10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

  For the Fiscal Year Ended December 31, 2002

¨ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-25844

TAITRON COMPONENTS INCORPORATED

(Name of Registrant as specified in its charter)

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

28040 West Harrison Parkway

Valencia, California 91355-4162

(Address of Principal Executive Offices)

(661) 257-6060

Registrant’s telephone number, including area code:

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

None

Securities registered under Section 12(g) of the Exchange Act:

Class A common stock, par value $.001 per share

(Title of each class)

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

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Approximate aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2002 was $5.2 million.

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

Class	Outstanding on February 28, 2003
Class A common stock, $.001 par value	4,909,071
Class B common stock, $.001 par value	762,612

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the Registrant’s Proxy Statement relating to Registrant’s Annual Meeting of Shareholders, scheduled to be held on May 16, 2003, are incorporated by reference in Part III of this Form 10-K.

PART I

ITEM 1. BUSINESS.

For a discussion of certain material factors which may affect Taitron, see “BUSINESS—Cautionary Statements and Risk Factors” commencing on page 9 of this report.

General

Taitron Components Incorporated (“Taitron” or the “Company”) is a national distributor of electronic components, primarily focused on discrete semiconductors, optoelectronic devices and passive components. Taitron’s “superstore” strategy consists of carrying a large quantity and variety of components in inventory to meet the rapid delivery requirements of its customers. At December 31, 2002, Taitron’s inventory consisted of over 1.5 billion components. Taitron currently distributes over 13,000 different products manufactured by more than 50 different suppliers. Taitron’s per unit sales price of components sold during the year ended December 31, 2002 averaged approximately 1.9 cents.

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

The United States electronics distribution industry is composed of national distributors (and international distributors), as well as regional and local distributors. Electronics distributors market numerous products, including active components (such as transistors, microprocessors and integrated circuits), passive components (such as capacitors and resistors), and electromechanical, interconnect and computer products. Taitron focuses its efforts almost exclusively on the distribution of discrete semiconductors, optoelectronic devices and passive components, a small subset of the component market. During four of the last five years, Electronic Buyers News ranked Taitron among the top 50 distributors and among the top 20 for distribution of discrete semiconductors based upon sales in North America. Of this magazine’s top 50 electronics distributors listed for 2001, Taitron believes that it’s the only distributor concentrating efforts principally on the discrete semiconductor market.

Taitron has continued to be impacted by the severe decline in demand from the U.S. market, which began in late 2000. As a result, Taitron has continued to experience declining sales since early 2001. In response to this declining demand,Taitron expects to increase its sales to existing customers through further expansion of the number of different types of discrete components and other non-integrated circuit components in its inventory and by attracting additional CEMs, OEMs and electronics distributor customers. In addition to traditional component fulfillment, Taitron also plans to reposition its market role into value added engineering services for the existing OEM and CEM customers through partnership agreements with offshore solution providers, such as Princeton Technology Corporation and Orchard Electronics Corporation Ltd., both Taiwanese based companies.

Discrete Semiconductors

Semiconductors can be broadly divided into two categories—discrete semiconductors, including transistors, diodes, rectifiers and bridges, which are packaged individually to perform a single or limited function, and integrated circuits, such as microprocessors and other “chips,” which can contain from a few to as many as several million transistors and other elements in a single package, and usually are designed to perform complex tasks.

While integrated circuits, such as microprocessor chips, have garnered more public exposure during the past several years, discrete semiconductors, the ancestral root of integrated circuits, have been a core element of electric equipment for more than 35 years. Discrete semiconductors are found in most consumer, industrial and military electrical and electronic applications.

Discrete semiconductors represent only a small subset of the different types of semiconductors currently available. Discrete semiconductors are generally more mature products with a more predictable demand, more stable pricing and more constant sourcing than other products in the semiconductor industry, and are thus less susceptible to technological obsolescence than integrated circuits. Taitron believes that the market for discrete semiconductors is growing, although at a slower pace than the market for semiconductors in general. This could in part be due to the fact that OEMs are designing products which utilize integrated circuits in place of discrete semiconductors.

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Optoelectronic Devices and Passive Components

In addition to discrete semiconductors, Taitron offers 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. Taitron markets these optoelectronic devices and passive components through the same channels, as the discrete semiconductors. Sales of optoelectronic devices and passive components were 36%, 29% and 27% of Taitron’s total sales for the years ended December 31, 2002, 2001 and 2000, respectively. During 2002, Taitron purchased inventory of $3,380,000 and $665,000 of passive and optoelectronic components, respectively, to facilitate planned increases in sales of these components in the future. This is a forward looking statement and Taitron cannot guarantee that sales of passive and optoelectronic components will increase in the future.

Electronic Distribution Channels

Electronic component manufacturers (“suppliers”) sell components directly to contract electronic manufacturers (CEMs) and to original equipment manufacturers (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 medium and smaller sized CEMs and OEMs, as well as smaller distributors. Many suppliers consider electronic distributors to be an integral part of their businesses. As a stocking, marketing and financial intermediary, the distributor relieves its suppliers of a portion of their costs and personnel associated with stocking and selling products, including otherwise sizable investments in finished goods inventories and accounts receivable. By having geographically dispersed selling and delivery capabilities, distributors are often able to serve smaller and medium sized companies more effectively and economically than can the supplier.

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

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

Most large distributors tend to be broad line distributors, carrying various different categories of electronic products, and usually focus their resources on the fastest selling products in each category they distribute. Of the top 50 electronics distributors reported by Electronic Buyers News for 2001, Taitron believes that only Taitron and three other companies focus a significant portion of their distribution efforts on discrete semiconductors. However, Taitron believes that the three other companies concentrate their selling efforts on other semiconductor components, such as integrated circuits, microprocessors and memory components. Taitron believes that it is the only distributor which concentrates its efforts primarily on the discrete semiconductor market.

Strategy

Since Taitron was founded in 1989, its goal has been to become one of the leading distributors of discrete semiconductors in North America. Taitron initially gained market share by concentrating on selling discrete semiconductors at competitive prices. Since 1997, Taitron has marketed itself as a “discrete components superstore”, with an in-depth focus on discrete semiconductors, passive and optoelectronic components and extensive inventory of a wide variety of products. In creating the “superstore” strategy, Taitron has attempted to develop a more efficient link between suppliers and the small to medium sized customers which generally do not have direct access to large suppliers and must purchase exclusively through distributors. The primary aspects of the Taitron’s strategy include:

Inventory. Taitron’s core strategy includes maintaining a substantial inventory of discrete and passive components purchased at prices generally lower than those commonly available to its competitors. This strategy allows Taitron to fill customer orders immediately from stock held in inventory. Taitron believes that its most important competitive advantage is the depth of its inventory. Unlike other distributors who carry only the best-selling discretes, Taitron’s entire inventory consists of a wide range of discrete semiconductors, optoelectronic devices and passive components. However, since demand remained weak throughout 2002, Taitron is focusing on lowering its inventory balances in 2003 and changing its product mix. With immediate

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availability of a wide selection of products and brands, Taitron believes that sales may grow if the market rebounds. See Part II Item 7—“MANAGEMENT’S DISCUSSION AND ANALYSIS—Liquidity and Capital Resources.”

Strategic Purchasing. When the opportunity presents itself, Taitron makes opportunistic purchases of a supplier’s uncommitted inventory in order to take advantage of favorable pricing. Taitron also makes significant purchases in advance in an attempt to maintain consistent inventory levels and meet anticipated orders. When possible, Taitron attempts to control its inventory risks by matching large customer orders with simultaneous purchases from suppliers. See “BUSINESS—Cautionary Statements and Risk Factors—Need to Maintain Large Inventory; Price Fluctuations”.

Engineering Services. Taitron anticipates the development of an engineering service business to support our existing OEM and CEM customers by outsourcing their product design and assembly work offshore. Strategic allies such as Princeton Technology Corporation and Orchard Electronics Corporation Ltd., both Taiwanese based companies, will help develop and facilitate this outsourcing program.

Master Distributor. Taitron distributes electronic components to other distributors, including nationwide distributors when their inventory cannot fulfill immediate customer orders. Taitron, with its higher volume, lower cost inventory acts as a master distributor for certain of its component suppliers. Taitron estimates that approximately 32% of its sales are a direct result of being a master distributor.

Preferred Distributors. In 1998, Taitron developed a Preferred Distributor Agreement with certain of its distributor customers to promote a much stronger business relationship. Under this type of agreement, Taitron’s preferred distributors provide point of sales (“POS”) reports which identify the distributor’s customers and Taitron provides the preferred distributors with limited price protection, limited stock rotations and return privileges among other benefits. As of the date of this Report, Taitron has entered into Preferred Distributor Agreements with over 60 distributors. Going forward, Taitron expects to be more selective in renewing some of the 60 preferred distributors to new agreements based on geographical regions and also to better focus support of new products and sales programs.

Support Smaller Distributors, CEMs and OEMs. Taitron focuses its marketing efforts on smaller contract manufacturers, distributors, CEMs and OEMs who generally do not have direct access to suppliers because of their limited purchasing volumes and, therefore, usually have to purchase their requirements from large distributors, often with substantial markups. During the last few years, there have been substantial consolidations within the electronics distribution industry creating very large distributors. This trend to consolidate creates opportunities for Taitron since suppliers do not usually direct sales efforts toward smaller or medium sized CEMs and OEMs and often the larger distributors no longer adequately service smaller customers. Taitron believes that its strategic purchasing policies enable Taitron to provide medium and smaller CEMs and OEMs and distributors competitive prices while still maintaining adequate profit margins. Taitron, generally, does not impose minimum order limitations on its customers, which enables smaller customers to avoid the costs of carrying large inventories. Taitron also offers its customers a limited range of value added services such as cutting and forming, quality monitoring and product source tracing. Taitron intends to grow through further expansion of the number of different types and brands of products in its inventory and by expanding its direct sales force geographically to attract additional electronics distributors, CEMs and OEMs. See “BUSINESS—Sales and Marketing”.

Relationships with Suppliers. Stock rotation and price protection privileges are beneficial to distributors because they enable distributors to reduce inventory cost or rotate inventory they are unable to sell, thus reducing the risks and costs associated with over-purchasing or obsolescence. Price protection mitigates the risks of falling prices of components held in inventory. Since 2001, Taitron has been aggressively pursuing new distribution agreements that provide Taitron with stock rotation and price protection privileges. These distribution agreements also provide stock buy back terms where suppliers will buy back inventory from the distributor if either the supplier or distributor terminates the distribution agreement. Taitron also believes that it has 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 the risk for price fluctuations) in order to obtain better pricing. Taitron has operated an office in Taipei, Taiwan, since 1997. This office focuses on product procurement and strengthening relationships with suppliers in the Far East. See “BUSINESS—Cautionary Statements and Risk Factors—Need to Maintain Large Inventory; Price Fluctuations” and “BUSINESS—Suppliers.”

Low Cost “PSD” Brand. Since October 2001, Taitron introduced a low cost commodity semiconductor line from a few strategic suppliers. The expected higher demand and faster turn of the PSD brand should help reduce carrying costs and offer Taitron’s preferred distributors and selective customers the most competitive price in the current market. Sales of the PSD brand was approximately $100,000 and $14,000 in 2002 and 2001, respectively.

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Reliable One Stop Shopping. Taitron offers a large selection of different name-brand discrete semiconductors, optoelectronic devices and passive components at competitive prices which reduces significantly the number of suppliers a buyer must purchase from. Taitron provides customers with catalogs that are specially designed to aid customers in quickly locating the types and brands of products that they need. Because of its large inventory, Taitron can often fill a significant portion, or all, of a customer’s order from stock. Historically, Taitron has been able to fill most of its customers’ orders within 24 hours and in compliance with their requested delivery schedules. See Part II Item 7—“MANAGEMENT’S DISCUSSION AND ANALYSIS—Results of Operations”, “BUSINESS—Customers” and “BUSINESS—Sales and Marketing.”

Products

Taitron markets 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, 2002, Taitron’s inventory contained over 1.5 billion separate components and over 13,000 distinct products. In 2002, the average per unit sales price of the products sold by Taitron was approximately 1.9 cents.

In 2002, Taitron purchased products from over 50 suppliers, including Everlight Electronics Co, Ltd., Fairchild Semiconductor Corporation, KEC America Corporation, General Semiconductor Inc., Samsung Electro-Mechanics Co., Vishay Americas Inc. and Zowie Technology Corporation. See “BUSINESS—Cautionary Statements and Risk Factors—Suppliers”, “BUSINESS—Customers” and “BUSINESS—Suppliers”.

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

Rectifiers. Rectifiers are generally utilized in power supply and other high power applications to convert alternating current to direct current. Taitron sells a wide variety of rectifiers, including silicon rectifiers, fast efficient rectifiers, schottky rectifiers, glass passivated rectifiers, fast efficient glass passivated rectifiers, silicon bridge rectifiers, 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 Taitron include switching diodes, varistor diodes, germanium diodes and zener diodes.

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

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

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

The products distributed by Taitron are mature products that are used in a wide range of commercial and industrial products and industries. Taitron believes that a majority of the products it distributes are used in applications where integrated circuits are not viable alternatives. As a result, Taitron has not experienced any material amount of product obsolescence, and does not expect to experience any material amount of product obsolescence in the foreseeable future. This is a forward looking statement and, as such, is subject to uncertainties. There can be no assurance that over time the functions for which discretes are used will not eventually be displaced by integrated circuits.

Taitron conducts limited quality monitoring of its products. Taitron purchases products from reliable manufacturers who provide warranties for their products that are common in the industry. Also, Taitron is certified according to the International Standardization Organization (“ISO”) and maintains its Certificate under the quality standard ISO 9001:2000.

Taitron’s distribution originates from a 55,000 square foot owned facility located in Valencia, California. Taitron utilizes a computerized inventory control/tracking system which enables Taitron to quickly access its inventory levels and trace

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product shipments. See Item 2—“PROPERTIES.”

Customers

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

During 2002, Taitron distributed its products to over 1,100 customers. For the years ended December 31, 2002, 2001 and 2000, no one customer accounted for more than 5.8%, 6.2% and 5.9% respectively, of Taitron’s net sales. Taitron does not believe that the loss of any one customer would have a material adverse effect on its business.

Historically, distributors have accounted for a much larger percentage of Taitron’s net sales than CEMs and OEMs. However, as Taitron has expanded its customer base, Taitron’s customer mix has become more balanced, and now CEMs and OEMs account for a larger percentage of Taitron’s net sales. In 2002, distributors represented approximately 32% and both CEMs and OEMs together represented approximately 53% of Taitron’s net sales. The remaining 15% sales represented other brokers, exporters, and overseas customers.

Taitron historically has not required its distributor customers to provide any point of sale reporting and therefore Taitron does not know the different industries which its products are sold by its distributor customers. However, based on its sales to CEMs and OEMs, Taitron believes that no one industry accounted for a majority of the applications of the products sold in 2002, 2001 or 2000.

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

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

As Taitron’s customers grow in size, Taitron may lose its larger customers to its suppliers and as the electronics distribution industry consolidates some of Taitron’s customers may be acquired by competitors. See “BUSINESS Cautionary Statements and Risk Factors—Competition.”

Sales and Marketing Channels

As of March 14, 2003, Taitron’s sales and marketing department consisted of 13 employees. During most of 2002, Taitron maintained a branch sales office in each of the following states: Arizona, Illinois, Florida, Massachusetts and Texas. However, towards the end of 2002, Taitron centralized its sales order processing and customer service department into its headquarters at Valencia, California and as of March 14, 2003 only maintains a branch office in the state of Illinois. However, Taitron still retains outside sales account managers in the states of Florida, Massachusetts and Georgia. Taitron’s 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.

Taitron also supplies products to national distributors who share franchised lines with Taitron. These national distributors usually have many office locations throughout the United States and are larger than Taitron. Taitron serves the national distributors by providing easy access to discrete products they choose not to inventory, as well as supporting their needs in shortage inventory situations. Sales to national distributors were $137,000 in 2002 and $392,000 in 2001.

Taitron also has sales channels into South America through its branch office in Sao Paulo, Brazil. South American sales were $245,000, $340,000 and $594,000 in 2002, 2001 and 2000, respectively.

Taitron also has sales channels into Asia through its branch office in Taipei, Taiwan. Sales to Asian customers were $626,000, $1.1 million and $1.5 million in 2002, 2001 and 2000, respectively.

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Independent sales representatives have played an important role in developing Taitron’s client base, especially with respect to OEMs. Many OEMs want their suppliers to have a local presence and Taitron’s network of independent sales representatives are responsive to these needs. Independent sales representatives are primarily responsible for face-to-face meetings with Taitron’s customers, and for developing new customers. Independent sales representatives are each given responsibility for a specific geographical territory. Historically, sales representatives were paid a commission of 5% on all sales made in their territory, regardless of whether they were involved in the sales process. However, since 1998, sales representatives have not been compensated for sales made to non-preferred distributors. Taitron believes that this commission policy directs independent sales representatives’ attention to CEMs, OEMs and preferred distributors, thereby increasing Taitron’s market share with end users. Taitron and its independent sales representatives also jointly advertise and participate in trade shows. Taitron utilized 14 independent sales representatives during 2002 to develop new OEM customers and to provide a more direct link to existing OEM customers.

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

To attract new customers, Taitron has advertised in national industry publications such as Electronic Buyer’s News, EEM Local Sources, Electronic Source Book, and, in Canada, Electronic Products and Technology. Taitron also participates in regional and national trade shows and jointly advertises with suppliers and independent sales representatives.

Suppliers

Taitron believes that it is important to develop and maintain good relationships with its suppliers. Historically, Taitron did not have long-term supply, distribution or franchise agreements with its suppliers, but instead cultivated strong working relationships with each of its suppliers. However, since 1997 Taitron has entered into franchise agreements with certain of its suppliers. Such franchise agreements have terms from one to two years with inventory and price protection programs. See “BUSINESS—Cautionary Statements and Risk Factors—Relationship with Suppliers”.

In order to facilitate good relationships with its suppliers, Taitron typically will carry a complete line of each supplier’s discrete products. Taitron also supports its suppliers by increasing their visibility through advertising and participation in regional and national trade shows. Taitron generally orders components far in advance, helping suppliers plan production. Outstanding commitments to purchase inventory from suppliers as of March 15, 2003 was approximately $1.2 million. Also, Taitron has distribution agreements with certain suppliers whereby the terms of the agreement provides stock-rotation, price protection and stock buy back terms. See “BUSINESS—Cautionary Statements and Risk Factors—Need to Maintain Large Inventory; Price Fluctuations” and “BUSINESS—Strategy”.

Taitron purchases components from over 50 different suppliers, including Everlight Electronics Co, Ltd., Fairchild Semiconductor Corporation, General Semiconductor Inc., Samsung Electro-Mechanics Co. and Vishay Americas Inc. Taitron is continually attempting to build relationships with suppliers and from time to time adds new suppliers in an attempt to provide its customers with a better product mix. Also, Taitron’s relationships with suppliers have been terminated from time to time. The possibility exists that the loss of one or more distribution relationships with a supplier might have a material adverse effect on Taitron and its results of operations. See “BUSINESS—Cautionary Statements and Risk Factors—Relationship with Suppliers”.

For the year ended December 31, 2002, the following suppliers: Samsung Electro-Mechanics Co., General Semiconductor Inc., Vishay Americas Inc. and Everlight Electronics Co, Ltd. accounted for approximately 60% of Taitron’s net purchases. 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. No assurance can be given that the loss or a significant disruption in the relationship with one or more of Taitron’s suppliers would not have a material adverse effect on Taitron’s business and results of operations. See “BUSINESS—Cautionary Statements and Risk Factors—Relationship with Suppliers”.

Competition

Taitron operates in a highly competitive environment. Taitron faces competition from numerous local, regional and national distributors (both in purchasing and selling inventory) and electronic component manufacturers, including some of its own suppliers. Many of Taitron’s competitors are more established and have greater name recognition and financial and marketing resources than Taitron. Taitron believes that competition in the electronic industry is based on breadth of product lines, product availability, choice of suppliers, customer service, response time, competitive pricing and product knowledge, as well as value-added services. Taitron believes it competes effectively with respect to breadth and availability of inventory,

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response time, pricing and product knowledge. To Taitron’s knowledge, no other national distributor focuses its business on discrete semiconductors to the same extent as does Taitron. Generally, large component manufacturers and large distributors do not focus their internal selling efforts on small to medium sized OEMs and distributors, which constitute the vast majority of Taitron’s customers; however, as Taitron’s customers increase in size, component manufacturers may find it cost effective to focus direct selling efforts on those customers, which could result in the loss of customers or decreased selling prices. See “BUSINESS—Cautionary Statements and Risk Factors—Competition” and “BUSINESS—Electronic Distribution Channels”.

Management Information Systems

Taitron has made a significant investment in computer hardware, software and personnel. The MIS department is responsible for software and hardware upgrades, maintenance of current software and related databases, and designing custom systems. Taitron believes that its MIS department is crucial to Taitron’s success and believes in continually upgrading its hardware and software. To that end, during 2002 Taitron continued to upgrade its Oracle applications system. Taitron believes that this system has the capabilities to serve Taitron for future anticipated needs including capabilities of networking with remote locations. Also, during 2002, Taitron continued to upgrade its web site, which allows customers internet access to its inventory. Taitron 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 Taitron.

Warehouse Management System

Since 1998, Taitron has invested over $160,000 in a warehouse management system. This wireless, fully bar-coded warehouse tracking system greatly enhances the processing speed, accuracy of product quantity and location control within the warehouse. It also reduces potential errors and accelerates the timeframe within delivering components to customers. During 2002, custom software was developed to link the warehouse management system with Taitron’s Oracle applications system and has continued to upgrade its warehouse management system.

