1,000


$
10,605,000


$
87,000


$
8,244,000


$
203,000


$
20,422,000




See accompanying notes to consolidated financial statements.




- 19 -
 Index


TAITRON COMPONENTS INCORPORATED




Consolidated Statements of Cash Flows




Year ended December 31,2010


2009Cash flows from operating activities:Net loss

$
(363,000
)

$
(961,000
)Adjustments to reconcile net loss to net cash (used in) provided by operating activities:Depreciation and amortization


227,000



226,000Provision for inventory reserves


600,000



600,000Provision for sales returns and doubtful accounts


32,000



39,000Stock based compensation


11,000



25,000Changes in assets and liabilities:Restricted cash


(100,000
)


(100,000
)Trade accounts receivable


(238,000
)


304,000Inventory


(707,000
)


1,019,000Prepaid expenses and other current assets


154,000



320,000Other assets


(19,000
)


(8,000
)Trade accounts payable


256,000



(207,000
)Accrued liabilities


48,000



(13,000
)Total adjustments


264,000



2,205,000Net cash (used in) provided by operating activities


(99,000
)


1,244,000Cash flows from investing activities:Acquisition of property & equipment


(65,000
)


(45,000
)Net cash used in investing activities


(65,000
)


(45,000
)Cash flows from financing activities:Borrowings on notes payable


500,000



500,000Payments on notes payable


-



(421,000
)Dividend payments


-



(276,000
)Net cash provided by (used in) financing activities


500,000



(197,000
)Impact of exchange rates on cash


(9,000
)


4,000Net increase in cash and cash equivalents


327,000



1,006,000Cash and cash equivalents, beginning of period


2,768,000



1,762,000Cash and cash equivalents, end of year

$
3,095,000


$
2,768,000Supplemental disclosures of cash flow information:Cash paid for interest

$
47,000


$
31,000Cash paid for income taxes, net

$
7,000


$
1,000




See accompanying notes to consolidated financial statements.


- 20 -
 Index


TAITRON COMPONENTS INCORPORATED




Notes to Consolidated Financial Statements




1  -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Overview of business




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.  We also offer value-added engineering and turn-key services, focusing on providing contract electronic manufacturers (CEMs) and original equipment manufacturers (OEMs) with ODM services for their multi-year turn-key projects.  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.







Basis of Presentation




The accompanying financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) as promulgated in the United States of America.





Principles of Consolidation





The consolidated financial statements include the accounts of the Company, its various wholly-owned subsidiaries 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 $203,000 and $219,000 as of December 31, 2010 and 2009, respectively.





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 provide assurance that these factors will not materially adversely affect the Company in the future.  Any significant disruption in the delivery of merchandise from the Company’s suppliers, substantially all of whom are foreign, could also have a material adverse impact on the Company’s business and results of operations.  Management estimates that over 90% of the Company’s products purchased were produced in Asia.





Samsung Electro-Mechanics Co. accounted for approximately 17% and 13% of all Taitron’s net purchases for fiscal years 2010 and 2009, 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.





For the year ended December 31, 2010 two customers accounted for 12% and 8% of our net sales.  For the year ended December 31, 2009 two customers accounted for 13% and 8% of our net sales.  As of December 31, 2010, two customers accounted for 14% and 11% of our trade receivables.  As of December 31, 2009, two customers accounted for 19.6% and 8.6% of our trade receivables.


- 21 -
 Index





Cash and Cash Equivalents





The Company considers all highly liquid investments with an original maturity of 90 days or less to be cash equivalents and maintains cash balances in multiple accounts at multiple banks.  Accounts at our primary domestic financial institution are non-interest-bearing transaction accounts with unlimited insurance coverage by the Federal Deposit Insurance Corporation through December 31, 2012.  Our cash held in a money market investment account exceeds insurance limits.  Our foreign accounts are not insured, however, 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.  At December 31, 2010 and 2009, the Company had no cash equivalents.