Foreign Trade Regulation

A large portion of the products distributed by Taitron are manufactured in the Far East, 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 Taitron’s business and results of operations.

Many of Taitron’s suppliers have their manufacturing facilities in countries whose economies continue to be volatile while recovering from recent years of financial concerns. Although local currencies have stabilized, the US dollar’s strength compared with Asian currencies may further reduce exports to Asia in the future. Sales to Asian customers were 4.5%, 6.6% and 4.4% of Taitron’s total sales in 2002, 2001 and 2000, respectively. Conversely, Taitron believes that the weaker Asian currencies may actually benefit Taitron in the short-term by providing opportunities for Taitron to purchase products at lower prices.

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

The ability to remain competitive with respect to the pricing of imported components could be adversely affected by increases in tariffs or duties, changes in trade treaties, strikes in air or sea transportation, and possible future United States legislation with respect to pricing and import quotas on products from foreign countries. For example, it is possible that political or economic developments in China, or with respect to the United States’ relationship with China, could have an adverse effect on Taitron’s business. Taitron’s ability to remain competitive could also be affected by other governmental actions related to, among other things, anti-dumping legislation and international currency fluctuations. While Taitron does not believe that any of these factors adversely impact its business at present, there can be no assurance that these factors will not materially adversely affect Taitron in the future. Any significant disruption in the delivery of merchandise from Taitron’s suppliers, substantially all of whom are foreign, could have a material adverse impact on Taitron’s business and results of operations. See “BUSINESS—Cautionary Statements and Risk Factors—Foreign Trade Regulation.”

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Employees

At March 14, 2003, Taitron had a total of 36 employees. None of Taitron’s employees are covered by a collective bargaining agreement and Taitron considers its relations with its employees to be good.

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

Taitron maintains a website with the address www.taitroncomponents.com. Taitron is 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. Taitron makes available free of charge through this website its annual reports on Form 10-K, quarterly reports on Form 10-Q 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 such material to, the Securities and Exchange Commission.

Cautionary Statements and Risk Factors

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

Revolving Line of Credit. As of December 31, 2002 and continuing through the date of this Report, Taitron was in default with certain conditions and covenants of its revolving line of credit facility. These defaults have not been waived, cured or otherwise excused by the lender. As of March 31, 2003, the outstanding balance of the credit facility is $2,200,000. Accordingly, the lender may demand full and immediate payment of this amount at anytime (for further discussion, also see “MANAGEMENT’S DISCUSSION AND ANALYSIS—Revolving Line of Credit and Liquidity and Capital Resources”).

Dependence Upon Key Personnel. We are highly dependent upon the services of Stewart Wang, our Chief Executive Officer and President. Our success to date has been largely dependent upon the efforts and abilities of Mr. Wang and the loss of Mr. Wang’s services for any reason could have a material adverse effect upon us. In addition, our work force includes executives and employees with significant knowledge and experience in the electronics distribution industry. Our future success will be strongly influenced by our ability to continue to recruit, train and retain a skilled work force. While we believe that we would be able to locate suitable replacements for our executives or other personnel if their services were lost, there can be no assurance that we would be able to do so on terms favorable to us. In particular, the hiring of a suitable replacement for Mr. Wang could be very difficult. We have purchased and currently intend to maintain a key-man life insurance policy on Mr. Wang’s life with benefits of $2,000,000 payable to us in the event of Mr. Wang’s death. The benefits received under this policy might not be sufficient to compensate us for the loss of Mr. Wang’s services should a suitable replacement not be employed. Mr. Wang is currently taking over the Chief Financial Officer position until the next annual board meeting in May 2003. The board will consider hiring a Chief Financial Officer, if needed, under the current market conditions.

Relationship with Suppliers. Typically, we do not have written long-term supply or distribution agreements with any of our non-franchise suppliers and our written franchise supplier agreements have terms of one to two years. Although we believe that we have established close working relationships with our principal suppliers, our success will depend, in large part, on maintaining these relationships and developing new supplier relationships for our existing and future product lines. Because of the lack of long-term contracts, there can be no assurance that we will be able to maintain these relationships. However, we believe that, even if we lose our direct relationship with a supplier, there exists alternative sources for our products. No assurance can be given that the loss or a significant disruption in the relationship with one or more of our suppliers would not have a material adverse effect on our business and results of operations. Recent consolidation of General Semiconductor Inc., our primary supplier, with Vishay Americas Inc., resulted in a dominate market share within Taitron. Although Taitron’s inventory is fully protected in the current distribution agreement, any loss of Vishay as a supplier will have a significant impact on our franchised distributor business and our results of operations.

Liquidity of Inventory. Inventory, according to Generally Accepted Accounting Principles, is included and classified as a current asset. 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.

Cyclical Nature of Electronics Industry. The electronics distribution industry has been affected historically by general economic downturns, which have had an adverse economic effect upon manufacturers and end-users of discrete components, as

9

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

Competition. We face intense competition, both in our selling efforts and purchasing efforts, from the significant number of companies that manufacture or distribute discrete products. Many of these companies have substantially greater assets and possess substantially greater financial and personnel resources than us. Many competing distributors also carry product lines which we do not carry. Generally, large component manufacturers and large distributors do not focus their direct selling efforts on small to medium sized OEMs and distributors, which constitute the vast majority of our customers. However, as our customers increase in size, component manufacturers may find it cost effective to focus direct selling efforts on those customers, which could result in the loss of customers or decrease on profit margins. There can be no assurance that we will be able to continue to compete effectively with existing or potential competitors. Also, we have seen new competition from Asia in two major areas: (a) more Asian manufacturers competing directly with U.S. distributors and (b) more OEMs and CEMs moving production capacity to Asia for cost savings.

Need to Maintain Large Inventory; Price Fluctuations. To adequately service our customers, we believe that it is necessary to maintain a significant inventory supply of our product offerings. However, if prices of components held in our inventory supply decline or if new technology is developed that displaces products distributed by us and held in inventory, our business and results of operations could be materially adversely affected.

Availability of Components. The semiconductor component business has from time to time experienced periods of extreme shortages in product supply, generally as the result of demand exceeding available supply. When these shortages occur, suppliers tend to either raise unit prices in order to reduce order backlog or place their customers on “allocation,” reducing the number of units sold to each customer. While we believe that, due to the depth of our inventory, we have not been adversely affected by past shortages in certain discrete components, no assurance can be given that future shortages will not adversely impact us.

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

The ability to remain competitive with respect to the pricing of imported components could be adversely affected by increases in tariffs or duties, changes in trade treaties, strikes in air or sea transportation, and possible future United States legislation with respect to pricing and import quotas on products from foreign countries. For example, it is possible that political or economic developments in China, or with respect to the United States’ relationship with China, could have an adverse effect on our business. Our ability to remain competitive could also be affected by other governmental actions related to, among other things, anti-dumping legislation and international currency fluctuations. While we do not believe that any of these factors adversely impact our business at present, there can be no assurance that these factors will not materially adversely affect us in the future. Any significant disruption in the delivery of merchandise from our suppliers, substantially all of whom are foreign, could also have a material adverse impact on our business and results of operations.

Control by Class B Common Stock Shareholder; Possible Depressive Affect on the Price of the Class A Common Stock. Stewart Wang, our Chief Executive Officer and President, beneficially owns all of our Class B common stock, which carries ten votes per share, and he thus controls approximately 62% of the voting power of our common stock. As a result, Mr. Wang is able to control us and our operations, including the election of at least a majority of our Board of Directors. Also, at any time while we have at least 800 shareholders who beneficially own shares of our common stock, our Articles of Incorporation provide for the automatic elimination of cumulative voting, which would allow Mr. Wang to elect all of the Directors. The disproportionate vote afforded the Class B common stock could also serve to discourage potential acquirers from seeking to acquire control of us through the purchase of the Class A common stock, which might have a depressive affect on the price of the Class A common stock.

Product Returns. On a case-by-case basis, we accept returns of products from our customers, without restocking charges, when they can demonstrate an acceptable cause for the return. Requests by a distributor to return products purchased for its own inventory are generally not included under this policy. We will also, on a case-by-case basis, accept returns of products upon payment of a restocking fee, which generally is set at 15% to 30% of the sales price. We will not accept returns of any products which were special ordered by a customer, or which are otherwise not generally included in our inventory. During the fiscal years ended December 31, 2002, 2001 and 2000, sales returns aggregated $225,000, $437,000 and $631,000, or 1.6%,

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2.6% and 1.9% of net sales, respectively. Historically, most allowable returns occur during the first two months following shipment. While we maintain reserves for product returns which we consider to be adequate, the possibility exists that we could experience returns in any period at a rate significantly in excess of historical levels, which could materially and adversely impact our results of operations for that period.

No Earthquake Insurance. Our former principal executive offices are located in Santa Clarita, California—an area which experienced significant damage in the 1994 Northridge, California earthquake. During 1994, we spent approximately $145,000 in repair costs and renovations to our facility resulting from that earthquake, none of which were covered by insurance. We believe that it is economically a better decision to self insure against any future earthquake losses than to pay the expensive earthquake insurance premiums. Our 55,000 square foot warehouse and headquarters which is also located in Valencia, is also self insured against future earthquake loss.

Subsequent Events—NASDAQ Listing. On January 21, 2003, Taitron received notice from NASDAQ that compliance with Marketplace Rule 4450(a)(2) (the “Rule”) has been obtained. The Rule requires that Taitron’s Class A common stock maintain a minimum market value of publicly held shares of $5,000,000 for continued inclusion by the Rule. Therefore, the matter as announced in Taitron’s Form 10-Q for the period ended September 30, 2002 and Form 8-K on January 21, 2003 is now closed and resolved. However, there can be no assurance that Taitron’s Class A common stock securities will be able to maintain compliance with the Rule, which could materially and adversely impact the value and marketability of these securities.

ITEM 2. PROPERTIES.

Taitron’s combined executive offices and warehouse facility, covering approximately 55,000 square feet, is located in Valencia, California. Taitron purchased the facility in 1999 for $3.3 million and moved in during the fourth quarter of 2000 after completing interior improvements. This property is subject to a mortgage held by a bank with an outstanding principal balance of approximately $2,625,000 as of December 31, 2002 and due on December 31, 2009. Taitron is obligated to make monthly payments of $20,312, which includes interest at 6.875% per annum.

Taitron still owns its previous office and warehouse facility, covering approximately 23,000 square feet, also located in Valencia, California. This property is also subject to a mortgage held by a bank with an outstanding principal balance of approximately $388,000 as of December 31, 2002 and due on December 1, 2013 (the “Mortgage”). Taitron is obligated to make monthly payments of $4,349, which includes interest at 6.359% per annum. During 2001, Taitron entered into an agreement to lease this facility for three years to an unrelated tenant. In September 2002, Taitron received a lease termination fee in the amount of $200,000 resulting from the immediate termination of the three year lease, originally scheduled to expire on April 30, 2004. Currently, the building is listed for sale and remains unoccupied.

During 1998, Taitron invested $519,000 in its Taiwan office, principally for acquisition of office and warehouse space that is owned by Taitron and not subject to any debt.

During most of 2002, Taitron maintained a branch sales office in each of the following states: Arizona, Illinois, Florida, Massachusetts, New York and Texas. Each office was approximately 1,000 to 2,800 square feet and accommodated up to three sales employees. Each of the leases were for a term of one to three years, all expired during 2002 and were not renewed. The Illinois sales office has rental expenses of $840 per month. However, towards the end of 2002, Taitron centralized its sales order processing and customer service department into its headquarters at Valencia, California and as of March 14, 2003 only maintains a branch office in the state of Illinois. However, Taitron still retains outside sales account managers in the states of Florida, Massachusetts and Georgia.

ITEM 3. LEGAL PROCEEDINGS.

In the ordinary course of business Taitron may become involved in legal proceedings from time-to-time. As of February 28, 2003, Taitron was not a party to any material pending legal proceedings.

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

No matters were submitted to a vote of the security holders of Taitron during the fourth quarter of 2002.

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PART II

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

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

	High		Low
Year Ended December 31, 2000
First Quarter	$	5.50	$	1.82
Second Quarter		4.25		2.25
Third Quarter		8.66		3.00
Fourth Quarter		3.82		1.88
Year Ended December 31, 2001
First Quarter		3.75		1.63
Second Quarter		2.74		1.69
Third Quarter		2.40		1.30
Fourth Quarter		2.14		1.10
Year Ended December 31, 2002
First Quarter		1.86		.80
Second Quarter		1.72		1.12
Third Quarter		1.55		1.15
Fourth Quarter		1.49		1.00

At February 28, 2003, there were approximately 100 holders of record of the Company’s common stock. The Company estimates that there are approximately 1,000 beneficial owners of its Class A common stock.

The Company’s Board of Directors is considering whether or not to pay dividends. At this time, the Company does not plan to pay cash dividends. The present policy of the Company is to retain earnings to finance the development of its operations. See “MANAGEMENT’S DISCUSSION AND ANALYSIS—Results of Operations; Liquidity and Capital Resources.”

In November 1996, the Board of Directors approved a program to repurchase up to 500,000 shares of its Class A common stock. In February 1998, September 1999 and September 2000 the Board of Directors again approved additional repurchases of up to $1,500,000, $500,000 and $1,000,000, respectively, of the Company’s Class A common stock. As of February 28, 2003, the Company had repurchased approximately 1.4 million shares of its Class A common stock in open market purchases for an approximate aggregate amount of $4 million.

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ITEM 6. SELECTED FINANCIAL DATA

The following table presents certain selected consolidated financial and operating data for the Company as of and for each of the years in the five year period ended December 31, 2002. The selected consolidated financial and operating data in the table should be read in conjunction with the Company’s Financial Statements and the notes thereto included elsewhere herein and in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Statements of Operations and Per Share Data:

(Dollars in thousands, except per share data)

	Year Ended December 31,
	2002			2001			2000		1999		1998
Net sales	$	13,816		$	16,736		$	32,948	$	29,326	$	30,828
Cost of goods sold		9,922			12,534			22,763		20,930		22,302
Gross profit		3,894			4,202			10,185		8,396		8,526
Selling, general and administrative expenses		4,355			5,521			6,668		6,053		5,333
Operating (loss) earnings		(461	)		(1,319	)		3,517		2,343		3,193
Income tax provision (benefit)		117			(391	)		1,025		759		1,023
Net (loss) earnings	$	(680	)	$	(1,254	)	$	1,663	$	1,029	$	1,499
(Loss) earnings per share:
Basic	$	(.12	)	$	(.22	)	$	.29	$	.17	$	.24
Diluted	$	(.12	)	$	(.22	)	$	.28	$	.17	$	.24
Weighted average common shares outstanding:
Basic		5,698			5,680			5,800		6,006		6,278
Diluted		5,698			5,680			5,922		6,050		6,287
	December 31,
	2002			2001			2000		1999		1998
Balance Sheet Data:
Working capital	$	21,887		$	18,432		$	19,559	$	22,396	$	25,239
Total assets		34,114			38,834			44,400		41,081		44,583
Total debt		7,922			12,097			14,364		12,774		14,375
Stockholders’ equity		24,546			25,117			26,639		25,440		25,096

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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 Report. Also, several of the matters discussed in this document contain forward looking statements that involve risks and uncertainties. Such forward looking statements are usually 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 such forward looking statements, which speak only as of the date made, and to advise readers that actual results could vary due to a variety of risks and uncertainties. Factors associated with the forward looking statements that could cause the forward looking statements to be inaccurate and could otherwise impact our future results are set forth in detail in this Report. In addition to the other information contained in this document, readers should carefully consider the information appearing in Item 1 of this Report under the heading “Cautionary Statements and Risk Factors.”

Overview

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

In addition to an overall economic slowdown and excess product availability, we believe the demand for discrete semiconductors in the U.S. market decreased from 1996 through the middle of 1999. From mid-1999 throughout most of 2000, demand increased as a result of industry wide shortages. However, the industry wide shortage began to diminish towards the end of 2000 and demand through today has drastically declined. In addition to the general economic slowdown, we believe the declining demand in the U.S. market has also resulted from the accelerated trend of moving the production capacity of OEM/CEM customers abroad and the consolidation of CEM customers domestically.

The Company’s core strategy includes maintaining a substantial inventory of discrete and passive components purchased at prices generally lower than those commonly available to its competitors. This strategy allows the Company to fill customer orders immediately from stock held in inventory. Since demand remained weak throughout 2002, the Company focused on lowering its inventory balances and changing its product mix. As a result, inventory levels decreased throughout the year from $27,895,000 as of December 31, 2001 to $24,314,000 as of December 31, 2002, including a non-cash provision of approximately $415,000 during 2002 to increase the Company’s inventory reserves. The Company has been strategically increasing its marketing efforts for its opto and passive components as part of the total product mix. As such, the Company has recently made strategically significant purchases with its key suppliers to ensure the continuity of its existing franchise lines. Since demand continued to be weak throughout the current period, the Company expects to continue lowering inventory balances throughout 2003, not withstanding the key strategic purchases previously mentioned.

In accordance with Generally Accepted Accounting Principles, management has classified inventory as a current asset. 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. There are no assurances that demand in the discrete semiconductor market will increase and that market conditions will improve. Therefore, it’s possible that further declines in our carrying values of inventory may result.

Since the beginning of 2001, our gross profit margins in general have been stable or slightly increased mainly because our purchasing price decreases have more than offset the selling price erosion in the down market. Our gross profit margins are subject to a number of factors, including product demand, a strong US dollar, manufacturer’s price protection programs, our ability to purchase inventory at favorable prices and our sales product mix.

Readers are cautioned that the foregoing statements are forward looking and are necessarily speculative. There can be no guarantee that a recovery in the discrete semiconductor market will take place. Also, if prices of components held in our inventory decline or if new technology is developed that displaces products distributed by us and held in inventory, our business could be materially adversely affected.

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Critical Accounting Policies and Estimates

Use Of Estimates—Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. These estimates have a significant impact on the Company’s 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—Revenue is recognized upon shipment of the merchandise. Reserves for sales allowances and customer returns are established based upon historical experience and management’s estimates of future returns. Sales returns for the year ended December 31, 2002 were $225,000 compared to $437,000 for 2001. The allowance for sales returns and doubtful accounts at December 31, 2002 and 2001 were $135,000 and $110,000, respectively. The Company reviews the actual sales returns and bad debts for its customers and establishes 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. The Company had inventory balances in the amounts of $24,314,000 and $27,895,000 at December 31, 2002 and 2001, respectively, which are presented net of valuation allowances of $1,083,000 and $1,309,000 at December 31, 2002 and 2001, respectively. The Company evaluates inventories to identify excess, high cost, slow-moving, or other factors rendering inventories as unmarketable at normal profit margins. For inventories supplied under franchise agreements, the Company relies upon its contractual rights to receive compensation for price differences caused by market fluctuations. Due to the large number of transactions and the complexity of managing and maintaining a large inventory of product offerings, estimates are made regarding adjustments to the cost of inventories. Based on our assumptions about future demand and market conditions, inventories are carried at the lower of cost or estimated market value. If our assumptions about future demand change, and/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.

Deferred Taxes—The Company reviews the nature of each component of its deferred income taxes for reasonableness. Included in the 2002 income tax provision is a total of $332,000 in non-cash income tax charges related to increasing its reserve against its deferred tax assets. Although the Company recorded non-cash income tax charges of $522,000 in the second quarter 2002, the reserve was reduced by $220,000 during the fourth quarter 2002 primarily as a result of the anticipated gain on sale of the Company’s former office/warehouse facility that is currently unoccupied, listed for sale and being actively marketed by a real estate agency.

Revolving Line Of Credit

On August 12, 2002, the Company amended its credit facility with its bank. This amendment accelerated the renewal date from May 18, 2004 to December 31, 2002 and decreased the maximum borrowings under the credit facility from $15 million to $9 million by November 30, 2002. The credit facility contains security agreements covering essentially all assets of the Company and requires compliance with certain financial covenants. Also, borrowings under the credit facility were limited to a certain formula, essentially consisting of a portion of the Company’s account receivables, inventory and fixed assets.

At December 31, 2002 and through the date of this report, the Company was in default under its revolving line of credit facility and such defaults have not been cured or waived by the bank. The bank has also indicated that no further borrowings will be made available under the credit facility. As of March 31, 2003, the outstanding balance of the credit facility is $2,200,000. Accordingly, the bank may demand full and immediate payment of this amount at anytime. The Company has communicated with the bank and submitted a proposal of repaying the credit facility no later than June 30, 2003, which the bank is currently considering. This repayment plan requires the Company to make principal payments by (a) selling or refinancing its former office/warehouse facility, which is currently unoccupied, (b) financing its accounts receivables and (c) issuing debt or equity securities. To the extent the Company is not able to sell assets, refinance assets, or issue debt or equity securities, the Company may need to liquidate assets to repay the credit facility by June 30, 2003.

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Results of Operations

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

	Year Ended December 31,
	2002			2001			2000
	(dollars in thousands)
Net sales	$	13,816		$	16,736		$	32,948
Cost of goods sold		9,922			12,534			22,763
% of net sales		71.8	%		74.9	%		69.1	%
Gross profit		3,894			4,202			10,185
% of net sales		28.2	%		25.1	%		30.9	%
Selling, general and administrative expenses		4,355			5,521			6,668
% of net sales		31.5	%		33.0	%		20.2	%
Operating (loss) earnings		(461	)		(1,319	)		3,517
% of net sales		(3.3	)%		(7.9	)%		10.7	%
Income tax provision (benefit)		117			(391	)		1,025
Effective tax rate as a % of (loss) earnings before income taxes		n/a			(23.8	)%		38.1	%
Net (loss) earnings	$	(680	)	$	(1,254	)	$	1,663
% of net sales		(4.9	)%		(7.5	)%		5.1	%

The Year Ended December 31, 2002 Compared to The Year Ended December 31, 2001

Net sales for the year ended December 31, 2002 were $13,816,000 compared with net sales for 2001 of $16,736,000, a decrease of $2,920,000 or 17.5%. This decrease was primarily due to an industry wide decrease in demand for discrete semiconductors and passive components resulting from an overall economic slowdown. However, the decrease in demand affected primarily only a decrease in discrete component sales of $2,953,000, when comparing $8,909,000 and $11,862,000 for the year 2002 and 2001, respectively. Discrete components sales comprised approximately 64% and 71% of net sales during the years ended December 31, 2002 and 2001, respectively.

Cost of goods sold decreased by $2,612,000 to $9,922,000 for the year ended December 31, 2002, a decrease of 20.8% from 2001. Cost of goods sold decreased primarily as a result of a decrease in the overall net sales, however at a faster rate resulting in gross profits increasing as a percentage of net sales to 28.2% for the current year from 25.1% for the same period last year. The increase in gross profit percentage during the year 2002, was primarily due to lower non-cash inventory write offs of approximately $415,000 (as discussed below—see “Supply and Demand Issues”), as compared to a $775,000 non-cash inventory write offs for the same period of 2001. Gross profits decreased by $308,000 to $3,894,000 for the current year from $4,202,000 for the same period in 2001. The decline in gross profit dollars were primarily due to the decline in the quantity of net sales, as well as general price decreases during the year ended December 31, 2002.

Selling, general and administrative expenses decreased by $1,166,000 or 21.1% for 2002 compared to 2001. The decrease is primarily attributable to reducing personnel-related expenses by approximately $820,000 and commissions paid to independent sales representatives, resulting from lower net sales, by approximately $91,000. SG&A expenses, as a percentage of net sales, decreased to 31.5% for the year ended December 31, 2002 compared to 33% for 2001.

Operating losses decreased by $858,000 or 65.1% between the years ended December 31, 2002, and 2001, from $1,319,000 to $461,000. Operating losses decreased principally as a result of lower selling, general and administrative expenses discussed above.

Interest expense for the year ended December 31, 2002 decreased by $307,000 compared to 2001. The decrease is due to lower borrowing levels and lower effective average borrowing interest rates incurred on our bank revolving line of credit as

16

compared to the prior year.

Income tax provision was $117,000 for the year ended December 31, 2002, as compared to income tax benefit of $391,000 for 2001. The change is a direct result of the Company recording a total of $332,000 in non-cash income tax charges (including non-cash income tax charges of $522,000 during the second quarter 2002) related to reserving for a portion of its deferred tax assets during the year ended December 31, 2002.

The Company had net losses of $680,000 for the year ended December 31, 2002 as compared with net losses of $1,254,000 for 2001, a decrease of $574,000 or 45.8%. The decrease in net losses is primarily attributable to lower selling, general and administrative expenses, partially offset by the income tax provision discussed above. Net loss as a percentage of net sales decreased to (4.9%) from (7.5%).

The Year Ended December 31, 2001 Compared to The Year Ended December 31, 2000

Net sales for the year ended December 31, 2001 were $16,736,000 compared with net sales for 2000 of $32,948,000, a decrease of $16,212,000 or 49.2%. This decrease was primarily due to an industry wide decrease in demand for discrete semiconductors and passive components resulting from an overall economic slowdown. Approximately 71% and 73% of net sales were comprised of discrete components sales during the year ended December 31, 2001 and 2000, respectively. Passive and Optoelectronic components sales decreased by $4,135,000 or 46% when comparing $4,874,000 and $9,009,000 of passive and opto sales, for the year 2001 and 2000, respectively. Our export sales decreased by $3,241,000 or 59% when comparing $2,243,000 and $5,484,000 of export sales, for the year 2001 and 2000, respectively. However, the overall average per unit sales price of components increased to 2.1 cents for the current year from 1.8 cents during the same time last year. The increase was primarily the result of selling less passive components, which have a lower average per unit sales price.

Cost of goods sold decreased by $10,229,000 to $12,534,000 for the year ended December 31, 2001, a decrease of 44.9% from 2000. Cost of goods sold decreased with the decrease in net sales, resulting in gross profits decreasing as a percentage of net sales to 25.1% for the current year from 30.9% for the prior year. Gross profits decreased by $5,983,000 to $4,202,000 for the current year from $10,185,000 for 2000. The decline in gross profit percentage during the year ended December 31, 2001, was primarily due to a non-cash inventory write off of approximately $775,000, (as discussed below—see “Supply and Demand Issues”), as compared to a $100,000 non-cash inventory write off for 2000. The decline in gross profit dollars were primarily due to the decline in the quantity of net sales as well as general price decreases during the year ended December 31, 2001.

Selling, general and administrative expenses decreased by $1,147,000 or 17.2% for 2001 compared to 2000. The decrease is primarily attributable to reducing personnel-related expenses by approximately $845,000 and commissions paid to independent sales representatives, resulting from lower net sales, by approximately $415,000. SG&A expenses, as a percentage of net sales, increased to 33.0% for the year ended December 31, 2001 compared to 20.2% for 2000, primarily due to the decline in net sales.

Operating earnings decreased by $4,836,000 or 137.5% between the years ended December 31, 2001, and 2000, from earnings of $3,517,000 to a loss of $1,319,000. Operating earnings decreased principally as a result of lower net sales with lower gross margins discussed above.

Interest expense for the year ended December 31, 2001 decreased by $160,000 compared to 2000. The decrease is due to lower borrowing levels and lower effective average borrowing interest rates incurred on our bank revolving line of credit as compared to the same period last year.

Income tax benefit was $391,000 for the year ended December 31, 2001, representing an effective tax rate of (37.6%), as compared to income tax expense of $1,025,000 for 2000, an effective tax rate of 38.1%. The change is a direct result of the Company recording operating losses during the year ended December 31, 2001 as compared to operating earnings during the prior year.

The Company had net losses of $1,254,000 for the year ended December 31, 2001 as compared with net earnings of $1,663,000 for 2000, a decrease of $2,917,000 or 175.4%. The decrease in net earnings is primarily attributable to lower gross profit dollars discussed above. Net loss as a percentage of net sales decreased to (7.5%) from net earnings of 5.1%.

17

Liquidity and Capital Resources

The Company historically has satisfied its liquidity requirements principally through cash generated from operations, short-term commercial loans and the sale of equity securities. The Company’s cash flows provided by (used in) operating, financing and investing activities for the years ended December 31, 2002, 2001 and 2000 were as follows:

	Year Ended December 31, (In thousands)
	2002			2001			2000
Operating activities	$	4,273		$	2,660		$	109
Investing activities		(60	)		(133	)		(1,319	)
Financing activities		(4,087	)		(2,527	)		1,195

Cash flows provided by operating activities increased to $4,273,000 during the year ended December 31, 2002, as compared to $2,660,000 during 2001. The increase is primarily attributable to a decrease in inventory of $3,166,000.

Cash flows used in investing activities was $60,000 during the year ended December 31, 2002, as compared to $133,000 during 2001.

Cash flows used in financing activities increased to $4,087,000 from $2,527,000 during the year ended December 31, 2002 as compared with 2001, primarily due to an increase in the net re-payments on our bank revolving line of credit facility during 2002. Conversely, the overall decrease in financing cash flow was partially offset by an increase in new subordinated borrowings of $1,000,000 from K.S. Best International Co. Ltd., a company controlled by the brother of the Company’s Chief Executive Officer and an increase in new bank financing of $2,600,000 collateralized by real estate. The new borrowing was obtained to satisfy a covenant under the Company’s revolving line of credit facility.

As of the date of this report, the Company is in default under its revolving line of credit facility and such defaults have not been cured or waived by the bank. The bank has also indicated that no further borrowings will be made available under the credit facility. As of March 31, 2003, the outstanding balance of the credit facility is $2,200,000. Accordingly, the bank may demand full and immediate payment of this amount at anytime. The Company has communicated with the bank and submitted a proposal of repaying the credit facility no later than June 30, 2003, which the bank is currently considering. Accordingly, cash flows from financing activities may change significantly in the following three months due to anticipated principal payments on the Company’s revolving line of credit facility and the possible re-financing of company assets and issuance of new debt or equity securities to fund these principal payments.

The Company believes that new sources of asset-based lending on real estate and/or accounts receivables and issuance of debt or equity securities will be required according to our proposal to repay the revolving line of credit facility by June 30, 2003. There can be no guarantee that this asset-based financing or the issuance of new debt or equity securities can be obtained on commercially reasonable terms and conditions and as of the date of this Report, we have no commitments for other equity, debt financing or other capital expenditures.

In conjunction with any funds received as a result of sales of assets, refinancing of assets, issuance of debt or equity securities related to repayment of the revolving line of credit facility discussed above, we believe that funds generated from operations and new sources of asset-based lending on accounts receivables, is likely to be sufficient to finance our working capital and capital expenditure requirements for the foreseeable future or until principal payments are due under the bank’s credit facility. To the extent the Company is not able to secure other new sources of asset-based lending on accounts receivables, issue debt or equity securities, the Company may need to liquidate assets to generate the necessary working capital. The Company is in violation of certain conditions and covenants (see Revolving Line of Credit discussed above) and therefore the bank may demand full payment at anytime.

Inventory is included in current 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.

18

Foreign Economic Issues

Many of the Company’s suppliers have their manufacturing facilities in countries whose economies continue to be volatile while recovering from recent years of financial concerns. Although local currencies have stabilized, the US dollar’s strength compared with Asian currencies may further reduce exports to Asia in the future. Conversely, the Company believes that the weaker Asian currencies may actually benefit the Company in the short-term by providing opportunities for the Company to purchase products at lower prices.

Subsequent Events

On January 21, 2003, the Company received notice from NASDAQ that compliance with Marketplace Rule 4450(a)(2) (the “Rule”) has been obtained. The Rule requires that the Company’s Class A common stock maintain a minimum market value of publicly held shares of $5,000,000 for continued inclusion by the Rule. Therefore, the matter as announced in the Company’s Form 10-Q for the period ended September 30, 2002 and Form 8-K on January 21, 2003 is now closed and resolved.

On February 20, 2003, the Company issued a new subordinated promissory note in the amount of $500,000 to K.S. Best International Co. Ltd., a company controlled by the brother of the Company’s Chief Executive Officer. This promissory note bears interest at 7% per annum, requires monthly principal payments of $100,000 beginning May 31, 2003 including monthly interest at each month-end and matures September 30, 2003. This new borrowing was obtained to pay-down the Company’s revolving line of credit facility (see Revolving Line of Credit Footnote 3).

On February 20, 2003, the Company issued a new subordinated promissory note in the amount of $500,000 to an unrelated party. This promissory note bears interest at 4.75% per annum, requires quarterly interest only payments beginning March 31, 2003 and matures February 20, 2006. In conjunction with the issuance of this note, the Company granted an option to purchase 50,000 shares of the Company’s Class A common stock (“Option”). The exercise price of the Option will be the 30-day average closing price of the Company’s Class A common stock prior to February 20, 2003 ($1.26 per share) and expires on February 20, 2006. This new borrowing was obtained to pay-down the Company’s revolving line of credit facility (see Revolving Line of Credit Footnote 3).

As of the date of this report, the Company is in default under its revolving line of credit facility and such defaults have not been cured or waived by the bank. The bank has also indicated that no further borrowings will be made available under the credit facility. As of March 31, 2003, the outstanding balance of the credit facility is $2,200,000. Accordingly, the bank may demand full and immediate payment of this amount at anytime. The Company has communicated with the bank and submitted a proposal of repaying the credit facility no later than June 30, 2003, which the bank is currently considering.

As of the date of this report, the Company has continued to list for sale its former office/warehouse facility that is currently unoccupied.

19

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

TAITRON COMPONENTS INCORPORATED

	Page
Reports of Independent Certified Public Accountants	21-22
Consolidated Balance Sheets at December 31, 2002 and 2001	23-24
Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000	25
Consolidated Statement of Shareholders’ Equity for the Years Ended December 31, 2002, 2001 and 2000	26
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000	27
Notes to Consolidated Financial Statements	28-37

20

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors

Taitron Components Incorporated:

We have audited the accompanying consolidated balance sheet of Taitron Components Incorporated as of December 31, 2002 and the related consolidated statements of operations, shareholders’ equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Taitron Components Incorporated as of December 31, 2002, and the consolidated results of its operations and its consolidated cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/    HASKELL & WHITE LLP

Irvine, California

February 28, 2003

21

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors

Taitron Components Incorporated:

We have audited the accompanying consolidated balance sheet of Taitron Components Incorporated as of December 31, 2001 and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the two years in the period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Taitron Components Incorporated as of December 31, 2001, and the consolidated results of its operations and its consolidated cash flows for each of the two years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.

/s/    GRANT THORNTON LLP

Los Angeles, California

February 19, 2002

22

TAITRON COMPONENTS INCORPORATED

Consolidated Balance Sheets

December 31,

	2002		2001
Assets
Current assets:
Cash and cash equivalents	$	326,000	$	182,000
Trade accounts receivable, net		2,009,000		2,024,000
Income tax receivable		310,000		781,000
Inventory, net		24,314,000		27,895,000
Prepaid expenses		252,000		248,000
Deferred income taxes		220,000		528,000
Other current assets		128,000		103,000
Total current assets		27,559,000		31,761,000
Property and equipment, net		6,383,000		6,768,000
Other assets		172,000		305,000
Total assets	$	34,114,000	$	38,834,000

See accompanying notes to consolidated financial statements.

23

TAITRON COMPONENTS INCORPORATED

Consolidated Balance Sheets—continued

December 31,

	2002			2001
Liabilities and Shareholders’ Equity
Current liabilities:
Revolving line of credit	$	3,935,000		$	11,685,000
Current portion of long-term debt		91,000			24,000
Trade accounts payable		1,314,000			1,171,000
Accrued liabilities and other		332,000			449,000
Total current liabilities		5,672,000			13,329,000
Long-term debt, less current portion		3,896,000			388,000
Total liabilities		9,568,000			13,717,000
Commitments and contingencies (Notes 3, 4 and 10)		—			—
Shareholders’ equity:
Preferred stock, $.001 par value. Authorized 5,000,000 shares. None issued or outstanding		—			—
Class A common stock, $.001 par value.
Authorized 20,000,000 shares; 4,945,107 and 4,880,682 shares issued and outstanding at December 31, 2002 and 2001, respectively		5,000			5,000
Class B common stock, $.001 par value.
Authorized, issued and outstanding 762,612 shares at December 31, 2002 and 2001		1,000			1,000
Additional paid-in capital		10,893,000			10,802,000
Accumulated other comprehensive loss, net of tax		(35,000	)		(53,000	)
Retained earnings		13,682,000			14,362,000
Total shareholders’ equity		24,546,000			25,117,000
Total liabilities and shareholders’ equity	$	34,114,000		$	38,834,000

See accompanying notes to consolidated financial statements.

24

TAITRON COMPONENTS INCORPORATED

Consolidated Statements of Operations

Year ended December 31,

	2002			2001			2000
Net sales	$	13,816,000		$	16,736,000		$	32,948,000
Cost of goods sold		9,922,000			12,534,000			22,763,000
Gross profit		3,894,000			4,202,000			10,185,000
Selling, general and administrative expenses		4,355,000			5,521,000			6,668,000
Operating (loss) earnings		(461,000	)		(1,319,000	)		3,517,000
Interest expense, net		(454,000	)		(761,000	)		(921,000	)
Other income, net		352,000			435,000			92,000
(Loss) earnings before income taxes		(563,000	)		(1,645,000	)		2,688,000
Income tax provision (benefit)		117,000			(391,000	)		1,025,000
Net (loss) earnings	$	(680,000	)	$	(1,254,000	)	$	1,663,000
(Loss) earnings per share:
Basic	$	(.12	)	$	(.22	)	$	.29
Diluted	$	(.12	)	$	(.22	)	$	.28
Weighted average common shares outstanding:
Basic		5,698,065			5,679,946			5,799,786
Diluted		5,698,065			5,679,946			5,922,127

See accompanying notes to consolidated financial statements.

25

TAITRON COMPONENTS INCORPORATED

Consolidated Statement of Shareholders’ Equity

Three years ended December 31, 2002

	Class A common stock				Class B common stock			Additional Paid-in capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Shareholders’ Equity
	Shares		Amount		Shares	Amount
Balances at December 31, 1999	5,085,026		$	5,000	762,612	$	1,000	$	11,457,000		$	24,000		$	13,953,000		$	25,440,000
Exercise of stock options	52,549			—	—		—		100,000			—			—			100,000
Repurchase of common stock	(153,600	)		—	—		—		(495,000	)		—			—			(495,000	)
Comprehensive income:
Foreign currency translation adjustment	—			—	—		—		—			(69,000	)		—			(69,000	)
Net earnings	—			—	—		—		—			—			1,663,000			1,663,000
Comprehensive income	—			—	—		—		—			—			—			1,594,000
Balances at December 31, 2000	4,983,975			5,000	762,612		1,000		11,062,000			(45,000	)		15,616,000			26,639,000
Exercise of stock options	28,765			—	—		—		55,000			—			—			55,000
Repurchase of common stock	(132,058	)		—	—		—		(315,000	)		—			—			(315,000	)
Comprehensive income:
Foreign currency translation adjustment	—			—	—		—		—			(8,000	)		—			(8,000	)
Net loss	—			—	—		—		—			—			(1,254,000	)		(1,254,000	)
Comprehensive loss	—			—	—		—		—			—			—			(1,262,000	)
Balances at December 31, 2001	4,880,682			5,000	762,612		1,000		10,802,000			(53,000	)		14,362,000			25,117,000
Issuances of common stock	100,000			—	—		—		119,000			—			—			119,000
Relative estimated fair value of stock options issued in connection with Notes Payable	—			—	—		—		29,000			—			—			29,000
Repurchase of common stock	(35,575	)		—	—		—		(57,000	)		—			—			(57,000	)
Comprehensive loss:
Foreign currency translation adjustment	—			—	—		—		—			18,000			—			18,000
Net loss	—			—	—		—		—			—			(680,000	)		(680,000	)
Comprehensive loss	—			—	—		—		—			—			—			(662,000	)
Balances at December 31, 2002	4,945,107		$	5,000	762,612	$	1,000	$	10,893,000		$	(35,000	)	$	13,682,000		$	24,546,000

See accompanying notes to consolidated financial statements.

26

TAITRON COMPONENTS INCORPORATED

Consolidated Statements of Cash Flows

Year ended December 31,

	2002			2001			2000
Cash flows from operating activities:
Net (loss) earnings	$	(680,000	)	$	(1,254,000	)	$	1,663,000
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
Depreciation and amortization		558,000			570,000			506,000
Amortization of debt discount related to options issued with notes payable		3,000			—			—
Write-down of inventory		415,000			775,000			100,000
Provision for sales returns and doubtful accounts		324,000			515,000			662,000
Deferred income taxes		308,000			221,000			(198,000	)
Changes in assets and liabilities:
Trade accounts receivable		(309,000	)		2,270,000			(1,416,000	)
Income tax receivable		471,000			(781,000	)		—
Inventory		3,166,000			1,939,000			(1,556,000	)
Prepaid expenses and other current assets		(29,000	)		200,000			19,000
Other assets		20,000			(18,000	)		(201,000	)
Trade accounts payable		143,000			(1,324,000	)		245,000
Accrued liabilities and other		(117,000	)		(453,000	)		285,000
Total adjustments		4,953,000			3,914,000			(1,554,000	)
Net cash provided by operating activities		4,273,000			2,660,000			109,000
Cash flows from investing activities:
Acquisition of property and equipment		(60,000	)		(133,000	)		(1,319,000	)
Net cash used in investing activities		(60,000	)		(133,000	)		(1,319,000	)
Cash flows from financing activities:
Borrowings from revolving line of credit		2,685,000			5,076,000			14,056,000
Payments on revolving line of credit		(10,435,000	)		(7,321,000	)		(9,445,000	)
Proceeds from exercise of stock options		—			55,000			100,000
Borrowings (payments) on notes payable		3,601,000			(22,000	)		(3,021,000	)
Repurchase of Class A common stock		(57,000	)		(315,000	)		(495,000	)
Proceeds from sale of Class A common stock		119,000			—			—
Net cash (used in) provided by financing activities		(4,087,000	)		(2,527,000	)		1,195,000
Impact of exchange rates on cash		18,000			(8,000	)		(69,000	)
Net increase (decrease) in cash and cash equivalents		144,000			(8,000	)		(84,000	)
Cash and cash equivalents, beginning of year		182,000			190,000			274,000
Cash and cash equivalents, end of year	$	326,000		$	182,000		$	190,000
Supplemental disclosures of cash flow information:
Cash paid for interest (net of capitalized interest of $0, $0 and $33,000 in 2002, 2001 and 2000, respectively)	$	433,000		$	869,000		$	979,000
Cash (refunded) paid for income taxes	$	(607,000	)	$	309,000		$	1,017,000

See accompanying notes to consolidated financial statements.

27

TAITRON COMPONENTS INCORPORATED

Notes to Consolidated Financial Statements

(1) Summary of Significant Accounting Policies

Description of Business

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

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its majority-owned subsidiary. All significant intercompany transactions have been eliminated in consolidation.