Revenue Recognition





The Company will recognize revenue on arrangements in accordance with FASB ASC No. 605, “Revenue Recognition”.  In all cases,revenue is recognized 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, 2010 and 2009 amounted to $26,000 and $24,000, 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, 2010 and 2009 amounted to $96,000 and $89,000, respectively.





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 $3,700,000 and $3,615,000 at December 31, 2010 and 2009, respectively.  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.





Property and Equipment





Property and equipment are carried at cost less accumulated 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.  Property and equipment amortized using an accelerated method does not result in a material difference over the straight-line method.  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





In accordance with ASC 350-30, the Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. The Company’s management currently believes there is no impairment of its long-lived assets. There can be no assurance, however, that market conditions will not change or demand for the Company’s products under development will continue. Either of these could result in future impairment of long-lived assets.





- 22 -
 Index




Marketing





Marketing costs consist primarily of payroll and related expenses for personnel engaged in marketing, business development, and selling activities.  Advertising and other promotional costs, are expensed as incurred, and were $5,000 and $3,000 for the years ending December 31, 2010 and 2009, respectively.





Shipping Activities





Outbound shipping charges to customers are included in “Net sales.”  Outbound shipping-related costs are included in “Cost of goods sold.”





Stock-Based Compensation





The Company accounts for its share-based compensation in accordance ASC 718-20.  Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the requisite vesting period.





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.





As a result of the implementation of certain provisions of ASC 740, IncomeTaxes (“ASC 740”), which clarifies the accounting and disclosure for uncertainty in tax positions, as defined, ASC 740 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes.  We adopted the provisions of ASC 740 as of January 1, 2007, and have analyzed filing positions in each of the federal and state jurisdictions where required to file income tax returns, as well as all open tax years in these jurisdictions.  We have identified the U.S. federal and California as our "major" tax jurisdictions.  Generally, we remain subject to Internal Revenue Service examination of our 2007 through 2009 U.S. federal income tax returns, and remain subject to California Franchise Tax Board examination of our 2006 through 2009 California Franchise Tax Returns.  However, we have certain tax attribute carryforwards which will remain subject to review and adjustment by the relevant tax authorities until the statute of limitations closes with respect to the year in which such attributes are utilized.





We believe that our income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material change to our financial position.  Therefore, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740.  In addition, we did not record a cumulative effect adjustment related to the adoption of ASC 740.  Our policy for recording interest and penalties associated with income-based tax audits is to record such items as a component of income taxes.





Fair Value of Financial Instruments





The fair value accounting guidance defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”  The definition is based on an exit price rather than an entry price, regardless of whether the entity plans to hold or sell the asset.  This guidance also establishes a fair value hierarchy to prioritize inputs used in measuring fair value as follows:


•         Level 1:  Observable inputs such as quoted prices in active markets;


•         Level 2:  Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and


•         Level 3:  Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.





The estimated fair values of our financial assets and liabilities that are recognized at fair value on a recurring basis, using available market information and other observable data are as follows:




- 23 -
 Index


December 31, 2010


December 31, 2009Level 1


Level 2


Level 3


Total


Level 1


Level 2


Level 3


TotalQuoted Prices

in Active

Markets or

Identical

Assets


Significant

Other

Observable

Inputs


Significant

Unobservable

Input





Quoted Prices

in Active

Markets or

Identical

Assets


Significant

Other

Observable

Inputs


Significant

Unobservable

InputCash

$
3,095,000


$
-


$
-


$
3,095,000


$
2,768,000


$
-


$
-


$
2,768,000Restricted cash


200,000



-



-



200,000



100,000



-



-



100,000Other assets


-



263,000



-



263,000



-



244,000



-



244,000Total Assets

$
3,295,000


$
263,000


$
-


$
3,558,000


$
2,868,000


$
244,000


$
-



3,112,000Current portion oflong-term debt

$
1,500,000


$
-


$
-


$
1,500,000


$
-


$
-


$
-


$
-Long term debt - non current


-



-



-



-



1,000,000











1,000,000Total Liabilities

$
1,500,000


$
-


$
-


$
1,500,000


$
1,000,000


$
-


$
-


$
1,000,000





Other assets includes the Company’s two cash investments in separate unrelated businesses and their fair values are accounted for under the cost basis of accounting with significant observable inputs.