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 United States legislation with respect to pricing and import quotas on products from foreign countries. For example, it is possible that political or economic developments in China, or with respect to the 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, there can be no assurance that these factors will not materially adversely affect the Company in the future. Any significant disruption in the delivery of merchandise from the Company’s suppliers, substantially all of whom are foreign, could also have a material adverse impact on the Company’s business and results of operations. Management estimates that over 50% of the Company’s products are produced in Asia.

As of the date of this report, the Company is in default under its revolving line of credit facility and such defaults have not been cured or waived by the bank (see Note 3 and 13).

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of 90 days or less to be cash equivalents. Management of the Company maintains a relatively low cash balance as cash is used to buy inventory and to repay debt in order to reduce interest cost.

Revenue Recognition

Revenue is recognized upon shipment of the merchandise, 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, 2002, 2001 and 2000 aggregated $225,000, $437,000 and $631,000, respectively.

28

Allowance for Sales Returns and Doubtful Accounts

The allowance for sales returns and doubtful accounts at December 31, 2002 and 2001 aggregated $135,000 and $110,000, 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 financial statements is net of valuation allowances of $1,083,000 and $1,309,000 at December 31, 2002 and 2001, 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.

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.

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

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

Stock Option Plan

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

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

For purposes of this pro-forma disclosure, the estimated fair value of the options is assumed to be amortized to expense over the SAR’s and options’ vesting periods.

	Year Ended December 31,
	2002			2001			2000
Net (loss) earnings
As reported	$	(680,000	)	$	(1,254,000	)	$	1,663,000
Pro forma	$	(707,000	)	$	(1,402,000	)	$	1,498,000
Diluted (loss) earnings per share
As reported	$	(.12	)	$	(.22	)	$	.28
Pro forma	$	(.12	)	$	(.25	)	$	.25

Income Taxes

The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which such temporary differences are expected to be

29

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.

Financial Instruments

The estimated fair values of cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate their carrying value because of the short-term maturity of these instruments. The fair value of long-term debt approximates its carrying value as the interest rates are comparable to rates currently offered to the Company for similar debt instruments with similar maturities. All financial instruments are held for purposes other than trading.

Net (Loss) Earnings Per Share

Basic (loss) earnings per share is computed by dividing net (loss) income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. Common equivalent shares, consisting primarily of stock options and warrants, are excluded from the computation of diluted loss per share for the years ended December 31, 2002 and 2001 as their effect is anti-dilutive.

Foreign Currency Translation

The financial statements of the Company’s majority-owned subsidiary in Mexico and division in Taiwan, which were established in 1998 and 1997, respectively, are translated into United States 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. Such transactional gains and losses are not significant to the consolidated financial statements.

Segment Reporting

The Company is centrally managed and operates in one business segment: distribution of discrete components including discrete semiconductors, passives and optoelectronic devices.

Reclassifications

Certain amounts in the 2001 and 2000 financial statements have been reclassified to conform to the 2002 financial statement presentation.

Use of Estimates

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

Recent Accounting Pronouncements

In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 addresses the timing and amount of costs recognized as a result of restructuring and similar activities. The Company will apply SFAS No. 146 prospectively to activities initiated after December 28, 2002. SFAS No. 146 had no significant impact at the point of adoption on the Company’s consolidated statements of income or financial position.

In November 2002, the FASB issued Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees.” FIN 45 requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation it has undertaken in issuing the guarantee. The Company will apply FIN 45 to guarantees, if any, issued after December 28, 2002. At adoption, FIN 45 did not have a significant impact on the

30

Company’s consolidated statements of income or financial position. FIN 45 also requires guarantors to disclose certain information for guarantees, including product warranties, outstanding at December 28, 2002.

In January 2003, the FASB issued Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities.” FIN 46 requires an investor with a majority of the variable interests in a variable interest entity to consolidate the entity and also requires majority and significant variable interest investors to provide certain disclosures. A variable interest entity is an entity in which the equity investors do not have a controlling interest or the equity investment at risk is insufficient to finance the entity’s activities without receiving additional subordinated financial support from the other parties. The Company does not believe that it has any investments in variable interest entities that will require consolidation.

(2) Property and Equipment

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

	12/31/2002			12/31/2001
Land	$	1,650,000		$	1,650,000
Buildings and improvements		4,871,000			4,896,000
Furniture and equipment		868,000			863,000
Computer software and equipment		2,080,000			1,887,000
Total Property and Equipment		9,469,000			9,296,000
Less: Accumulated depreciation and amortization		(3,086,000	)		(2,528,000	)
Property and Equipment, net	$	6,383,000		$	6,768,000

(3) Revolving Line of Credit

On August 12, 2002, the Company amended its credit facility with the bank. This amendment accelerated the renewal date from May 18, 2004 to December 31, 2002 and decreased the maximum borrowings under the credit facility from $15 million to $9 million. This amendment governing the renewed credit facility contained security agreements covering essentially all assets of the Company and required compliance with certain financial covenants. Also, borrowings under the credit facility were limited to a certain formula, essentially consisting of a portion of the Company’s account receivables, inventory and fixed assets.

Borrowings under the credit facility bear interest at the bank’s prime rate (4.25% at December 31, 2002) plus .75% or at the option of the Company, at LIBOR (weighted average of 2.62% at December 31, 2002) plus 3.25%.

At December 31, 2002, the Company was in default under its revolving line of credit facility and such defaults have not been cured or waived by the bank. Accordingly, the bank may demand full payment at anytime.

(3) Long-Term Debt

Long-term debt is summarized as follows:

	12/31/2002			12/31/2001
Note payable collateralized by real property, due December 31, 2009, bearing an interest rate of 6.875%	$	2,625,000		$	—
Subordinated note, due September 30, 2005, bearing an interest rate of 4.75%		1,000,000			—
Note payable collateralized by real property, due December 1, 2013, bearing an interest rate of 6.359%		388,000			412,000
		4,013,000			412,000
Less current maturities		(91,000	)		(24,000	)
		3,922,000			388,000
Less unamortized debt discount		(26,000	)		—
	$	3,896,000		$	388,000

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The subordinated note of $1,000,000, due September 30, 2005, is from K.S. Best International Co. Ltd., a company controlled by the brother of the Company’s Chief Executive Officer. In connection with the subordinated note, the Company issued 100,000 stock options (Note 8) with a relative estimated fair value of $29,000. Such amount has been presented as a debt discount and accreted through periodic interest charges through the maturity date of the note.

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

Year ending December 31:
2003	$	91,000
2004		102,000
2005		1,116,000
2006		120,000
2007		128,000
Thereafter		2,456,000
	$	4,013,000

(5) Shareholders’ Equity

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

There are 20,000,000 shares of authorized Class A common stock, par value $.001 per share, with 4,945,107 and 4,880,682 shares issued and outstanding as of December 31, 2002 and 2001, respectively. Each holder of Class A common stock is entitled to one vote for each share held.

There are 762,612 shares of authorized Class B common stock, par value $.001 per share, with 762,612 shares issued and outstanding as of December 31, 2002 and 2001. Each holder of Class B common stock is entitled to ten votes for each share held. The shares of Class B common stock are convertible at any time at the election of the shareholder into one share of Class A common stock, subject to certain adjustments. The Company’s Chief Executive Officer is the sole beneficial owner of all the outstanding shares of Class B common stock.

During 2002, 2001, and 2000, the Company repurchased 35,575, 132,058 and 153,600 shares of its Class A common stock on the open market for $56,000, $315,000 and $495,000, respectively, and intends to permanently retire such shares.

(6) Income Taxes

Income tax (benefit) provision is summarized as follows:

	Year Ended December 31
	2002			2001			2000
Current:
Federal	$	(191,000	)	$	(503,000	)	$	993,000
State		—			(109,000	)		213,000
		(191,000	)		(612,000	)		1,206,000
Deferred:
Federal		308,000			228,000			(168,000	)
State		—			(7,000	)		(13,000	)
		308,000			221,000			(181,000	)
Income tax provision (benefit)	$	117,000		$	(391,000	)	$	1,025,000

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

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	Year Ended December 31
	2002			2001			2000
“Expected” income tax (benefit) expense	$	(190,000	)	$	(559,000	)	$	913,000
State tax (benefit) expense, net of Federal benefit		—			(77,000	)		148,000
Foreign losses		87,000			72,000			—
Increase in valuation allowance		217,000			149,000			—
Other		3,000			24,000			(36,000	)
Income tax provision (benefit)	$	117,000		$	(391,000	)	$	1,025,000

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

	Year Ended December 31
	2002			2001
Deferred tax assets:
Inventory reserves	$	464,000		$	608,000
Section 263a adjustment		138,000			160,000
Allowances for bad debts and returns		58,000			59,000
Accrued expenses		20,000			43,000
Other		17,000			—
Total deferred tax assets		697,000			870,000
Valuation allowance		(366,000	)		(149,000	)
Deferred tax liabilities:
Depreciation		(45,000	)		(122,000	)
Deferred state taxes		(66,000	)		(71,000	)
Net deferred tax assets	$	220,000		$	528,000

The Company has a net operating loss aggregating approximately $250,000 for state tax purposes that expire in 2008. 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.

(7) 401(k) Profit Sharing Plan

In January 1995, the Company implemented a defined contribution profit sharing plan pursuant to Section 401(k) of the Internal Revenue Code (the Code) covering all employees of the Company. Participants once eligible, as defined by the plan, may contribute up to 15% of their compensation, but not in excess of the maximum allowed under the Code. The plan also provides for a 20% matching contribution vesting immediately, at the discretion of the Company. For the years ended December 31, 2002, 2001 and 2000, employer matching contributions aggregated approximately $20,000, $29,000 and $36,000, respectively.

The plan invests a portion of its assets in the common stock of the Company. The plan held 102,203 and 119,181 shares of the Company’s common stock at December 31, 2002 and 2001, respectively.

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(8) Stock Options and Warrants

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

The fair value of options, SAR’s and warrants used to compute pro forma net (loss) earnings and (loss) earnings per share disclosures is the estimated present value at grant date using the Black-Scholes option-pricing model with the following weighted average assumptions used for 2002 and 2001: dividend yield of 0%; expected volatility of 41%; a risk free interest rate of approximately 4% and an expected holding period of five years; assumptions for 2000: dividend yield of 0%; expected volatility of 70%; a risk free interest rate of approximately 5% and an expected holding period of five years.

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

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

	Number of Shares		Weighted Average Exercise Price
Balance at December 31, 1999	636,850		$	1.69
Granted	110,800			3.19
Exercised	(60,515	)		1.90
Forfeited	(46,799	)		1.58
Balance at December 31, 2000	640,336			2.52
Granted	142,800			1.83
Exercised	(28,765	)		1.90
Forfeited	(145,837	)		2.06
Balance at December 31, 2001	608,534			2.10
Granted	104,650			1.33
Forfeited	(105,834	)		2.03
Balance at December 31, 2002	607,350			2.01

The weighted average fair value of options granted in 2002, 2001 and 2000 was $0.71, $0.81 and $2.30, respectively.

At December 31, 2002, the range of exercise prices was: $1.30 to $1.87 for 306,200 options; $2.06 to $3.00 for 254,450 options; and; $3.19 to $4.13 for 46,700 options. The remaining contractual life of outstanding options is 90 days after termination of employment of option holder.

At December 31, 2002, 2001 and 2000, the number of options exercisable was 412,718, 456,699 and 469,235, respectively, and weighted average exercise prices of those options were $2.16, $2.61 and $2.61, respectively.

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(9) Net (Loss) Earnings Per Share

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

	Year Ended December 31,
	2002			2001			2000
Net (loss) earnings available to common shareholders used in basic (loss) earnings per share	$	(680,000	)	$	(1,254,000	)	$	1,663,000
Weighted average number of common shares used in basic (loss) earnings per share		5,698,065			5,679,946			5,799,786
Basic (loss) earnings per share	$	(.12	)	$	(.22	)	$	.29
Effect of dilutive securities:
Options		—			—			122,341
Weighted number of common shares and dilutive potential common shares used in diluted (loss) earnings per share		5,698,065			5,679,946			5,922,127
Diluted (loss) earnings per share	$	(.12	)	$	(.22	)	$	.28

(10) Commitments and Contingencies

Operating Leases

The Company leased property under non-cancelable operating leases expiring on various dates through 2002. There were no new operating leases entered into during 2002. Rental expense for the years ended December 31, 2002, 2001 and 2000 aggregated $57,000, $88,000 and $89,000, respectively.

Standby Letter of Credit

At December 31, 2002, 2001 and 2000, the Company had no standby or commercial letters of credit outstanding under the revolving line of credit agreement with the bank (Note 3).

Inventory Purchasing

Outstanding commitments to purchase inventory from suppliers aggregated $1,050,000 and $3,700,000 as of December 31, 2002 and 2001, respectively.

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(11) Valuation and Qualifying Accounts and Reserves

The following is the Company’s schedule of activity in the valuation and qualifying accounts and reserves for the years ended December 31, 2002, 2001 and 2000:

	Balance at Beginning of year		Charged to Costs and Expenses		Deductions		Balance At end of year
Allowance for sales returns and doubtful accounts:
2002	$	110,000	$	324,000	$	299,000	$	135,000
2001	$	120,000	$	515,000	$	525,000	$	110,000
2000	$	120,000	$	662,000	$	662,000	$	120,000
Inventory reserves:
2002	$	1,309,000	$	415,000	$	641,000	$	1,083,000
2001	$	966,000	$	775,000	$	432,000	$	1,309,000
2000	$	1,030,000	$	100,000	$	164,000	$	966,000
Valuation allowance against deferred tax assets:
2002	$	149,000	$	437,000	$	220,000	$	366,000
2001	$	—	$	149,000	$	—	$	149,000
2000	$	—	$	—	$	—	$	—

(12) Other Transactions

During the quarter ending September 30, 2002, the Company received $200,000 from an unrelated tenant at one of its buildings, to immediately terminate a three year lease, originally scheduled to expire on April 30, 2004. The rental income was approximately $15,000 per month related to the lease, prior to the termination date.

(13) Subsequent Events

On January 21, 2003, the Company received notice from NASDAQ that compliance with Marketplace Rule 4450(a)(2) (the “Rule”) has been obtained. The Rule requires that the Company’s Class A common stock maintain a minimum market value of publicly held shares of $5,000,000 for continued inclusion by the Rule. Therefore, the matter as announced in the Company’s Form 10-Q for the period ended September 30, 2002 and Form 8-K on January 21, 2003 is now closed and resolved.

On February 20, 2003, the Company issued a new subordinated promissory note in the amount of $500,000 to K.S. Best International Co. Ltd., a company controlled by the brother of the Company’s Chief Executive Officer. This promissory note bears interest at 7% per annum, requires monthly principal payments of $100,000 beginning May 31, 2003 including monthly interest at each month-end and matures September 30, 2003. This new borrowing was obtained to pay-down the Company’s revolving line of credit facility (see Revolving Line of Credit Footnote 3).

On February 20, 2003, the Company issued a new subordinated promissory note in the amount of $500,000 to an unrelated party. This promissory note bears interest at 4.75% per annum, requires quarterly interest only payments beginning March 31, 2003 and matures February 20, 2006. In conjunction with the issuance of this note, the Company granted an option to purchase 50,000 shares of the Company’s Class A common stock (“Option”). The exercise price of the Option will be the 30-day average closing price of the Company’s Class A common stock prior to February 20, 2003 ($1.26 per share) and expires on February 20, 2006. This new borrowing was obtained to pay-down the Company’s revolving line of credit facility (see Revolving Line of Credit Footnote 3).

As of the date of this report, the Company is in default under its revolving line of credit facility and such defaults have not been cured or waived by the bank. The bank has also indicated that no further borrowings will be made available

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under the credit facility. As of March 31, 2003, the outstanding balance of the credit facility is $2,200,000. Accordingly, the bank may demand full payment of this amount at anytime. The Company has communicated with the bank and submitted a proposal of repaying the credit facility no later than June 30, 2003, which the bank is currently considering.

As of the date of this report, the Company has continued to list for sale its former office/warehouse facility that is currently unoccupied.

(14) Selected Quarterly Financial Data (Unaudited)

	Three Months Ended
	3/31/2002			6/30/2002			9/30/2002		12/31/2002
Net sales	$	3,706,000		$	3,579,000		$	3,389,000	$	3,142,000
Gross profit	$	1,023,000		$	934,000		$	993,000	$	944,000
Net (loss) earnings	$	(193,000	)	$	(743,000	)	$	144,000	$	112,000
(Loss) earnings per share:
Basic	$	(.03	)	$	(.13	)	$	.03	$	.02
Diluted	$	(.03	)	$	(.13	)	$	.02	$	.02

	Three Months Ended
	3/31/2001			6/30/2001			9/30/2001			12/31/2001
Net sales	$	5,524,000		$	4,152,000		$	3,726,000		$	3,334,000
Gross profit	$	1,637,000		$	1,106,000		$	975,000		$	484,000
Net (loss) earnings	$	(74,000	)	$	(364,000	)	$	(307,000	)	$	(509,000	)
(Loss) earnings per share:
Basic	$	(.01	)	$	(.06	)	$	(.06	)	$	(.09	)
Diluted	$	(.01	)	$	(.06	)	$	(.06	)	$	(.09	)

Fourth Quarter Adjustments

2002—The net loss for the fourth quarter of 2002 includes an adjustment to reduce the Company’s valuation allowance against deferred tax assets by $220,000. The valuation allowance adjustment was recorded based on information which became available during the fourth quarter of 2002.

2001—The Company increased the reserve for inventory in the total amount of $485,000 during the fourth quarter of 2001.

The Company also established a valuation allowance for tax deferred assets in the amount of $149,000 during the fourth quarter 2001 which was expensed to income tax benefit. The Company also increased the recorded amount of income tax receivables and deferred tax assets in the amount of $407,000 during the fourth quarter.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL

DISCLOSURES

On January 6, 2003, the Company filed a Form 8-K, dated December 27, 2002, reporting a change of the Company’s accountants. Grant Thornton LLP was previously the principal accountants for the Company. On December 27, 2002, the Company dismissed Grant Thornton LLP as principal accountants and Haskell & White LLP was engaged as principal accountants to audit the accounts of the Company for the year ending December 31, 2002. The decision to change accountants was approved by the Registrant’s Audit Committee and the Board of Directors.

During the fiscal years ended December 31, 2001 and 2000 and through the date of this report, there were no disagreements with Grant Thornton LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope of procedure which disagreement, if not resolved to the satisfaction of Grant Thornton LLP, would have caused them to make reference to the matter of such disagreement in connection with the Form 8-K, dated December 27, 2002. The accountant’s report for the fiscal years ended December 31, 2001 and 2000 did not contain an adverse opinion or a disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope, or accounting principles.

The Company had requested that Grant Thornton LLP furnish it with a letter addressed to the Securities and Exchange Commission stating whether it agrees with the above statements. A copy of that letter is filed as Exhibit 16.1 to the Form 8-K, dated December 27, 2002, incorporated herein by reference.

PART III

ITEM 10. DIRECTORS, AND EXECUTIVE OFFICERS, OF THE REGISTRANT

Information regarding directors and executive officers of the Company will appear in the Proxy Statement for the 2003 Annual Meeting of Shareholders under the caption “Election of Directors” and is incorporated herein by this reference. The Proxy Statement will be filed with the SEC within 120 days following December 31, 2002.

ITEM 11. EXECUTIVE COMPENSATION

Information regarding executive compensation will appear in the Proxy Statement for the 2003 Annual Meeting of Shareholders under the caption “Executive Compensation” and is incorporated herein by this reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information regarding security ownership of certain beneficial owners and management will appear in the Proxy Statement for the 2003 Annual Meeting of Shareholders under the caption “Security Ownership of Certain Beneficial Owners and Management” and is incorporated herein by this reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding certain relationships and related transactions will appear in the Proxy Statement for the 2003 Annual Meeting of Shareholders under the caption “Certain Relationships and Related Transactions” and is incorporated herein by this reference.

ITEM 14. CONTROLS AND PROCEDURES

Evaluation of the Company’s Disclosure Controls and Internal Controls

The Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) has concluded, based on his evaluation as of a date within 90 days of the filing of this Form 10-Q, that its disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934) are effective. There

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have been no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of his evaluation.

CEO/CFO Certification

Appearing immediately following the signature pages of this annual report there are two separate forms of certifications of the CEO/CFO. The first form of certification is required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002, which we refer to as the Section 302 Certification. This section of the annual report which you are currently reading is the information concerning the Controls Evaluation referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.

Disclosure Controls and Internal Controls

Disclosure Controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, or the Exchange Act, such as this annual report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Internal Controls are procedures which are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized; (2) our assets are safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded and reported, all to permit the preparation of our financial statements in conformity with generally accepted accounting principles.

Limitations on the Effectiveness of Controls

Our management, including the CEO/CFO, does not expect that our Disclosure Controls or our Internal Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Scope of the Controls Evaluation

The CEO/CFO evaluation of our Disclosure Controls and our Internal Controls included a review of the controls’ objectives and design, the controls’ implementation by the Company and the effect of the controls on the information generated for use in this annual report. In the course of the Controls Evaluation, we sought to identify data errors, controls problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken. This type of evaluation will be done on a quarterly basis so that the conclusions concerning controls effectiveness can be reported in our annual reports on Form 10-K and our quarterly reports on Form 10-Q. Our Internal Controls are also evaluated on an ongoing basis by other personnel in our financial organization and by our independent auditors in connection with their audit and review activities. The overall goals of these various evaluation activities are to monitor our Disclosure Controls and our Internal Controls and to make modifications as necessary; our intent in this regard is that the Disclosure Controls and the Internal Controls will be maintained as dynamic systems that change (including with improvements and corrections) as conditions warrant.

Among other matters, we sought in our evaluation to determine whether there were any “significant deficiencies” or “material weaknesses” in the Company’s Internal Controls, or whether the Company had identified any acts of fraud involving personnel who have a significant role in the Company’s Internal Controls. This information was important both for the Controls Evaluation generally and because items 5 and 6 in the Section 302 Certification of

39

the CEO/CFO require that the CEO/CFO disclose that information to our Board’s Audit Committee and to our independent auditors and to report on related matters in this section of the Annual Report. In the professional auditing literature, “significant deficiencies” are referred to as “reportable conditions;” these are control issues that could have a significant adverse effect on the ability to record, process, summarize and report financial data in the financial statements. A “material weakness” is defined in the auditing literature as a particularly serious reportable condition where the internal control does not reduce to a relatively low level the risk that misstatements caused by error or fraud may occur in amounts that would be material in relation to the financial statements and not be detected within a timely period by employees in the normal course of performing their assigned functions. We also sought to deal with other controls matters in the Controls Evaluation, and in each case if a problem was identified, we considered what revision, improvement and/or correction to make in accord with our on-going procedures.

In accordance with SEC requirements, the CEO/CFO noted that, since the date of the Controls Evaluation to the date of this annual report, there have been no significant changes in Internal Controls or in other factors that could significantly affect Internal Controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

Conclusions

Based upon the Controls Evaluation, our CEO/CFO has concluded that, subject to the limitations noted above, our Disclosure Controls are effective to ensure that material information relating to us and our subsidiaries is made known to management, including the CEO/CFO, particularly during the period when our periodic reports are being prepared, and that our Internal Controls are effective to provide reasonable assurance that our financial statements are fairly presented in conformity with generally accepted accounting principles.

ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information regarding principal accountant fees and services will appear in the Proxy Statement for the 2003 Annual Meeting of Shareholders and is incorporated herein by this reference.

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PART IV

ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) List the following documents filed as part of this report:

(1) Financial Statements:

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

(2) Financial Statement Schedule:

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

(3) Exhibits:

3.1	Articles of Incorporation of Taitron Components Incorporated (the Registrant). (a)
3.2	Bylaws of the Registrant. (a)
4.1	Specimen certificate evidencing Class A common stock of the Registrant. (a)
4.2	Form of Underwriter’s Warrant. (a)
10.1	Form of Director and Officer Indemnification Agreement. (a)
10.2	1995 Stock Incentive Plan, As Amended (e)
10.3	Form of Employment Agreement, dated as of January 1, 1995, by and between the Registrant and Stewart Wang. (a)
10.4	Loan and Security Agreement, dated May 5, 1994, between the Registrant and Union Bank. (a)
10.5	Loan Agreement, dated October 15, 1993, by and between the Registrant and California Statewide Certified Development Corporation. (a)
10.6	Wm Michaels Limited Regional Prototype Defined Contribution Plan and Trust (d)
10.7	Form of Sales Representative Agreement. (a)
10.8	Loan Agreement, dated June 16, 1995, between Registrant and Union Bank. (b)
10.9	Convertible Subordinated Note Agreement, dated May 18, 1996, by and between the Registrant and Tenrich Holdings. (c)
10.10	Lease Agreement, dated May 29, 1996, by and between Scott Valencia Property Company as Lessor and Taitron Components Incorporated, as Lessee for property located at 27827 Ave Scott, Santa Clarita, California 91355. (c)
10.11	Amended Loan Agreement and Note, dated January 2, 1997, between Registrant and Union Bank; Amended Loan Agreement and Note, dated March 13, 1997, between Registrant and Union Bank. (e)
10.12	Business Loan Agreement and Addendum, dated May 6, 1997, between the Registrant and Comerica Bank—California. (d)
10.13	Master Revolving Note and Addendum, dated May 6, 1997, between the Registrant and Comerica Bank—California. (d)

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10.14	Security Agreement, dated May 6, 1997, between the Registrant and Comerica Bank—California. (d)
10.15	Amendment to Business Loan Agreement and Master Revolving Note, dated June 9, 1999, between the Registrant and Comerica Bank—California. (f)
10.16	Amendment to Business Loan Agreement, dated December 27, 1999, between the Registrant and Comerica Bank—California. (f)
10.17	Amendment to Business Loan Agreement, dated May 5, 2000, between the Registrant and Comerica Bank—California. (g)
10.18	Amendment to Business Loan Agreement, dated May 18, 2001, between the Registrant and Comerica Bank—California. (h)
10.19	Amendment to Business Loan Agreement, dated December 5, 2001, between the Registrant and Comerica Bank—California. (i)
10.20	Commitment Letter to Amend Business Loan Agreement, dated March 21, 2002, between the Registrant and Comerica Bank—California. (i)
10.21	Amendment to Business Loan Agreement and Master Revolving Note, dated May 31, 2002, between the Registrant and Comerica Bank—California. (j)
10.22	Loan Proposal, dated August 12, 2002, between the Registrant and Comerica Bank—California. (j)
10.23	Subordinate Promissory Note, dated September 30, 2002. (k)
10.24	Business Loan Agreement, dated December 10, 2002, between the Registrant and General Bank
10.25	Promissory Note and Amendment, dated December 10, 2002, between the Registrant and General Bank.
10.26	Deed of Trust, dated December 10, 2002, between the Registrant and General Bank.
24.1	Power of Attorney (see page 43 of this Annual Report on Form 10-K).

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

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

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

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

(e) Incorporated by reference from Taitron Components Incorporated Form 10-QSB for the quarter ended June 30, 1998

(f) Incorporated by reference from Taitron Components Incorporated Form 10-K for the Fiscal year ended December 31, 1999.

(g) Incorporated by reference from Taitron Components Incorporated Form 10-K for the Fiscal year ended December 31, 2000.

42

(h) Incorporated by reference from Taitron Components Incorporated Form 10-Q for the quarter ended September 30, 2001.

(i) Incorporated by reference from Taitron Components Incorporated Form 10-K for the Fiscal year ended December 31, 2001.

(j) Incorporated by reference from Taitron Components Incorporated Form 10-Q for the quarter ended June 30, 2002.

(k) Incorporated by reference from Taitron Components Incorporated Form 10-Q for the quarter ended September 30, 2002.

(b) Reports on Form 8-K:

On January 6, 2003, the Company filed a Form 8-K, dated December 27, 2002, reporting a change of the Company’s accountants (Item 9).

No other reports on Form 8-K were filed during the fourth quarter of 2002.

43

SIGNATURES

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

TAITRON COMPONENTS INCORPORATED (Registrant)
By:	/s/    STEWART WANG
	Stewart Wang
Its:	Chief Executive Officer & Chief Financial Officer
Date:	April 14, 2003

POWER OF ATTORNEY

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

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

Signature	Title	Date
/s/    JOHNSON KU         Johnson Ku	Chairman of the Board	April 14, 2003
/s/    STEWART WANG         Stewart Wang	Chief Executive Officer, President, Chief Financial Officer and Director (Principal Executive & Accounting Officer)	April 14, 2003
/s/    RICHARD CHIANG         Richard Chiang	Director	April 14, 2003
/s/    CRAIG MILLER         Craig Miller	Director	April 14, 2003
/s/    FELIX SUNG         Felix Sung	Director	April 14, 2003

44

Certification of

Chief Executive Officer and Chief Financial Officer

Of Taitron Components Incorporated

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

I, Stewart Wang, certify that:

1. I have reviewed this annual report on Form 10-K of Taitron Components Incorporated;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Dated April 14, 2003.	By:	/s/    STEWART WANG
		Stewart Wang Chief Executive Officer & Chief Financial Officer

45

Exhibit 99.01—Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C Section 1350, and accompanies the annual report on Form 10-K (the “Form 10-K”) for the year ended December 31, 2002 of Taitron Components Incorporated (the “Issuer”).

I, Stewart Wang, the Chief Executive Officer, Director and Chief Financial Officer of Issuer, certify that to the best of my knowledge:

(i) the Form 10-K fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d); and:

(ii) the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operation of the Issuer.

Dated April 14, 2003.	By:	/s/    STEWART WANG
		Stewart Wang Chief Executive Officer & Chief Financial Officer

46

EX-10.24

Exhibit 10.24

BUSINESS LOAN AGREEMENT

Principal $2,6525,000.00	Loan Date 12-10-2002	Maturity 12-10-2009	Loan No 7015171550	Call/Coll	Account	Officer 570	Initials
References in the shaded area are for Lender’s use only and do not limit the applicability of this document to any particular loan or item. Any item above containing ***** has been omitted due to text length limitations.

Borrower:	Taitron Components Incorporated	Lender:	General Bank
	28040 West Harrison Parkway		Real Estate Department
	Valencia, CA 91355		1420 East Valley Blvd.
			Alhambra, CA 91801

THIS BUSINESS LOAN AGREEMENT dated December 10,2002, is made and executed between Taitron Components Incorporated (“Borrower”) and General Bank (“Lender”) on the following terms and conditions. Borrower has received prior commercial loans from Lender or has applied to Lender for a commercial loan or loans or other financial accommodations, including those which may be described on any exhibit or schedule attached to this Agreement (“Loan”). Borrower understands and agrees that: (A) in granting, renewing, or extending any Loan, Lender is relying upon Borrower’s representations, warranties, and agreements as set forth in this Agreement; (B) the granting, renewing, or extending of any Loan by Lender at all times shall be subject to Lender’s sole judgment and discretion; and (C) all such Loans shall be and remain subject to the terms and conditions of this Agreement.

TERM. This Agreement shall be effective as of December 10, 2002, and shall continue in full force and effect until such time as all of Borrower’s Loans in favor of Lender have been paid in full, including principal, interest, costs, expenses, attorneys’ fees, and other fees and charges, or until December 10,2009.

CONDITIONS PRECEDENT TO EACH ADVANCE. Lender’s obligation to make the initial Advance and each subsequent Advance under this Agreement shall be subject to the fulfillment to Lender’s satisfaction of all of the conditions set forth in this Agreement and in the Related Documents.

Loan Documents. Borrower shall provide to Lender the following documents for the Loan: (1) the Note; (2) Security Agreements granting to Lender security interests in the Collateral; (3) financing statements and all other documents perfecting Lender’s Security Interests; (4) evidence of insurance as required below; (5) together with all such Related Documents as Lender may require for the Loan; all in form and substance satisfactory to Lender and Lender’s counsel.

Borrower’s Authorization. Borrower shall have provided in form and substance satisfactory to Lender properly certified resolutions, duly authorizing the execution and delivery of this Agreement, the Note and the Related Documents. In addition, Borrower shall have provided such other resolutions, authorizations, documents and instruments as Lender or its counsel, may require.

Payment of Fees and Expenses. Borrower shall have paid to Lender all fees, charges, and other expenses which are then due and payable as specified in this Agreement or any Related Document.

Representations and Warranties. The representations and warranties set forth in this Agreement, in the Related Documents, and in any document or certificate delivered to Lender under this Agreement are true and correct.

No Event of Default. There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement or under any Related Document.

REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any Indebtedness exists:

Organization. Borrower is a corporation for profit which is, and at all times shall be, duly organized, validly existing, and in good standing under and by virtue of the laws of the State of California. Borrower is duly authorized to transact business in all other states in which Borrower is doing business, having obtained all necessary filings, governmental licenses and approvals for each state in which Borrower is doing business. Specifically, Borrower is, and at all times shall be, duly qualified as a foreign corporation in all states in which the failure to so qualify would have a material adverse effect on its business or financial condition. Borrower has the full power and authority to own its properties and to transact the business in which it is presently engaged or presently proposes to engage. Borrower maintains an office at 28040 West Harrison Parkway, Valencia, CA 91355. Unless Borrower has designated otherwise in writing, the principal office is the office at which Borrower keeps its books and records including its records concerning the Collateral. Borrower will notify Lender prior to any change in the location of Borrower’s state of organization or any change in Borrower’s name. Borrower shall do all things necessary to preserve and to keep in full force and effect its existence, rights and privileges, and shall comply with all regulations, rules, ordinances, statutes, orders and decrees of any governmental or quasi-governmental authority or court applicable to Borrower and Borrower’s business activities.

Assumed Business Names. Borrower has filed or recorded all documents or filings required by law relating to all assumed business names used by Borrower. Excluding the name of Borrower, the following is a complete list of all assumed business names under which Borrower does business: None.

Authorization. Borrower’s execution, delivery, and performance of this Agreement and all the Related Documents have been duly authorized by all necessary action by Borrower and do not conflict with, result in a violation of, or constitute a default under (1) any provision of Borrower’s articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (2) any law, governmental regulation, court decree, or order applicable to Borrower or to Borrower’s properties.

Financial Information. Each of Borrower’s financial statements supplied to Lender truly and completely disclosed Borrower’s financial condition as of the date of the statement, and there has been no material adverse change in Borrower’s financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements.

Legal Effect. This Agreement constitutes, and any instrument or agreement Borrower is required to give under this Agreement when delivered will constitute legal, valid, and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms. /

Properties. Except as contemplated by this Agreement or as previously disclosed in Borrower’s financial statements or in writing to Lender and as accepted by Lender, and except for property tax liens for taxes not presently due and payable, Borrower owns and has good title to all of Borrower’s properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower’s properties are titled in Borrower’s legal name, and Borrower has not used or filed a financing statement under any other name for at least the last five (5) years.

Hazardous Substances. Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (1) During the period of Borrower’s ownership of Borrower’s Collateral, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance by any person on, under, about or from any of the Collateral. (2) Borrower has no knowledge of, or reason to believe that there has been (a) any breach or violation of any Environmental Laws; (b) any use, generation, manufacture, storage,

BUSINESS LOAN AGREEMENT

Loan No: 7015171550 (Continued) Page 2

treatment, disposal, release or threatened release of any Hazardous Substance on, under, about or from the Collateral by any prior owners or occupants of any of the Collateral; or (c) any actual or threatened litigation or claims of any kind by any person relating to such matters. (3) Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the Collateral shall use, generate, manufacture, store, treat, dispose of or release any Hazardous Substance on, under, about or from any of the Collateral; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation all Environmental Laws. Borrower authorizes Lender and its agents to enter upon the Collateral to make such inspections and tests as Lender may deem appropriate to determine compliance of the Collateral with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower’s expense and for Lender’s purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower’s due diligence in investigating the Collateral for hazardous waste and Hazardous Substances. Borrower hereby (1) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (2) agrees to indemnify and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release of a hazardous waste or substance on the Collateral. The provisions of this section of the Agreement, including the obligation to indemnify, shall survive the payment of the Indebtedness and the termination, expiration or satisfaction of this Agreement and shall not be affected by Lender’s acquisition of any interest in any of the Collateral, whether by foreclosure or otherwise.

Litigation and Claims. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower’s financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing.

Taxes. To the best of Borrower’s knowledge, all of Borrower’s tax returns and reports that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided.

Lien Priority. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower’s Loan and Note, that would be prior or that may in any way be superior to Lender’s Security Interests and rights in and to such Collateral.

Binding Effect. This Agreement, the Note, all Security Agreements (if any), and all Related Documents are binding upon the signers thereof, as well as upon their successors, representatives and assigns, and are legally enforceable in accordance with their respective terms.

AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, so long as this Agreement remains in effect, Borrower will:

Notices of Claims and Litigation. Promptly inform Lender in writing of (1) all material adverse changes in Borrower’s financial condition, and (2) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor.

Financial Records. Maintain its books and records in accordance with GAAP, applied on a consistent basis, and permit Lender to examine and audit Borrower’s books and records at all reasonable times.

Financial Statements. Furnish Lender with the following:

Annual Statements. As soon as available, but in no event later than thirty (30) days after the end of each fiscal year, Borrower’s balance sheet and income statement for the year ended, prepared by Borrower.

Tax Returns. As soon as available, but in no event later than thirty (30) days after the applicable filing date for the tax reporting period ended, Federal and other governmental tax returns, prepared by Borrower.

All financial reports required to be provided under this Agreement shall be prepared in accordance with GAAP, applied on a consistent basis, and certified by Borrower as being true and correct.

Additional Information. Furnish such additional information and statements, as Lender may request from time to time.

Insurance. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower’s properties and operations, in form, amounts, coverages and with insurance companies acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least thirty (30) days prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such lender’s loss payable or other endorsements as Lender may require.

Insurance Reports. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (1) the name of the insurer; (2) the risks insured; (3) the amount of the policy; (4) the properties insured; (5) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (6) the expiration date of the policy. In addition, upon request of Lender (however not more often than annually), Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower.

Other Agreements. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements.

Loan Fees, Charges and Expenses. In addition to all other agreed upon fees, charges, and expenses, pay the following: Documentation fee of $250.00.

Loan Proceeds. Use all Loan proceeds solely for the following specific purposes: to refinance an industrial building.

Taxes, Charges and Liens. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower’s properties, income, or profits.

Performance. Perform and comply, in a timely manner, with all terms, conditions, and provisions set forth in this Agreement, in the Related Documents, and in all other instruments and agreements between Borrower and Lender. Borrower shall notify Lender immediately in writing of any default in connection with any agreement.

Operations. Maintain executive and management personnel with substantially the same qualifications and experience as the present executive

BUSINESS LOAN AGREEMENT

Loan No: 7015171550 (Continued) Page 3

and management personnel; provide written notice to Lender of any change in executive and management personnel; conduct its business affairs in a reasonable and prudent manner.

Environmental Studies. Promptly conduct and complete, at Borrower’s expense, all such investigations, studies, samplings and testings as may be requested by Lender or any governmental authority relative to any substance, or any waste or by-product of any substance defined as toxic or a hazardous substance under applicable federal, state, or local law, rule, regulation, order or directive, at or affecting any property or any facility owned, leased or used by Borrower.

Compliance with Governmental Requirements. Comply with all laws, ordinances, and regulations, now or hereafter in effect, of all governmental authorities applicable to the conduct of Borrower’s properties, businesses and operations, and to the use or occupancy of the Collateral, including without limitation, the Americans With Disabilities Act. Borrower may contest in good faith any such law, ordinance, or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Borrower has notified Lender in writing prior to doing so and so long as, in Lender’s sole opinion, Lender’s interests in the Collateral are not jeopardized. Lender may require Borrower to post adequate security or a surety bond, reasonably satisfactory to Lender, to protect Lender’s interest.

Inspection. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower’s other properties and to examine or audit Borrower’s books, accounts, and records and to make copies and memoranda of Borrower’s books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower’s expense.

Environmental Compliance and Reports. Borrower shall comply in all respects with any and all Environmental Laws; not cause or permit to exist, as a result of an intentional or unintentional action or omission on Borrower’s part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower’s part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources.

Additional Assurances. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, assignments, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests.

LENDER’S EXPENDITURES. If any action or proceeding is commenced that would materially affect Lender’s interest in the Collateral or if Borrower fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Borrower’s failure to discharge or pay when due any amounts Borrower is required to discharge or pay under this Agreement or any Related Documents, Lender on Borrower’s behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on any Collateral and paying all costs for insuring, maintaining and preserving any Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Borrower. All such expenses will become a part of the Indebtedness and, at Lender’s option, will (A) be payable on demand; (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (1) the term of any applicable insurance policy; or (2) the remaining term of the Note; or (C) be treated as a balloon payment which will be due and payable at the Note’s maturity.

NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender:

Indebtedness and Liens. (1) Except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases, (2) sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower’s assets (except as allowed as Permitted Liens), or (3) sell with recourse any of Borrower’s accounts, except to Lender.

Continuity of Operations. (1) Engage in any business activities substantially different than those in which Borrower is presently engaged, (2) cease operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, or (3) pay any dividends on Borrower’s stock (other than dividends payable in its stock), provided, however that notwithstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a “Subchapter S Corporation” (as defined in the Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership of shares of Borrower’s stock, or purchase or retire any of Borrower’s outstanding shares or alter or amend Borrower’s capital structure.

Loans, Acquisitions and Guaranties. (1) Loan, invest in or advance money, or assets, (2) purchase, create or acquire any interest in any other enterprise or entity, or (3) incur any obligation as surety or guarantor other than in the ordinary course of business.

CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (A) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (B) Borrower or any Guarantor dies, becomes incompetent or becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (C) there occurs a material adverse change in Borrower’s financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; or (D) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor’s guaranty of the Loan or any other loan with Lender.

RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower’s accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the Indebtedness against any and all such accounts.

DEFAULT. Each of the following shall constitute an Event of Default under this Agreement:

BUSINESS LOAN AGREEMENT

Loan No: 7015171550 (Continued) Page 4

Payment Default. Borrower fails to make any payment when due under the Loan.

Other Defaults. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower.

Environmental Default. Failure of any party to comply with or perform when due any term, obligation, convenant or condition contained in any environmental agreement executed in connection with any Loan.

Default in Favor of Third Parties. Borrower or any Grantor defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower’s or any Grantor’s property or Borrower’s or any Grantor’s ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents.

False Statements. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower’s behalf under this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter.

Insolvency. The dissolution or termination of Borrower’s existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower’s property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower.

Defective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien) at any time and for any reason.

Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the Loan. This includes a garnishment of any of Borrower’s accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute.

Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness. In the event of a death, Lender, at its option, may, but shall not be required to, permit the Guarantor’s estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure any Event of Default.

Change in Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower.

Adverse Change. A material adverse change occurs in Borrower’s financial condition, or Lender believes the prospect of payment or performance of the Loan is impaired.