The carrying value of the Company’s long-term debt for year ending December 31, 2010, is considered to approximate fair market value, due to its short-term maturity as well as the interest rate of the instrument is based predominantly on variable reference rates.





The carrying value of accounts receivable, inventory, trade payables and accrued liabilities approximates their fair values due to their short-term maturities.




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. Diluted loss per share includes potentially dilutive securities such as outstanding options and warrants, using various methods such as the treasury stock or modified treasury stock method in the determination of dilutive shares outstanding during each reporting period. Common equivalent shares, consisting primarily of stock options, of approximately 316,000 and 339,000 for the years ended December 31, 2010 and 2009, respectively, are excluded from the computation of diluted loss per share as their effect is anti-dilutive.





Foreign Currency Translation





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





Use of Estimates





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





Reclassifications





Certain reclassifications have been made to the prior years’ financial statements in order to conform to the current year presentation.  Such reclassifications are immaterial to both current and all previously issued financial statements taken as a whole and had no effect on previously reported results of operations.




Business Segments




We operate in one industry, the business of providing distribution and value-added services for electronic components.  Management designates the internal reporting used by the chief executive officer for making decisions and assessing performance as the source of our reportable segments.  See Note 12 to the consolidated financial statements Geographic Information, for additional information.
  - 24 -
 Index




Recent Adopted Accounting Pronouncements





In June 2009, the FASB issued changes to the consolidation guidance applicable to a variable interest entity (VIE). FASB ASC Topic 810, "Consolidation," (“ASC 810”) amends the guidance governing the determination of whether an enterprise is the primary beneficiary of a VIE, and is, therefore, required to consolidate an entity, by requiring a qualitative analysis rather than a quantitative analysis. The qualitative analysis will include, among other things, consideration of who has the power to direct the activities of the entity that most significantly impact the entity's economic performance and who has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. This standard also requires continuous reassessments of whether an enterprise is the primary beneficiary of a VIE. FASB ASC 810 also requires enhanced disclosures about an enterprise's involvement with a VIE. Topic 810 is effective as of the beginning of interim and annual reporting periods that begin after November 15, 2009. The adoption of ASC 810 did not have an impact on the Company’s financial position, results of operations or cash flows.





Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the United States Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future financial statements.







2  -  RESTRICTED CASH





At December 31, 2010 and 2009, we had $200,000 and $100,000, respectively, of restricted cash on deposit as collateral for our $200,000 and $100,000, respectively, irrevocable letter of credit in favor of a trade vendor for inventory purchasing.








3  -  PROPERTY AND EQUIPMENT





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




December 31,2010


2009Land

$
1,297,000


$
1,297,000Buildings and improvements


5,125,000



5,125,000Furniture and equipment


740,000



978,000Computer software and equipment


443,000



2,364,000Total Property and Equipment


7,605,000



9,764,000Less: Accumulated depreciation and amortization


(2,628,000
)


(4,629,000
)Property and Equipment, net

$
4,977,000


$
5,135,000


4  -  OTHER ASSETS





Other assets is summarized as follows:




December 31,2010


2009Investment in securitites

$
68,000


$
68,000Investment in joint venture


147,000



147,000Other


48,000



29,000Other Assets

$
263,000


$
244,000





Our $68,000 investment in securities as of December 31, 2010 remained unchanged from 2009 and relates to 154,808 shares of Zowie Technology Corporation, a manufacturer of discrete semiconductors and also a supplier of our electronic component products.  This investment is accounted for under the cost method basis of accounting.





- 25 -
 Index





Our $147,000 investment in joint venture as of December 31, 2010 remained unchanged from 2009 and relates to our 49% ownership of Taiteam (Yangzhou) Technology Corporation Limited, a joint venture with its 51% owner, Full Harvest Development Limited.  This joint venture is not considered to be a “Variable Interest Entity”, as defined under ASC 810 (formerly FAS Interpretation No. 46R), and as such, is accounted for under the equity method basis of accounting.  This joint venture is not operational and as such, there has been no activity in this joint venture during 2010.





5  -  LONG-TERM DEBT





Long-term debt consists of the following:




December 31,2010


2009Secured credit facility - related party


1,500,000



1,000,000Less current portion


(1,500,000
)


-Long-term debt, less current portion

$
-


$
1,000,000




Secured credit facility - On April 21, 2008 we entered into a $3,000,000 credit facility, collateralized by real property, from K.S. Best International Co. Ltd., a company controlled by the brother of our Chief Executive Officer, maturing on April 21, 2011.  Credit is available in $500,000 advances, each advance payable in monthly interest only installments, at the rate of Prime + 0.25% per annum with the entire principal amount outstanding due two years from the date of each advance or April 21, 2011, whichever is earlier.  As of December 31, 3010 the aggregate outstanding balance on this credit facility was $1,500,000 as on June 3, 2008 we borrowed $500,000 due April 21, 2011, on April 3, 2009 we borrowed $500,000 due April 3, 2011 and on April 1, 2010, we borrowed $500,000 due April 21, 2011.





6  -  SHAREHOLDER’S EQUITY





Preferred Stock - There are 5,000,000 shares of authorized preferred stock, par value $0.001 per share, with no shares of preferred stock issued or outstanding.  The terms of the shares are subject to the discretion of the Board of Directors.





Class A Common Stock - There are 20,000,000 shares of authorized Class A common stock, par value $0.001 per share, with 4,777,144 issued and outstanding as of December 31, 2010 and 2009.  Each holder of Class A common stock is entitled to one vote for each share held.  During 2010 and 2009, the Company did not repurchase, nor issue, any shares of its Class A common stock.





Class B Common Stock - There are 762,612 shares of authorized Class B common stock, par value $0.001 per share, with 762,612 shares issued and outstanding as of December 31, 2010 and 2009.  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.





Dividends – During 2010, the Company did not declare any dividends.  On June 2, 2009, the Board of Directors declared an annual cash dividend of $0.05 per share of Class A and Class B common stock, payable to shareholders of record at the close of business on June 15, 2009.  The total dividend amount paid for the year ended December 31, 2009 was $276,000.




- 26 -
 Index




7  -  INCOME TAXES





Income tax provision is summarized as follows:




Year Ended December 31,2010


2009Current:Federal

$
-


$
-State


7,000



2,0007,000



2,000Deferred:Federal


(81,000
)


(249,000
)State


(21,000
)


(64,000
)Increase in valuation allowance


102,000



313,000-



-Income tax provision

$
7,000


$
2,000




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




Year Ended December 31,2010


2009“Expected” income tax expense (benefit)

$
(93,000
)

$
(313,000
)State tax expense, net of Federal benefit


2,000



2,000Foreign (income) loss


-



-Increase in valuation allowance


102,000



313,000Other


(4,000
)


-Income tax provision

$
7,000


$
2,000




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




December 31,2010


2009Deferred tax assets:Inventory reserves

$
1,585,000


$
1,549,000Section 263a adjustment


82,000



82,000Allowances for bad debts and returns


33,000



33,000Accrued expenses


21,000



20,000Asset valuation reserve


57,000



57,000State net operating loss carry forward


239,000



182,000Other


45,000



34,000Total deferred tax assets


2,062,000



1,957,000Valuation allowance


(1,906,000
)


(1,804,000
)156,000



153,000Deferred tax liabilities:Deferred state taxes


(156,000
)


(153,000
)Net deferred tax assets

$
-


$
-







As of December 31, 2010, the Company had approximately $435,000 and $1,146,000 in net operating loss carryforwards for federal and state income tax purposes, respectively.  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.  We have identified the U.S. federal and California as our "major" tax jurisdiction and generally, we remain subject to Internal Revenue Service examination of our 2007 through 2009 U.S. federal income tax returns, and remain subject to California Franchise Tax Board examination of our 2006 through 2009 California Franchise Tax Returns.