Insecurity. Lender in good faith believes itself insecure.

Right to Cure. If any default, other than a default on Indebtedness, is curable and if Borrower or Grantor, as the case may be, has not been given a notice of a similar default within the preceding twelve (12) months, it may be cured (and no Event of Default will have occurred) if Borrower or Grantor, as the case may be, after receiving written notice from Lender demanding cure of such default: (1) cure the default within fifteen (15) days; or (2) if the cure requires more than fifteen (15) days, immediately initiate steps which Lender deems in Lender’s sole discretion to be sufficient to cure the default and thereafter continue and complete all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical.

EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make further Loan Advances or disbursements), and, at Lender’s option, all Indebtedness immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the “Insolvency” subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender’s rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender’s right to declare a default and to exercise its rights and remedies.

DEBT COVERAGE RATIO. If at any time, the Debt Coverage Ratio shall be less than 1.20 to 1.00 Borrower and/or Guarantor shall (no later than 30 days after demand by Lender) reduce the outstanding principal balance by an amount sufficient to cause the ratio of Net Operating Income to the projected Debt Service due Lender over the next 12 months to be equal to no less than 1.20 to 1.00. Debt Coverage is subject to annual review. A penalty of a 0.25 higher interest rate will be assessed if Borrower failed to comply with this reporting covenant.

CONDITIONS. Borrower shall deposit an amount equal to six (6) monthly payments on the loan in a reserve account maintained with Lender. Release of such amount will be subject to (i) Satisfactory monthly payment for a consecutive 12 months period; (ii) A debt coverage ratio (“DCR”) of at least 1.20:1.00.

MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement:

Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment.

Attorneys’ Fees; Expenses. Borrower agrees to pay upon demand all of Lender’s costs and expenses, including Lender’s attorneys’ fees and Lender’s legal expenses, incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone else to help enforce this Agreement, and Borrower shall pay the costs and expenses of such enforcement. Costs and expenses include Lender’s attorneys’ fees and legal expenses whether or not there is a lawsuit, including attorneys’ fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also shall pay all court costs and such additional fees as may be directed by the court.

Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement.

Consent to Loan Participation. Borrower agrees and consents to Lender’s sale or transfer, whether now or later, of one or more participation interests in the Loan to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever,

BUSINESS LOAN AGREEMENT

Loan No: 7015171550 (Continued) Page 5

to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy Borrower may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loan and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower’s obligation under the Loan irrespective of the failure or insolvency of any holder of any interest in the Loan. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender.

Governing Law. This Agreement will be governed by, construed and enforced in accordance with federal law and the laws of the State of California. This Agreement has been accepted by Lender in the State of California.

Choice of Venue. If there is a lawsuit. Borrower agrees upon Lender’s request to submit to the jurisdiction of the courts of Los Angeles County, State of California.

No Waiver by Lender. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender’s right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender’s rights or of any of Borrower’s or any Grantor’s obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender.

Notices. Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party’s address. For notice purposes, Borrower agrees to keep Lender informed at all times of Borrower’s current address. Unless otherwise provided or required by law, if there is more than one Borrower, any notice given by Lender to any Borrower is deemed to be notice given to all Borrowers.

Severability. If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified, it shall be considered deleted from this Agreement. Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement.

Subsidiaries and Affiliates of Borrower. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word “Borrower” as used in this Agreement shall include all of Borrower’s subsidiaries and affiliates. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any of Borrower’s subsidiaries or affiliates.

Successors and Assigns. All covenants and agreements contained by or on behalf of Borrower shall bind Borrower’s successors and assigns and shall inure to the benefit of Lender and its successors and assigns. Borrower shall not, however, have the right to assign Borrower’s rights under this Agreement or any interest therein, without the prior written consent of Lender.

Survival of Representations and Warranties. Borrower understands and agrees that in making the Loan, Lender is relying on all representations, warranties, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement or the Related Documents. Borrower further agrees that regardless of any investigation made by Lender, all such representations, warranties and covenants will survive the making of the Loan and delivery to Lender of the Related Documents, shall be continuing in nature, and shall remain in full force and effect until such time as Borrower’s Indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur.

Time is of the Essence. Time is of the essence in the performance of this Agreement.

DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, ail references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. Accounting words and terms not otherwise defined in this Agreement shall have the meanings assigned to them in accordance with generally accepted accounting principles as in effect on the date of this Agreement:

Advance. The word “Advance” means a disbursement of Loan funds made, or to be made, to Borrower or on Borrower’s behalf on a line of credit or multiple advance basis under the terms and conditions of this Agreement.

Agreement. The word “Agreement” means this Business Loan Agreement, as this Business Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Business Loan Agreement from time to time.

Borrower. The word “Borrower” means Taitron Components Incorporated.

Collateral. The word “Collateral” means all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, collateral mortgage, deed of trust, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor’s lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise.

Environmental Laws. The words “Environmental Laws” mean any and all state, federal and local statutes, regulations and ordinances relating to the protection of human health or the environment, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. (“CERCLA”), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 (“SARA”), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety Code, Section 25100, et seq., or other applicable state or federal laws, rules, or regulations adopted pursuant thereto.

BUSINESS LOAN AGREEMENT

Loan No: 7015171550 (Continued) Page 6

Event of Default. The words “Event of Default” mean any of the events of default set forth in this Agreement in the default section of this Agreement.

GAAP. The word “GAAP” means generally accepted accounting principles.

Grantor. The word “Grantor” means each and all of the persons or entities granting a Security Interest in any Collateral for the Loan, including without limitation all Borrowers granting such a Security Interest.

Guarantor. The word “Guarantor” means any guarantor, surety, or accommodation party of any or all of the Loan.

Guaranty. The word “Guaranty” means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note.

Hazardous Substances. The words “Hazardous Substances” mean materials that, because of their quantity, concentration or physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled. The words “Hazardous Substances” are used in their very broadest sense and include without limitation any and all hazardous or toxic substances, materials or waste as defined by or listed under the Environmental Laws. The term “Hazardous Substances” also includes, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos.

Indebtedness. The word “Indebtedness” means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Borrower is responsible under this Agreement or under any of the Related Documents.

Lender. The word “Lender” means General Bank, its successors and assigns.

Loan. The word “Loan” means any and all loans and financial accommodations from Lender to Borrower whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time.

Note. The word “Note” means the Note executed by Taitron Components Incorporated in the principal amount of $2,625,000.00 dated December 10, 2002, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the note or credit agreement.

Permitted Liens. The words “Permitted Liens” mean (1) liens and security interests securing Indebtedness owed by Borrower to Lender; (2) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (3) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (4) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure indebtedness outstanding on the date of this Agreement or permitted to be incurred under the paragraph of this Agreement titled “Indebtedness and Liens”; (5) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and (6) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of Borrower’s assets.

Related Documents. The words “Related Documents” mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Loan.

Security Agreement. The words “Security Agreement” mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest.

Security Interest. The words “Security Interest” mean, without limitation, any and all types of collateral security, present and future, whether in the form of a lien, charge, encumbrance, mortgage, deed of trust, security deed, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor’s lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever whether created by law, contract, or otherwise.

BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT AND BORROWER AGREES TO ITS TERMS. THIS BUSINESS LOAN AGREEMENT IS DATED DECEMBER 10, 2002.

BORROWER:
TAITRON COMPONENTS-INCORPORATED
By:
	Stewart Wang, Chief Executive Officer of Taitron Components Incorporated

LENDER:
GENERAL BANK
By:
	Authorized Signer

EX-10.25

Exhibit 10.25

PROMISSORY NOTE

Principal $2,625,000.00	Loan Date 12-10-2002	Maturity 12-10-2009	Loan No 7015171550	Call/Coll	Account	Officer 570	Initials
References in the shaded area are for Lender’s use only and do not limit the applicability of this document to any particular loan or item. Any item above containing **** has been omitted due to text length limitations.

Borrower:	Taitron Components Incorporated	Lender:	General Bank
	28040 West Harrison Parkway		Real Estate Department
	Valencia, CA 91355		1420 East Valley Blvd.
			Alhambra, CA 91801

Principal Amount: $2,625,000.00 Date of Note: December 10, 2002

PROMISE TO PAY. Taitron Components Incorporated (“Borrower”) promises to pay to General Bank (“Lender”), or order, in lawful money of the United States of America, the principal amount of Two Million Six Hundred Twenty-five Thousand & 00/100 Dollars ($2,625,000.00) together with interest on the unpaid principal balance from December 10,2002, until paid in full.

PAYMENT. Subject to any payment changes resulting from changes In the Index, Borrower will pay this loan in accordance with the following payment schedule: 36 monthly consecutive principal and Interest payments In the initial amount of $20,312.55 each, beginning January 10 2003, with interest calculated on the unpaid principal balances at an interest rate of 6.875%; 47 monthly consecutive principal and interest payments In the initial amount of $19,612.52 each, beginning January 10,2006, with interest calculated on the unpaid principal balances at an interest rate based on the Five Year Treasury Note Rate (currently 3.000%), plus a margin of 3.375 percentage points, resulting in an initial interest rate of 6.375%; and one principal and Interest payment of $2,085,180.32 on December 10, 2009, with interest calculated on the unpaid principal balances at an interest rate based on the Five Year Treasury Note Rate (currently 3.000%), plus a margin of 3.375 percentage points resulting in an initial interest rate of 6.375%. This estimated final payment is based on the assumption that all payments will be made exactly as scheduled and that the Index does not change; the actual final payment will be for all principal and accrued interest not yet paid, together with any other unpaid amounts under this Note. Unless otherwise agreed or required by applicable law, payments will be applied first to accrued unpaid interest, then to principal, and any remaining amount to any unpaid collection costs and late charges. The annual interest rate for this Note Is computed on a 365/360 basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender’s address shown above or at such other place as Lender may designate in writing.

VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an independent index which is the Five Year Treasury Note Rate (the “Index”). The Index is not necessarily the lowest rate charged by Lender on its loans. If the Index becomes unavailable during the term of this loan. Lender may designate a substitute index after notice to Borrower. Lender will tell Borrower the current Index rate upon Borrower’s request. The interest rate change will not occur more often than each semi-annually. Borrower understands that Lender may make loans based on other rates as well. The Index currently is 3.000%. The interest rate or rates to be applied to the unpaid principal balance of this Note will be the rate or rates set forth herein in the “Payment” section. Notwithstanding any other provision of this Note, after the first payment stream, the Interest rate for each subsequent payment stream will be effective as of the last payment date of the Just-ending payment stream. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. Whenever increases occur in the interest rate, Lender, at its option, may do one or more of the following: (A) increase Borrower’s payments to ensure Borrower’s loan will pay off by its original final maturity date, (B) increase Borrower’s payments to cover accruing interest, (C) increase the number of Borrower’s payments, and (D) continue Borrower’s payments at the same amount and increase Borrower’s final payment.

PREPAYMENT FEE; MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees and other prepaid finance charges are earned fully as of the date of the loan and will not be subject to refund upon early payment (whether voluntary or as a result of default), except as otherwise required by law. In any event, even upon full prepayment of this Note, Borrower understands that Lender is entitled to a minimum interest charge of $100.00 Upon prepayment of this Note, Lender is entitled to the following prepayment fee: 6 months interest penalty will be applied to unscheduled principal repayment during the first three years. Other than Borrower’s obligation to pay any minimum interest charge and prepayment fee Borrower may pay all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower’s obligation to continue to make payments under the payment schedule. Rather, early payments will reduce the principal balance due and may result in Borrower’s making fewer payments. Borrower agrees not to send Lender payments marked “paid in full”, “without recourse”, or similar language. If Borrower sends such a payment, Lender may accept it without losing any of Lender’s rights under this Note, and Borrower will remain obligated to pay any further amount owed to Lender. All written communications concerning disputed amounts, including any check or other payment instrument that indicates that the payment constitutes “payment in full” of the amount owed or that is tendered with other conditions or limitations or as full satisfaction of a disputed amount must be mailed or delivered to: General Bank, Real Estate Department 1420 East Valley Blvd Alhambra, CA 91801.

LATE CHARGE. If a payment is 10 days or more late. Borrower will be charged 5.000% of the unpaid portion of the regularly scheduled payment or $10.00, whichever is greater.

INTEREST AFTER DEFAULT. Upon Borrower’s failure to pay all amounts declared due pursuant to this section, including failure to pay upon final maturity. Lender, at its option, may, if permitted under applicable law, increase the variable interest rate on this Note by 5.000 percentage points.

DEFAULT. Each of the following shall constitute an event of default (“Event of Default”) under this Note:

Payment Default. Borrower fails to make any payment when due under this Note.

Other Defaults. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Note or in any of the related documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower.

Default in Favor of Third Parties. Borrower or any Grantor defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower’s property or Borrower’s ability to repay this Note or perform Borrower’s obligations under this Note or any of the related documents.

Environmental Default. Failure of any party to comply with or perform when due any term, obligation, convenant or condition contained in any environmental agreement executed in connection with any loan.

False Statements. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower’s behalf under this Note or the related documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter.

Insolvency. The dissolution or termination of Borrower’s existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower’s property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any

PROMISSORY NOTE

Loan No: 7015171550 (Continued) Page 2

proceeding under any bankruptcy or insolvency laws by or against Borrower.

Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the loan. This includes a garnishment of any of Borrower’s accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute.

Events Affecting Guarantor. Any of the preceding events occurs with respect to any guarantor, endorser, surety, or accommodation party of any of the indebtedness or any guarantor, endorser, surety, or accommodation party dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any guaranty of the indebtedness evidenced by this Note. In the event of a death. Lender, at its option, may, but shall not be required to, permit the guarantor’s estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure any Event of Default.

Change In Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower.

Adverse Change. A material adverse change occurs in Borrower’s financial condition, or Lender believes the prospect of payment or performance of this Note is impaired.

Cure Provisions. If any default, other than a default in payment is curable and if Borrower has not been given a notice of a breach of the same provision of this Note within the preceding twelve (12) months, it may be cured (and no event of default will have occurred) if Borrower, after receiving written notice from Lender demanding cure of such default: (1) cures the default within fifteen (15) days; or (2) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender’s sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical.

LENDER’S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, and then Borrower will pay that amount.

ATTORNEYS’ FEES; EXPENSES. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower will pay Lender that amount. This includes, subject to any limits under applicable law, Lender’s attorneys’ fees and Lender’s legal expenses, whether or not there is a lawsuit, including attorneys’ fees, expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), and appeals. Borrower also will pay any court costs, in addition to all other sums provided by law.

GOVERNING LAW. This Note will be governed by, construed and enforced in accordance with federal law and the laws of the State of California. This Note has been accepted by Lender in the State of California.

CHOICE OF VENUE. If there is a lawsuit. Borrower agrees upon Lender’s request to submit to the jurisdiction of the courts of Los Angeles County, State of California.

DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $15.00 if Borrower makes a payment on Borrower’s loan and the check or preauthorized charge with which Borrower pays is later dishonored.

RIGHT OF SETOFF. To the extent permitted by applicable law. Lender reserves a right of setoff in all Borrower’s accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the indebtedness against any and all such accounts.

COLLATERAL. Borrower acknowledges this Note is secured by the following collateral described in the security instrument listed herein: a Deed of Trust dated December 10, 2002, to a trustee in favor of Lender on real property located in Los Angeles County, State of California.

INTEREST RATE. The interest rate will be fixed at 6.875% for the first, second and third years, and the remaining four years will be changed to 5 years Treasury Note Rate plus 3.375% (currently 3.00%), adjustable semi-annually.

REPAYMENT SCHEDULE. Principal and interest payable monthly based on a 20 year amortization due in 7 years with balloon payment due at maturity.

AUTMATIC DEBIT. Borrower shall establish a DDA account for monthly payment of principal and interest. A penalty of a 0.50% interest rate will be added to the existing interest rate if the DDA account is closed or Borrower fails to maintain sufficient funds for automatic debit.

SUCCESSOR INTERESTS. The terms of this Note shall be binding upon Borrower, and upon Borrower’s heirs, personal representatives, successors and assigns, and shall inure to the benefit of Lender and its successors and assigns.

GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive any applicable statute of limitations, presentment, demand for payment, and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender’s security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. The obligations under this Note are joint and several.

PROMISSORY NOTE

Loan No: 7015171550 (Continued) Page 3

PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE.

BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE.

BORROWER:

TAITRON COMPONENTS INCORPORATED

By:
	Stewart Wang, Chief Executive Officer of Taitron Components Incorporated

LENDER:

GENERAL BANK

X
	Authorized Signer

AMENDMENT TO PROMISSORY NOTE

Principal $2,6525,000.00	Loan Date 12-10-2002	Maturity 12-10-2009	Loan No 7015171550	Call/Coll	Account	Officer 570	Initials
References in the shaded area are for Lender’s use only and do not limit the applicability of this document to any particular loan or item. Any item above containing ***** has been omitted due to text length limitations.

Borrower:	Taitron Components Incorporated	Lender:	General Bank
	28040 West Harrison Parkway		Real Estate Department
	Valencia, CA 91355		1420 East Valley Blvd.
			Alhambra, CA 91801

This AMENDMENT TO PROMISSORY NOTE Is attached to and by this reference is made a part of the Promissory Note, dated December 10, 2002, and executed in connection with a loan or other financial accommodations between GENERAL BANK and Taitron Components Incorporated.

WHEREAS, the Borrower and the Lender have entered into a certain Promissory Note and Loan Agreement (the “Agreement”) dated as December 10, 2002, whereby the Lender agreed to make available to Borrower financial accommodations in the aggregate principal amount of Two Million Six Hundred Twenty Five Thousand Dollars and No/100 ($2,625,000.00) (collectively the “Loan”), upon the terms and subject to the conditions set forth in the Agreement and other documents related to the Loan (collectively the “Loan Documents”); and

WHEREAS, the parties have agreed that the Loan shall mature 84 months from the date of its original funding and/or the date of the recording of the Deed of Trust securing the loan, whichever occurs first (the date of such funding or recording hereinafter referred to as the (“Closing Date”), the exact date of which could not be fixed with certainty at the time the parties entered into the Agreement; and

WHEREAS, the parties understand that the date of the first payment and the maturity of the Loan set forth in the Promissory Note Is subject to change when the Closing Date becomes certain; and

WHEREAS, the Borrower has agreed to permit the Lender to fix the new maturity date by changing the dates originally set forth in the Promissory Note.

NOW THEREFORE, the Borrower and the Lender in consideration of the promises made herein and in the Loan Documents and intending to be legally bound hereby agree as follows:

1. Borrower hereby authorizes Lender to fix the first payment date and the maturity date of the Loan, when the Closing Date becomes certain, by changing the date originally shown on the Loan Documents.

2. Except as specifically amended hereby, each and every term of the Agreement and the other Loan Documents is hereby ratified and reaffirmed and shall remain in full force and effect.

IN WITNESS WHEREOF, the parties have duly executed this Amendment as of the day and year first above written.

TO BE COMPLETED BY LENDER

Closing Date: 12-31-2002

New Maturity Date: 12-31-2009

New First Payment Date: 1-31-2003

Authorized Officer:.

THIS AMENDMENT TO PROMISSORY NOTE IS EXECUTED ON DECEMBER 10, 2002.

BORROWER:

TAITRON COMPONENTS1NCORPORATED.

By:
	Stewart Wang, Chief Executive Officer of Taitron Components Incorporated

LENDER:

GENERAL BANK

X
	Authorized Signer

EX-10.26

Exhibit 10.26

RECORDAT10N REQUESTED BY:

General Bank

Real Estate Department

1420 East Valley Blvd.

Alhambra, CA 91801

WHEN RECORDED MAIL TO:

General Bank

Real Estate Department

1420 East Valley Blvd.

Alhambra, CA 91801

SEND TAX NOTICES TO:

Taitron Components Incorporated

28040 West Harrison Parkway

Valencia, CA 91355                                                                                                           FOR RECORDER’S USE ONLY

DEED OF TRUST

THIS DEED OF TRUST is dated December 10, 2002, among Taitron Components Incorporated, a California corporation (“Trustor”); General Bank, whose address is Real Estate Department, 1420 East Valley Blvd., Alhambra, CA 91801 (referred to below sometimes as “Lender” and sometimes as “Beneficiary”); and United Title Company, whose address is 3250 Wilshire Boulevard, 18th floor, Los Angeles, CA 90010 (referred to below as “Trustee”).

CONVEYANCE AND GRANT. For valuable consideration, Trustor irrevocably grants, transfers and assigns to Trustee in trust, with power of sale, for the benefit of Lender as Beneficiary, all of Trustor’s right, title, and interest in and to the following described real property, together with all’existing or subsequently erected or affixed buildings, improvements and fixtures; all easements, rights of way, and appurtenances; all water, water rights and ditch rights (including stock in utilities with ditch or irrigation rights); and all other rights royalties and profits relating to the real property, including without limitation all minerals, oil, gas, geothermal and similar matters, (the Real Property ) located in LOS Angeles County, State of California:

See Exhibit “A”, which is attached to this Deed of Trust and made a part of this Deed of Trust as if fully set forth herein.

The Real Property or its address is commonly known as 28040 West Harrison Parkway, Valencia, CA 91355. The Assessor’s Parcel Number for the Real Property is 3271-025-06

Trustor presently assigns to Lender (also known as Beneficiary in this Deed of Trust) all of Trustor’s right, title, and interest in and to all present and future leases of the Property and all Rents from the Property. This is an absolute assignment of Rents made in connection with an obligation secured by real property pursuant to California Civil Code Section 2938. In addition, Trustor grants to Lender a Uniform Commercial Code security interest in the Persona! Property and Rents.