- 27 -
 Index





As a result of the implementation of ASC 740, we recognized no material adjustment to unrecognized tax benefits.  At the adoption date of January 1, 2007, we had $795,000 of unrecognized tax benefits, all of which would affect our effective tax rate if recognized.  At December 31, 2010 and 2009, we have $1,906,000 and $1,804,000 of unrecognized tax benefits, respectively. The Company will continue to classify income tax penalties and interest, if any, as part of interest and other expenses in its statements of operations. The Company has incurred no interest or penalties as of December 31, 2010 and 2009.





8  -  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 each of the years ended December 31, 2010 and 2009, employer matching contributions aggregated approximately $40,000 and 33,000, respectively.





Participants in the plan, through self-directed brokerage accounts, held 237,939 and 228,939 shares in Class A common stock of the Company as of December 31, 2010 and 2009, respectively.  The Plan does not offer new issues of common stock of the Company as an investment option.





9  -  STOCK OPTIONS





The Company’s 2005 Stock Incentive Plan (the “Plan”) 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 was as follows for 2010 and 2009: dividend yield of 2%; expected volatility of 33%; a risk free interest rate of approximately 4.4% and an expected holding period of five years.





Stock option activity during the periods indicated is as follows:





Number of

Shares


Weighted

Average

Exercise

Price


Weighted

Average

Years

Remaining

Contractual

Term


Aggregate

Intrinsic

ValueOutstanding at December 31, 2008


453,167


$
1.81



3.6


$
-Granted


42,000



0.87



8.1Forfeited


(99,667
)


1.62Outstanding at December 31, 2009


395,500



1.75



4.3


$
19,000Granted


3,000



1.19



9.2Forfeited


(32,000
)


3.19Outstanding at December 31, 2010


366,500


$
1.62



3.4


$
69,000Exercisable at December 31, 2010


315,499


$
1.69



3.0


$
48,000




At December 31, 2010, the range of individual weighted average exercise prices was $0.84 to $1.92.


- 28 -
 Index





10  -  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 potentially dilutive common stock.




Year ended December 31,2010


2009Net loss available to common shareholders used in basic and diluted loss per share

$
(363,000
)

$
(961,000
)Weighted average number of common shares used in basic loss per share (Class A and B shares)


5,539,756



5,539,756Basic loss per share (Class A and B shares)

$
(0.07
)

$
(0.17
)Effect of dilutive securities:Options


-



-Weighted average number of common shares and dilutive potential common shares used in diluted loss per share (Class A and B shares)


5,539,756



5,539,756Diluted loss per share

$
(0.07
)

$
(0.17
)




11  -  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 a material risk to its financial condition.





Inventory Purchasing


Outstanding commitments to purchase inventory from suppliers aggregated $1,114,000 as of December 31, 2010.





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.


- 29 -
 Index





12  -  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 or assets:




Year ended December 31,


December 31,2010


2009


2010


2009Long-lived


Long-livedRevenues


Revenues


Assets


AssetsUnited States

$
5,834,000


$
3,873,000


$
3,357,000


$
3,454,000Mexico


607,000



667,000



160,000



172,000Brazil


351,000



231,000



-



-Taiwan


120,000



90,000



286,000



285,000China


22,000



48,000



1,174,000



1,224,000Canada


88,000



29,000



-



-Other foreign countries


167,000



602,000



-



-Total

$
7,189,000


$
5,540,000


$
4,977,000


$
5,135,000





14  -  SUBSEQUENT EVENTS





In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through March 31, 2011, the date the financial statements were issued.





Through the filing date of this report, the Company has funded $196,000 out of a total amount of $245,000 to an unrelated third party in anticipation of acquiring a 49% non-controlling interest in a People’s Republic of China (PRC) based manufacturer of electronic parts and devices.  This joint venture will further the Company’s capabilities in the ODM services it provides to customers.  The acquisition is scheduled to be fully funded and closed by June 30, 2011 and is subject to satisfactory due diligence and standard representations and warranties by the selling third party.