THIS DEED OF TRUST, INCLUDING THE ASSIGNMENT OF RENTS AND THE SECURITY INTEREST IN THE RENTS AND PERSONAL PROPERTY IS GIVEN TO SECURE (A) PAYMENT OF THE INDEBTEDNESS AND (B) PERFORMANCE OF ANY AND ALL OBLIGATIONS UNDER THE NOTE, THE RELATED DOCUMENTS, AND THIS DEED OF TRUST. THIS DEED OF TRUST IS GIVEN AND ACCEPTED ON THE FOLLOWING TERMS:

PAYMENT AND PERFORMANCE. Except as otherwise provided in this Deed of Trust, Trustor shall pay to Lender all amounts secured by this Deed of Trust as they become due, and shall strictly and in a timely manner perform all of Trustor’s obligations under the Note, this Deed of Trust, and the Related Documents.

POSSESSION AND MAINTENANCE OF THE PROPERTY. Trustor agrees that Trustor’s possession and use of the Property shall be governed by the following provisions:

Possession and Use. Until the occurrence of an F-vsnt of Default, Trustor may (1) remain in possession and control of the Property; (2) use, operate or manage the Property; and (3) collect the Rents from the Property.

Duty to Maintain. Trustor shall maintain the Property in tenantable condition and promptly perform all repairs, replacements, and maintenance necessary to preserve its value.

Compliance With Environmental Laws. Trustor represents and warrants to Lender that: (1) During the period of Trustor’s ownership of the Property, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance by any person on, under, about or from the Property; (2) Trustor has no knowledge of, or reason to believe that there has been, except as previously disclosed to and acknowledged by Lender in writing, (a) any breach or violation of any Environmental Laws, (b) any use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance on, under, about or from the Property by any prior owners or occupants of the Property, or (c) any actual or threatened litigation or claims of any kind by any person relating to such matters; and (3) Except as previously disclosed to and acknowledged by Lender in writing, (a) neither Trustor nor any tenant contractor agent or other authorized user of the Property shall use, generate, manufacture, store, treat, dispose of or release any Hazardous Substance on, under, about or from the Property; and (b) any such activity shall be conducted in compliance with all applicable federal state and local laws, regulations and ordinances, including without limitation all Environmental Laws. Trustor authorizes Lender and its agents to enter upon the Property to make such inspections and tests, at Trustor’s expense, as Lender may deem appropriate to determine compliance of the Property with this section of the Deed of Trust. Any inspections or tests made by Lender shall be for Lender’s

DEED OF TRUST

Loan No: 7015171550 (Continued) Page 2

purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Trustor or to any other person. The representations and warranties contained herein are based on Trustor’s due diligence in investigating the Property for Hazardous Substances. Trustor hereby (1) releases and waives any future claims against Lender for indemnity or contribution in the event Trustor becomes liable for cleanup or other costs under any such laws; and (2) agrees to indemnify and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Deed of Trust or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release occurring prior to Trustor’s ownership or interest in the Property, whether or not the same was or should have been known to Trustor. The provisions of this section of the Deed of Trust, including the obligation to indemnify, shall survive the payment of the Indebtedness and the satisfaction and reconveyance of the lien of this Deed of Trust and shall not be affected by Lender’s acquisition of any interest in the Property, whether by foreclosure or otherwise.

Nuisance, Waste. Trustor shall not cause, conduct or permit any nuisance nor commit, permit, or suffer any stripping of or waste on or to the Property or any portion of the Property. Without limiting the generality of the foregoing, Trustor will not remove, or grant to any other party the right to remove, any timber, minerals (including oil and gas), coal, clay, scoria, soil, gravel or rock products without Lender’s prior written consent.

Removal of Improvements. Trustor shall not demolish or remove any Improvements from the Real Property without Lender’s prior written consent. As a condition to the removal of any Improvements, Lender may require Trustor to make arrangements satisfactory to Lender to replace such Improvements with Improvements of at least equal value.

Lender’s Right to Enter. Lender and Lender’s agents and representatives may enter upon the Real Property at all reasonable times to attend to Lender’s interests and to inspect the Real Property for purposes of Trustor’s compliance with the terms and conditions of this Deed of Trust.

Compliance with Governmental Requirements. Trustor shall promptly comply with all laws, ordinances, and regulations, now or hereafter in effect, of all governmental authorities applicable to the use or occupancy of the Property, including without limitation, the Americans With Disabilities Act. Trustor may contest in good faith any such law, ordinance, or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Trustor has notified Lender in writing prior to doing so and so long as, in Lender’s sole opinion, Lender’s interests in the Property are not jeopardized. Lender may require Trustor to post adequate security or a surety bond, reasonably satisfactory to Lender, to protect Lender’s interest.

Duty to Protect. Trustor agrees neither to abandon or leave unattended the Property. Trustor shall do all other acts, in addition to those acts set forth above in this section, which from the character and use of the Property are reasonably necessary to protect and preserve the Property.

TAXES AND LIENS. The following provisions relating to the taxes and liens on the Property are part of this Deed of Trust:

Payment. Trustor shall pay when due (and in all events at least ten (10) days prior to delinquency) all taxes, special taxes, assessments, charges (including water and sewer), fines and impositions levied against or on account of the Property, and shall pay when due all claims !or work done on or for services rendered or material furnished to the Property. Trustor shall maintain the Property free of all liens having priority over or equal to the interest of Lender under this Deed of Trust, except for the lien of taxes and assessments not due and except as otherwise provided in this Deed of Trust.

Right to Contest. Trustor may withhold payment of any tax, assessment, or claim in connection with a good faith dispute over the obligation to pay, so long as Lender’s interest in the Property is not jeopardized. If a lien arises or is filed as a result of nonpayment, Trustor shall within fifteen (15) days after the lien arises or, if a lien is filed, within fifteen (15) days after Trustor has notice of the filing, secure the discharge of the lien, or if requested by Lender, deposit with Lender cash or a sufficient corporate surety bond or other security satisfactory to Lender in an amount sufficient to discharge the lien plus any costs and attorneys’ fees, or other charges that could accrue as a result of a foreclosure or sale under the lien. In any contest, Trustor shall defend itself and Lender and shall satisfy any adverse judgment before enforcement against the Property. Trustor shall name Lender as an additional obligee under any surety bond furnished in the contest proceedings.

Evidence of Payment. Trustor shall upon demand furnish to Lender satisfactory evidence of payment of the taxes or assessments and shall authorize the appropriate governmental official to deliver to Lender at any time a written statement of the taxes and assessments against the Property.

Notice of Construction. Trustor shall notify Lender at least fifteen (15) days before any work is commenced, any services are furnished, or any materials are supplied to the Property, if any mechanic’s lien, materialmen’s lien, or other lien could be asserted on account of the work, services, or materials and the cost exceeds $1,000.00. Trustor will upon request of Lender furnish to Lender advance assurances satisfactory to Lender that Trustor can and will pay the cost of such improvements.

PROPERTY DAMAGE INSURANCE. The following provisions relating to insuring the Property are a part of this Deed of Trust.

Maintenance of Insurance. Trustor shall procure and maintain policies of fire insurance with standard extended coverage endorsements on a replacement basis for the full insurable value covering all Improvements on the Real Property in an amount sufficient to avoid application of any coinsurance clause, and with a standard mortgagee clause in favor of Lender. Trustor shall also procure and maintain comprehensive general liability insurance in such coverage amounts as Lender may request with Trustee and Lender being named as additional insureds in such liability insurance policies. Additionally, Trustee shall maintain such other insurance, including but not limited to hazard, business interruption, and boiler insurance, as Lender may reasonably require. Notwithstanding the foregoing, in no event shall Trustor be required to provide hazard insurance in excess of the replacement value of the improvements on the Real Property. Policies shall be written in form, amounts, coverages and basis reasonably acceptable to Lender and issued by a company or companies reasonably acceptable to Lender. Trustor, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least thirty (30) days prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Trustor or any other person. Should the Real Property be located in an area designated by the Director of the Federal Emergency Management Agency as a special flood hazard area, Trustor agrees to obtain and maintain Federal Flood Insurance, if available, within 45 days after notice is given by Lender that the Property is located in a special flood hazard area, for the full unpaid principal balance of the loan and any prior liens on the property securing the loan, up to the maximum policy limits set under the National Flood Insurance

DEED OF TRUST

Loan No: 7015171550 (Continued) Page 3

Program, or as otherwise required by Lender, and to maintain such insurance for the term of the loan.

Application of Proceeds. Trustor shall promptly notify Lender of any loss or damage to the Property if the estimated cost of repair or replacement exceeds $1,000.00. Lender may make proof of loss if Trustor fails to do so within fifteen (15) days of the casualty, fin Lender’s sole judgment Lender’s security interest in the Property has been impaired, Lender may, at Lender’s election, receive and retain the proceeds of any insurance and apply the proceeds to the reduction of the Indebtedness, payment of any lien affecting the Property, or the restoration and repair of the Property. If the proceeds are to be applied to restoration and repair, Trustor shall repair or replace the damaged or destroyed improvements in a manner satisfactory to Lender. Lender shall upon satisfactory proof of such expenditure, pay or reimburse Trustor from the proceeds for the reasonable cost of repair or restoration if Trustor is not in default under this Deed of Trust. Any proceeds which have not been disbursed within 180 days after their receipt and which Lender has not committed to the repair or restoration of he Property shall used first to pay any amount owing to Lender under this Deed of Trust, then to pay accrued interest and the remainder if any, shall be applied to the principal balance of the Indebtedness. If Lender holds any proceeds after payment in full of the Indebtedness, such proceeds shall be paid to Trustor as Trustor’s interests may appear.

Trustor’s Report on Insurance. Upon request of Lender, however not more than once a year, Trustor shall furnish to Lender a report on each existing policy of insurance showing: (1) the name of the insurer; (2) the risks insured; (3) the amount of the policy; (4) the property insured, the then current replacement value of such property, and the manner of determining that value; and (5) the expiration date of the policy. Trustor shall, upon request of Lender, have an independent appraiser satisfactory to Lender determine the cash value replacement cost of the Property.

LENDER’S EXPENDITURES If any action or proceeding is commenced that would materially affect Lender’s interest in the Property or if Trustor Fails to comply with any provision of this Deed of Trust or any Related Documents, including but not limited to Trustor’s failure to discharge or pay when due any amounts Trustor is required to discharge or pay under this Deed of Trust or any Related Documents, Lender on Trustor s behalf may (but shall not obligated o) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes liens security interests, encumbrances and other claims, at any time levied or placed on the Property and paying a I costs for insuring maintaining and preserving the Property. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Trustor. All such expenses will become a part of the Indebtedness and, at Lender’s option will (A) be payable on demand; (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (1) the term of any applicable insurance policy; or (2) the remaining term of the note; or (C) be treated as a balloon payments which will be due and payable at the Note’s maturity. The Deed of Trust also will secure payment of these amounts. Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon Default.

WARRANTY; DEFENSE OF TITLE. The following provisions relating to ownership of the Property are a part of this Deed of Trust:

Title. Trustor warrants that: (a) Trustor holds good and marketable title of record to the Property in fee simple free and clear of all liens and encumbrances other than those set forth in the Real Property description or in any title insurance policy, title report, or final title opinion issue in favor of, and accepted by, Lender in connection with this Deed of Trust, and (b) Trustor has the full right, power, and authority to execute and deliver this Deed of Trust to Lender.

Defense of Title. Subject to the exception in the paragraph above, Trustor warrants and will forever defend the title to the Property against the lawful claims of all persons. In the event any action or proceeding is commenced that questions Trustor’s title or the interest of Trustee or Lender under this Deed of Trust, Trustor shall defend the action at Trustor’s expense Trustor may be the nominal party in such proceeding, but Lender shall be entitled to participate in the proceeding and to be represented in the proceeding by counsel of Lender’s own choice, and Trustor will deliver, or cause to be delivered, to Lender such instruments as Lender may request from time to time to permit such participation.

Compliance With Laws. Trustor warrants that the Property and Trustor’s use of the Property complies with all existing applicable laws, ordinances, and regulations of governmental authorities.

Survival of Representations and Warranties. All representations, warranties, and agreements made by Trustor in this Deed of Trust shall survive the execution and delivery of this Deed of Trust, shall be continuing in nature, and shall remain in full force and effect until such time as Trustor’s Indebtedness shall be paid in full.

CONDEMNATION. The following provisions relating to eminent domain and inverse condemnation proceedings are a part of this Deed of Trust:

Proceedings. If any eminent domain or inverse condemnation proceeding is commenced affecting the Property, Trustor shall promptly Notify Lender in writing and Trustor shall promptly take such steps as may be necessary to pursue or defend the action and obtain the award. Trustor or may be the nominal party in any such proceeding, but Lender shall be entitled at its election, to participate in the proceeding and to be represented in the proceeding by counsel of its own choice, and Trustor will deliver or cause to be delivered to Lender such instruments and documentation as may be requested by Lender from time to time to permit such participation.

Application of Net Proceeds. If any award is made or settlement entered into in any condemnation proceedings affecting all or any part of the Property or by any proceeding or purchase in lieu of condemnation, Lender may at its election and to the extent permitted by law, require that all or any portion of the award or settlement be applied to the Indebtedness and to the repayment of all reasonable costs, expenses, and attorneys’ fees incurred by Trustee or Lender in connection with the condemnation proceedings.

IMPOSITION OF TAXES, FEES AND CHARGES BY GOVERNMENTAL AUTHORITIES. The following provisions relating to governmental taxes, fees and charges are a part of this Deed of Trust:

Current Taxes, Fees and Charges. Upon request by Lender, Trustor shall execute such documents in addition to this Deed of Trust and take whatever other action is requested by Lender to perfect and continue Lender’s lien on the Real Property. Trustor shall reimburse Lender to all taxes, as described below, together with all expenses incurred in recording, perfecting or continuing this Deed of trust, including without limitation all taxes, fees, documentary stamps, and other charges for recording or registering this Deed of Trust.

Taxes. The following shall constitute taxes to which this section applies: (1) a specific tax upon this type of Deed of Trust or upon all or any part of the Indebtedness secured by this Deed of Trust; (2) a specific tax on Trustor which Trustor is authorized or required to deduct from payments on the Indebtedness secured by this type of Deed of Trust; (3) a tax on this type of Deed of Trust chargeable against the Lender or the holder of the Note; and (4) a specific tax on all or any portion of the Indebtedness or on payments of principal and interest made by

DEED OF TRUST

Loan No: 7015171550 (Continued) Page 4

Trustor.

Subsequent Taxes. If any tax to which this section applies is enacted subsequent to the date of this Deed of Trust, this event shall have the same effect as an Event of Default, and Lender may exercise any or all of its available remedies for an Event of Default as provided below unless Trustor either (1) pays the tax before it becomes delinquent, or (2) contests the tax as provided above in the Taxes and Liens section and deposits with Lender cash or a sufficient corporate surety bond or other security satisfactory to Lender.

SECURITY AGREEMENT; FINANCING STATEMENTS. The following provisions relating to this Deed of Trust as a security agreement are a part of this Deed of Trust:

Security Agreement. This instrument shall constitute a Security Agreement to the extent any of the Property constitutes fixtures, and Lender shall have all of the rights of a secured party under the Uniform Commercial Code as amended from time to time.

Security Interest. Upon request by Lender, Trustor shall execute financing statements and take whatever other action is requested by Lender to perfect and continue Lender’s security interest in the Rents and Personal Property. Trustor shall reimburse Lender for all expenses incurred in perfecting or continuing this security interest. Upon default, Trustor shall not remove, sever or detach the Personal Property from the Property. Upon default, Trustor shall assemble any Personal Property not affixed to the Property in a manner and at a place reasonably convenient to Trustor and Lender and make it available to Lender within three (3) days after receipt of written demand from Lender to the extent permitted by applicable law.

Addresses. The mailing addresses of Trustor (debtor) and Lender (secured party) from which information concerning the security interest granted by this Deed of Trust may be obtained (each as required by the Uniform Commercial Code) are as stated on the first page of this Deed of Trust.

FURTHER ASSURANCES; ATTORNEY-IN-FACT. The following provisions relating to further assurances and attorney-in-fact are a part of this Deed of Trust:

Further Assurances. At any time, and from time to time, upon request of Lender, Trustor will make, execute and deliver, or will cause to be made, executed or delivered, to Lender or to Lender’s designee, and when requested by Lender, cause to be filed, recorded, refiled, or rerecorded, as the case may be, at such times and in such offices and places as Lender may deem appropriate, any and all such mortgages, deeds of trust, security deeds, security agreements, financing statements, continuation statements, instruments of further assurance, certificates, and other documents as may, in the sole opinion of Lender, be necessary or desirable in order to effectuate, complete, perfect, continue, or preserve (1) Trustor’s obligations under the Note, this Deed of Trust, and the Related Documents, and (2) the liens and security interests created by this Deed of Trust as first and prior liens on the Property, whether now owned or hereafter acquired by Trustor. Unless prohibited by law or Lender agrees to the contrary in writing, Trustor shall reimburse Lender for all costs and expenses incurred in connection with the matters referred to in this paragraph.

Attorney-in-Fact. If Trustor fails to do any of the things referred to in the preceding paragraph, Lender may do so for and in the name of Trustor and at Trustor’s expense. For such purposes, Trustor hereby irrevocably appoints Lender as Trustor’s attorney-in-fact for the purpose of making, executing, delivering, filing, recording, and doing all other things as may be necessary or desirable, in Lender’s sole opinion, to accomplish the matters referred to in the preceding paragraph.

FULL PERFORMANCE. If Trustor pays all the Indebtedness when due, and otherwise performs all the obligations imposed upon Trustor under this Deed of Trust, Lender shall execute and deliver to Trustee a request (or full reconveyance and shall execute and deliver to Trustor suitable statements of termination of any financing statement on file evidencing Lender’s security interest in the Rents and the Personal Property. Lender may charge Trustor a reasonable reconveyance fee at the time of reconveyance.

EVENTS OF DEFAULT. Each of the following, at Lender’s option, shall constitute an Event of Default under this Deed of Trust:

Payment Default. Trustor fails to make any payment when due under the Indebtedness.

Other Defaults. Trustor fails to comply with or to perform any other term, obligation, covenant or condition contained in this Deed of Trust or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Trustor.

Compliance Default. Failure to comply with any other term, obligation, covenant or condition contained in this Deed of Trust, the Note or in any of the Related Documents. If such a failure is curable and if Trustor has not been given a notice of a breach of the same provision of this Deed of Trust within the preceding twelve (12) months, it may be cured (and no Event of Default w have occurred) if Trustor, after Lender sends written notice demanding cure of such failure: (a) cures the failure within fifteen (15) days; or (b) if the cure requires more than fifteen (15) days, immediately initiates steps sufficient to cure the failure and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical.

Default on Other Payments. Failure of Trustor within the time required by this Deed of Trust to make any payment for taxes or insurance, or any other payment necessary to prevent filing of or to effect discharge of any lien.

Environmental Default. Failure of any party to comply with or perform when due any term, obligation, convenant or condition contained in any environmental agreement executed in connection with the Property.

Default in Favor of Third Parties. Should Trustor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Trustor’s property or Trustor’s ability to repay the Indebtedness or perform their respective obligations under this Deed of Trust or any of the Related Documents.

False Statements. Any warranty, representation or statement made or furnished to Lender by Trustor or on Trustor’s behalf under this Deed of Trust or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter.

Defective Collateralization. This Deed of Trust or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien) at any time and for any reason.

Insolvency. The dissolution or termination of Trustor’s existence as a going business, the insolvency of Trustor, the appointment of a

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Loan No: 7015171550 (Continued) Page 5

receiver for any part of Trustor’s property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Trustor.

Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Trustor or by any governmental agency against any property securing the Indebtedness. This includes a garnishment of any of Trustor’s accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Trustor as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Trustor gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute.

Breach of Other Agreement. Any breach by Trustor under the terms of any other agreement between Trustor and Lender that is not remedied within any grace period provided therein, including without limitation any agreement concerning any indebtedness or other obligation of Trustor to Lender, whether existing now or later.

Events Affecting Guarantor. Any of the preceding events occurs with respect to any guarantor, endorser, surety, or accommodation party of any of the Indebtedness or any guarantor, endorser, surety, or accommodation party dies or becomes incompetent, or revokes-or disputes the validity of, or liability under, any Guaranty of the Indebtedness. In the event of a death, Lender, at its option, may, but shall not be required to, permit the guarantor’s estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure any Event of Default.

Adverse Change. A material adverse change occurs in Trustor’s financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired.

Insecurity. Lender in good faith believes itself insecure.

Right to Cure. If such a failure is curable and if Trustor has not been given a notice of a breach of the same provision of this Deed of Trust within the preceding twelve (12) months, it may be cured (and no Event of Default will have occurred) if Trustor, after Lender sends written notice demanding cure of such failure: (a) cures the failure within fifteen (15) days; or (b) if the cure requires more than fifteen (15) days, immediately initiates steps sufficient to cure the failure and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical.

RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this Deed of Trust, at any time thereafter, Trustee or Lender may exercise any one or more of the following rights and remedies:

Election of Remedies. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Trustor under this Deed of Trust, after Trustor’s failure to perform, shall not affect Lender’s right to declare a default and exercise its remedies.

Foreclosure by Sale. Upon an Event of Default under this Deed of Trust, Beneficiary may declare the entire Indebtedness secured by this Deed of Trust immediately due and payable by delivery to Trustee of written declaration of default and demand for sale and of written notice of default and of election to cause to be sold the Property, which notice Trustee shall cause to be filed for record. Beneficiary also shall deposit with Trustee this Deed of Trust, the Note, other documents requested by Trustee, and all documents evidencing expenditures secured hereby. After the lapse of such time as may then be required by law following the recordation of the notice of default, and notice of sale having been given as then required by law. Trustee, without demand on Trustor, shall sell the Property at the time and place fixed by it in the notice of sale, either as a whole or in separate parcels, and in such order as it may determine, at public auction to the highest bidder for cash in lawful money of the United States, payable at time of sale. Trustee may postpone sale of all or any portion of the Property by public announcement at such time and place of sale, and from time to time thereafter may postpone such sale by public announcement at the time fixed by the preceding postponement in accordance with applicable law. Trustee shall deliver to such purchaser its deed conveying the Property so sold, but without any covenant or warranty, express or implied. The recitals in such deed of any matters or facts shall be conclusive proof of the truthfulness thereof. Any person, including Trustor, Trustee or Beneficiary may purchase at such sale. After deducting all costs, fees and expenses of Trustee and of this Trust, including cost of evidence of title in connection with sale, Trustee shall apply the proceeds of sale to payment of: all sums expended under the terms hereof, not then repaid, with accrued interest at the amount allowed by law in effect at the date hereof; all other sums then secured hereby; and the remainder, if any, to the person or persons legally entitled thereto.

Judicial Foreclosure. With respect to a” or any part of the Real Property, Lender shall have the right in lieu of foreclosure by power of sale to foreclose by judicial foreclosure in accordance with and to the full extent provided by California law.

UCC Remedies. With respect to all or any part of the Personal Property, Lender shall have all the rights and remedies of a secured party under the Uniform Commercial Code, including without limitation the right to recover any deficiency in the manner and to the full extent provided by California law.

Collect Rents. Lender shall have the right, without notice to Trustor to take possession of and manage the Property and collect the Rents, including amounts past due and unpaid, and apply the net proceeds, over and above Lender’s costs, against the Indebtedness. In furtherance of this right, Lender may require any tenant or other user of the Property to make payments of rent or use fees directly to Lender. If the Rents are collected by Lender, then Trustor irrevocably designates Lender as Trustor’s attorney-in-fact to endorse instruments received in payment thereof in the name of Trustor and to negotiate the same and collect the proceeds. Payments by tenants or other users to Lender in response to Lender’s demand shall satisfy the obligations for which the payments are made, whether or not any proper grounds for the demand existed. Lender may exercise its rights under this subparagraph either in person, by agent, or through a receiver.

Appoint Receiver. Lender shall have the right to have a receiver appointed to take possession of all or any part of the Property, with the power to protect and preserve the Property, to operate the Property preceding foreclosure or sale, and to collect the Rents from the Property and apply the proceeds, over and above the cost of the receivership, against the Indebtedness. The receiver may serve without bond if permitted by law. Lender’s right to the appointment of a receiver shall exist whether or not the apparent value of the Property exceeds the Indebtedness by a substantial amount. Employment by Lender shall not disqualify a person from serving as a receiver.

Tenancy at Sufferance. If Trustor remains in possession or the Property after the Property is sold as provided above or Lender otherwise

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Loan No: 7015171550 (Continued) Page 6

becomes entitled to possession of the Property upon default of Truslor, Trustor shall become a tenant at sufferance of Lender or the purchaser of the Property and shall, at Lender’s option, either (1) pay a reasonable rental for the use of the Property, or (2) vacate the Property immediately upon the demand of Lender.

Other Remedies. Trustee or Lender shall have any other right or remedy provided in this Deed of Trust or the Note or by law.

Notice of Sale. Lender shall give Trustor reasonable notice of the time and place of any public sale of the Personal Property or of the time after which any private sale or other intended disposition of the Personal Property is to be made. Reasonable notice shall mean notice given at least ten (10) days before the time of the sale or disposition. Any sale of the Personal Property may be made in conjunction with any sale of the Real Property.

Sale of the Property. To the extent permitted by applicable law, Trustor hereby waives any and all rights to have the Property marshalled. In exercising its rights and remedies, the Trustee or Lender shall be free to sell all or any part of the Property together or separately, in one sale or by separate sales. Lender shall be entitled to bid at any public sale on all or any portion of the Property.

Attorneys’ Fees; Expenses. If Lender institutes any suit or action to enforce any of the terms of this Deed of Trust, Lender shall be entitled to recover such sum as the court may adjudge reasonable as attorneys’ fees at trial and upon any appeal. Whether or not any court action is involved, and to the extent not prohibited by law, all reasonable expenses Lender incurs that in Lender’s opinion are necessary at any time for the protection of its interest or the enforcement of its rights shall become a part of the Indebtedness payable on demand and shall bear interest at the Note rate from the date of the expenditure until repaid. Expenses covered by this paragraph include, without limitation, however subject to any limits under applicable law, Lender’s attorneys’ fees and Lender’s legal expenses, whether or not there is a lawsuit, including attorneys’ fees and expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services, the cost of searching records, obtaining title reports (including foreclosure reports), surveyors’ reports, and appraisal fees, title insurance, and fees for the Trustee, to the extent permitted by applicable law. Trustor also wilt pay any court costs, in addition to all other sums provided by law.

Rights of Trustee. Trustee shall have all of the rights and duties of Lender as set forth in this section.

POWERS AND OBLIGATIONS OF TRUSTEE. The following provisions relating to the powers and obligations of Trustee are part of this Deed of Trust:

Powers of Trustee. In addition to all powers of Trustee arising as a matter of law, Trustee shall have the power to lake the following actions with respect to the Property upon the written request of Lender and Trustor: (a) join in preparing and filing a map or plat of the Real Property, including the dedication of streets or other rights to the public; (b) join in granting any easement or creating any restriction on the Real Property; and (c) join in any subordination or other agreement affecting this Deed of Trust or the interest of Lender under this Deed of Trust,

Obligations to Notify. Trustee shall not be obligated to notify any other party of a pending sale under any other trust deed or lien, or of any action or proceeding in which Trustor, Lender, or Trustee shall be a party, unless the action or proceeding is brought by Trustee.

Trustee. Trustee shall meet all qualifications required for Trustee under applicable law. In addition to the rights and remedies set forth above, with respect to all or any part of the Property, the Trustee shall have the right to foreclose by notice and sale, and Lender shall have the right to foreclose by judicial foreclosure, in either case in accordance with and to the full extent provided by applicable law.

Successor Trustee. Lender, at Lender’s option, may from time to time appoint a successor Trustee to any Trustee appointed under this Deed of Trust by an instrument executed and acknowledged by Lender and recorded in the office of the recorder of Los Angeles County, State of California. The instrument shall contain, in addition to all other matters required by state law, the names of the original Lender, Trustee, and Trustor, the book and page where this Deed of Trust is recorded, and the name and address of the successor trustee, and the instrument shali be executed and acknowledged by Lender or its successors in interest. The successor trustee, without conveyance of the Property, shall succeed to all the titie, power, and duties conferred upon the Trustee in this Deed of Trust and by applicable law. This procedure for substitution of Trustee shall govern to the exclusion of all other provisions for substitution.

Acceptance by Trustee. Trustee accepts this Trust when this Deed of Trust, duly executed and acknowledged, is made a public record as provided by law.

NOTICES. Any notice required to be given under this Deed of Trust shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Deed of Trust. Trustor requests that copies of any notices of default and sale be directed to Trustor’s address shown near the beginning of this Deed of Trust. All copies of notices of foreclosure from the holder of any lien which has priority over this Deed of Trust shall be sent to Lender’s address, as shown near the beginning of this Deed of Trust. Any part/ may change its address for notices under this Deed of Trust by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party’s address. For notice purposes, Trustor agrees to keep Lender informed at all times of Trustor’s current address. Unless otherwise provided or required by law, if there is more than one Trustor, any notice given by Lender to any Trustor is deemed to be notice given to all Trustors.

STATEMENT OF OBLIGATION FEE. Lender may coiled a fee, not to exceed the maximum amount permitted by law, for furnishing the statement of obligation as provided by Section 2943 of the Civil Code of California.

RIDER. See “Rider to Deed of Trust” attached hereto and made a part hereof.

MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Deed of Trust:

Amendments. This Deed of Trust, together with any Related Documents, constitutes the entire understanding and agreement Of the parties as to the matters set forth in this Deed of Trust. No alteration of or amendment to this Deed of Trust shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment.

Annual Reports. If the Property is used for purposes other than Trustor’s residence, Trustor shall furnish to Lender, upon request, a certified statement of net operating income received from the Property during Trustor’s previous fiscal year in such form and detail as Lender shall require. “Net operating income” shall mean all cash receipts from the Property less all cash expenditures made in connection with the

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Loan No: 7015171550 (Continued)             Page 7

operation of the Property.

Caption Headings. Caption headings in this Deed of Trust are for convenience purposes only and are not to be used to interpret or define the provisions of this Deed of Trust.

Merger. There shall be no merger of the interest or estate created by this Deed of Trust with any other interest or estate in the Property at any time held by or for the benefit of Lender in any capacity, without the written consent of Lender.

Governing Law. This Deed of Trust will be governed by, construed and enforced in accordance with federal law and the laws of the State of California. This Deed of Trust has been accepted by Lender in the State of California.

Choice of Venue. If there is a lawsuit, Trustor agrees upon Lender’s request to submit to the jurisdiction of the courts of Los Angeles County, State of California.

No Waiver by Lender. Lender shall not be deemed to have waived any rights under this Deed of Trust unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Deed of Trust shall not prejudice or constitute a waiver of Lender’s right otherwise to demand strict compliance with that provision or any other provision of this Deed of Trust. No prior waiver by Lender, nor an^ course of dealing between Lender and Trustor, shall constitute a waiver of any of Lender’s rights or of any of Trustor’s obligations as to any future transactions. Whenever the consent of Lender is required under this Deed of Trust, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender.

Severability. If a court of competent jurisdiction finds any provision of this Deed of Trust to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified, it shall be considered deleted from this Deed of Trust. Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Deed of Trust shall not affect the legality, validity or enforceability of any other provision of this Deed of Trust.

Successors and Assigns. Subject to any limitations stated in this Deed of Trust on transfer of Trustor’s interest, this Deed of Trust shall be binding upon and inure to the benefit of the parties, their successors and assigns. If ownership of the Property becomes vested in a person other than Trustor, Lender, without notice to Trustor, may deal with Trustor’s successors with reference to this Deed of Trust and the Indebtedness by way of forbearance or extension without releasing Trustor from the obligations of this Deed of Trust or liability under the Indebtedness.

Time is of the Essence. Time is of the essence in the performance of this Deed of Trust.

DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Deed of Trust. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Deed of Trust shall have the meanings attributed to such terms in the Uniform Commercial Code:

Beneficiary. The word “Beneficiary” means General Bank, and its successors and assigns.

Borrower. The word “Borrower” means Taitron Components Incorporated.

Deed of Trust. The words “Deed of Trust” mean this Deed of Trust among Trustor, Lender, and Trustee, and includes without limitation all assignment and security interest provisions relating to the Personal Property and Rents.

Default. The word “Default” means the Default set forth in this Deed of Trust in the section titled “Default”.

Environmental Laws. The words “Environmental Laws” mean any and all state, federal and local statutes, regulations and ordinances relating to the protection of human health or the environment, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. (“CERCLA”), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 (“SARA”), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety Code, Section 25100, e! seq., or other applicable stale or federal laws, rules, or regulations adopted pursuant thereto.

Event of Default. The words “Event of Default” mean any of the events of default set forth in this Deed of Trust in the events of default section of this Deed of Trust.

Guaranty. The word “Guaranty” means the guaranty from guarantor, endorser, surety, or accommodation party to Lender, including without limitation a guaranty of all or part of the Note.

Hazardous Substances. The words “Hazardous Substances” mean materials that, because of their quantity, concentration or physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled. The words “Hazardous Substances” are used in their very broadest sense and include without limitation any and all hazardous or toxic substances, materials or waste as defined by or listed under the Environmental Laws. The term “Hazardous Substances” also includes, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos.                         :

Improvements. The word “Improvements” means all. existing and future improvements, buildings, structures, mobile homes affixed on the Real Property, facilities, additions, replacements and other construction on the Real Property.             ;

Indebtedness. The word “Indebtedness” means all principal, interest, and other amounts, costs and expenses payable under the Note or Related Documents, together with all renewals of, extensions of, modifications of, consolidations of and substitutions for the Note or Related Documents and any amounts expended or advanced by Lender to discharge Trustor’s obligations or expenses incurred by Trustee or Lender to enforce Trustor’s obligations under this Deed of Trust, together with interest on such amounts as provided in this Deed of Trust.

Lender. The word “Lender” means General Bank, its successors and assigns.

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Loan No: 7015171550 (Continued)             Page 8

Note. The word “Note” means the promissory note dated December 10, 2002, in the original principal amount Of $2,625,000.00 from Trustor to Lender, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the promissory note or agreement.

Personal Property. The words “Personal Property” mean all equipment, fixtures, and other articles of personal property now or hereafter owned by Trustor, and now or hereafter attached or affixed to the Real Property; together with all accessions, parts, and additions to, all replacements of, and all substitutions for, any of such property; and together with all proceeds (including without limitation all insurance proceeds and refunds of premiums) from any sale or other disposition of the Property.

Property. The word “Property” means collectively the Real Property and the Personal Property.

Real Property. The words “Real Property” mean the real property, interests and rights, as further described in this Deed of Trust.

Related Documents. The words “Related Documents” mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness.

Rents. The word “Rents” means all present and future leases, rents, revenues, income, issues, royalties, profits, and other benefits derived from the Property together with the cash proceeds of the Rents.

Trustee. The word Trustee” means United Title Company, whose address is 3250 Wilshire Boulevard, 18th floor, Los Angeles, CA 90010 and any substitute or successor trustees.

Trustor. The word Trustor” means Taitron Components Incorporated.

TRUSTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS DEED OF TRUST, AND TRUSTOR AGREES TO ITS TERMS, INCLUDING THE VARIABLE RATE PROVISIONS OF THE NOTE SECURED BY THIS DEED OF TRUST.

TRUSTOR:

TAITRON COMPONENTS INCORPORATED
By:
	Stewart Wang, Chief Executive Officer of Taitron Components Incorporated

CERTIFICATE OF ACKNOWLEDGMENT

STATE OF                             

COUNTY OF                         

On                          , 20     before me,                                                              , personally appeared Stewart Wang, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person; whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument.

      WITNESS my hand and official seal

Signature  

RIDER TO DEED OF TRUST

The following provisions are part of the foregoing Deed of Trust in favor of GENERAL BANK as Beneficiary:

Each Trustor hereby agrees not to give, create, or permit the creation of, or agree to any further liens, mortgages or encumbrance, or any part of or interest thereof, without the prior written and recorded consent of Beneficiary. Beneficiary may withhold its consent in its sole, arbitrary, and unfettered discretion.

Any giving, placement, creation or agreement to give, place or create any lien, mortgage, trust deed, including any equitable lien and equitable mortgage which encumbers Trustor’s interest in the real property which is

encumbered by this Deed of Trust, or any part of or interest thereof, without the prior written and recorded consent of Beneficiary shall constitute a default hereunder, and shall give rise to all of Beneficiary’s remedies available herein or as provided by law.

Any lien, mortgage, trust deed, including equitable lien and equitable mortgage created after the date hereof which encumbers Trustor’s interest in the real property encumbered by this Deed of Trust, or any part of or interest thereof, without the prior, recorded, written consent of Beneficiary, shall be null and void.

Failure by Beneficiary to take any action after the recordation of any such lien, mortgage or trust deed shall not constitute a waiver of or estoppel to assert any of the rights hereinabove granted Beneficiary. No such waiver or estoppel shall be effective for any purpose except by way of a written, recorded consent or waiver duly executed by Beneficiary.

Notwithstanding anything in this Rider to the contrary, the creation of any involuntary lien which encumbers the real property which is encumbered by this Deed of Trust, or any part or interest in such real property, shall not constitute a default under this Deed of Trust if such involuntarily created lien is removed within seventy-five (75) days after the creation thereof, or if not so removed, Trustor shall have arranged for a bond in an amount satisfactory to Beneficiary bonding around any such involuntary lien.

Date: December 10, 2002

Taitron Components Incorporated, a California Corporation

By:
	Stewart Wang, Chief Executive Officer

EXHIBIT “A”

PARCEL A:

ALL OF PARCEL 9 TOGETHER WITH THAT PORTION OF PARCEL 8 OF PARCEL MAP NO. 20839, IN THE UNINCORPORATED TERRITORY OF JHE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS SHOWN ON MAP

FILED IN BOOK 273 PAGES 38 TO 43 INCLUSIVE, OF PARCEL MAPS, RECORDS OF SAID COUNTY DESCRIBED AS A WHOLE AS FOLLOWS:

BEGINNING AT THE POINT OF INTERSECTION OF THE NORTHWESTERLY LINE OF SAID PARCEL 8 WITH A LINE 5.50 FEET SOUTHWESTERLY OF AND PARALLEL WITH, MEASURED AT RIGHT ANGLES TO, THE NORTHEASTERLY LINE OF SAID PARCEL 8; THENCE

1. ALONG SAID PARALLEL LINE SOUTH 48° 56’ 10” EAST 386.81 FEET TO THE SOUTHEASTERLY LINE OF SAID PARCEL 8; THENCE

2. ALONG THE SOUTHEASTERLY LINES OF SAID PARCELS 8 AND 9 NORTH 41° 03’ 50” EAST 220.28 FEET TO THE NORTHEASTERLY LINE OF SAID PARCEL 9; THENCE

3. ALONG SAID NORTHEASTERLY LINE NORTH 32° 55’ 20” WEST 337.10 FEET TO THE NORTHERLY CORNER OF SAID PARCEL 9 BEING A POINT ON A CURVE CONCAVE SOUTHEASTERLY HAVING A RADIUS OF 1958.00 FEET, TO WHICH LAST SAID COURSE IS RADICAL; THENCE

4. SOUTHWESTERLY ALONG SAID CURVE AND ALONG THE NORTHWESTERLY LINES OF PARCELS 9 AND 8 THROUGH A CENTRAL ANGLE OF 09° 21’ 35” AN ARC DISTANCE OF 319.85 FEET TO THE POINT OF BEGINNING.

AS AMENDED BY CERTIFICATE OF CORRECTION RECORDED OCTOBER 17, 1996 AS INSTRUMENT NO. 96-1689481 AND SEPTEMBER 11, 1997 AS INSTRUMENT NO. 97-1406486 BOTH OF OFFICIAL RECORDS OF SAID COUNTY.

SAID LAND IS ALSO KNOWN AS LOT 2 OF CERTIFICATE OF COMPLIANCE NUMBER 101,572 RECORDED OCTOBER 23, 1997 AS INSTRUMENT NO. 97-1671255, OFFICIAL RECORDS.

EXCEPT THEREFROM ALL OIL, GAS, MINERALS AND OTHER HYDROCARBON SUBSTANCES LYING BELOW THE SURFACE OF SAID LAND, BUT WITHOUT THE RIGHT OF SURFACE ENTRY, AS RESERVED OR GRANTED IN DOCUMENTS OF RECORD.

PARCEL B:

TOGETHER WITH AN EASEMENT FOR INGRESS, EGRESS, DRAINAGE AND DRIVEWAY PURPOSES AS SET FORTH IN THAT CERTAIN RESERVATION OF RECIPROCAL INGRESS AND EGRESS, DRIVEWAY AND DRAINAGE EASEMENTS AS RECORDED ON DECEMBER 12, 1997 AS INSTRUMENT NO. 97-1956856 OVER THE FOLLOWING:

OVER THAT PORTION OF PARCEL 10 OF PARCEL MAP NO. 20839 IN THE UNINCORPORATED TERRITORY OF THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS SHOWN ON PARCEL . MAP 20839 FILED IN BOOK 273 PAGES 38 TO 43 INCLUSIVE, OF PARCEL MAPS, RECORDS OF SAID COUNTY, BEING A 13.00 FOOT WIDE STRIP OF LAND, THE SOUTHWESTERLY LINE OF WHICH IS DESCRIBED AS FOLLOWS: BEGINNING AT THE SOUTHERLY CORNER OF SAID PARCEL 10; THENCE ALONG THE SOUTHWESTERLY LINE OF SAID PARCEL 10 NORTH 32° 55’ 20” WEST 337.10 FEET TO THE WESTERLY CORNER OF SAID PARCEL 10.

THE NORTHEASTERLY LINE OF SAID STRIP SHALL BE PROLONGED OR SHORTENED SO AS TO BEGIN ON THE SOUTHEASTERLY LINE OF SAID PARCEL 10 AND TERMINATE ON THE NORTHWESTERLY LINE OF SAID PARCEL 10.

SAID EASEMENT SHALL BE APPURTENANT TO AND RUN WITH THE LAND DESCRIBED LINE IN PARCEL B HEREIN.

PARCEL C:

AN EASEMENT FOR INGRESS, EGRESS, DRAINAGE AND DRIVEWAY PURPOSES OVER THAT PORTION OF LAND MORE PARTICULARLY DESCRIBED IN EXHIBIT E OF THAT CERTAIN AGREEMENT OF GRANTS OF RECIPROCAL INGRESS AND EGRESS, DRIVEWAY AND DRAINAGE EASEMENTS RECORDED MAY 12, 1998 AS INSTRUMENT NO. 98-794646, OFFICIAL RECORDS.