On March 7, 2011, we extended the maturity date of our secured credit facility borrowings for two additional years, now expiring June 30, 2013.  All other terms and conditions remain unchanged.  See Note 5.




ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE.None.





ITEM 9A.  CONTROLS AND PROCEDURES.





Evaluation of Disclosure Controls and Procedures.





Our management, with the participation of our principal executive and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (“Exchange Act”)) as of the end of the period covered by this report.  Based on that evaluation, our principal executive and principal financial officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.





Internal Control over Financial Reporting.





a) Management’s Annual Report on Internal Control over Financial Reporting.  Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) for the Company.  Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.  Because of its inherent limitations, internal control over financial reporting may not prevent nor detect misstatements.  Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.





- 30 -
 Index





Our internal controls framework is based on the criteria set forth in the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and includes those policies and procedures that: (i) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (ii) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.





Based on such criteria, our management, with the participation of our principal executive and principal financial officer, evaluated the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010 and 2009 and concluded that, as of December 31, 2010 and 2009, our internal control over financial reporting was effective.





Management's assessment report was not subject to attestation by the Company's independent registered public accounting firm and as such, no attestation was performed pursuant to SEC Final Rule Release Nos. 33-8934; 34-58028 that permit the Company to provide only management's assessment report for the year ended December 31, 2010 and 2009.





b) Changes in Internal Control over Financial Reporting.  There has been no change in our internal control over financial reporting that occurred in our fiscal quarter ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.





ITEM 9B. OTHER INFORMATION.     None.





PART III





ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.





The information required by this section, with the exception of the information provided below concerning the Company’s Code of Ethics, will appear in the Proxy Statement for the 2011 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, 2010.





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 11.  EXECUTIVE COMPENSATION.





The information required by this section will appear in the Proxy Statement under the caption “Executive Compensation” and is incorporated herein by this reference.





ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.





The information required by this section 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 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.





The information required by this section will appear in the Proxy Statement under the caption “Certain Relationships and Related Transactions” and is incorporated herein by this reference.





ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES.





The information required by this section will appear in the Proxy Statement under the caption “Principal Accounting Fees and Services” and is incorporated herein by this reference.


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 Index




PART IV





ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.





Financial Statement Schedules.     Not Applicable.





Exhibits





21.1*
List of Subsidiaries. (1)
 23.1*
Consent of Independent Registered Public Accounting Firm – Anton & Chia LLP.
 24.1*
Power of Attorney (contained on the signature page hereof).
 31.1*
Principal Executive Officer - Section 302 Certification.
 31.2*
Principal Financial Officer - Section 302 Certification.
 32*
Principal Executive and Principal Financial Officer - Section 906 Certification.
 
 
 *
Filed herewith.
 (1)
Incorporated by reference from the Exhibit 21.1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 filed on March 31, 2010.




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 Index




SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.







TAITRON COMPONENTS INCORPORATEDDated:  March 31, 2011
By:
/s/ Stewart WangStewart WangDirector, Chief Executive Officer and President




Dated:  March 31, 2011
By:
/s/ David VanderhorstDavid VanderhorstChief Financial Officer







POWER OF ATTORNEY





KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Stewart Wang and David Vanderhorst and each of them singly, as attorneys-in-fact and agents, 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 attorneys-in-fact, or his substitutes, may do or cause to be done by virtue hereof.





Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated below.





Signature

Title

Date/s/ Johnson Ku

Chairman of the Board

March 31, 2011Johnson Ku/s/ Stewart Wang

Director, Chief Executive Officer and President

March 31, 2011Stewart Wang/s/ Richard Chiang

Director

March 31, 2011Richard Chiang/s/ Craig Miller

Director

March 31, 2011Craig Miller/s/ Felix Sung

Director

March 31, 2011Felix Sung
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