The following discussion should be read in conjunction with the condensed consolidated financial statements, including the related notes, appearing in Item 1 of this report as well as our most recent annual report on Form 10-KSB for the year ended December 31, 2007. Also, several of the matters discussed in this document contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Forward-looking statements usually are denoted by words or phrases such as "believes," "expects," "projects," "estimates," "anticipates," "will likely result" or similar expressions. We wish to caution readers that all forward-looking statements are necessarily speculative and not to place undue reliance on forward-looking statements, which speak only as of the date made, and to advise readers that actual results could vary due to a variety of risks and uncertainties. Factors associated with the forward looking statements that could cause the forward looking statements to be inaccurate and could otherwise impact our future results are set forth in detail in our most recent annual report on Form 10-KSB. In addition to the other information contained in this document, readers should carefully consider the information contained in our most recent annual report on Form 10-KSB under the heading "Cautionary Statements and Risk Factors."

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

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 our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States. These estimates have a significant impact on our valuation and reserve accounts relating to the allowance for sales returns, doubtful accounts, inventory reserves and deferred income taxes. Actual results could differ from these estimates.

Revenue Recognition - 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 our estimates of future returns. Sales returns for the quarters ended September 30, 2008 and 2007 were $65,000 and $16,000, respectively and the nine months ended September 30, 2008 and 2007 aggregated $118,000 and $152,000, respectively. The allowance for sales returns and doubtful accounts at September 30, 2008 aggregated $91,000.

Inventory - Inventory, consisting principally of products held for resale, is recorded at the lower of cost (determined using the first in-first out method) or estimated market value. We had inventory balances in the amount of $13,851,000 at September 30, 2008, which is presented net of valuation allowances of $2,959,000. We evaluate inventories to identify excess, high-cost, slow-moving or other factors rendering inventories as unmarketable at normal profit margins. Due to the large number of transactions and the complexity of managing and maintaining a large inventory of product offerings, estimates are made regarding adjustments to the cost of inventories. 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, 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.

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

Deferred Taxes - In June 2006, FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN48), which defines the threshold for recognizing the benefits of tax return positions in the financial statements as "more-likely-than-not" to be sustained by the taxing authority. A tax position that meet the "more-likely-than-not" criterion shall be measured at the largest amount of benefit that is more than 50% likely of being realized upon ultimate settlement. FIN48 applies to all tax positions accounted for under SFAS No. 109, Accounting for Income Taxes. FIN48 is effective for fiscal years beginning after December 15, 2006. We adopted FIN48 as of January 1, 2007. Based on our preliminary analysis, we believe that our income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material change to our financial position including our effective tax rate. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to FIN 48 and we did not record a cumulative effect adjustment related to the adoption of FIN 48. In addition, we have not recorded any accrued interest nor penalties related to income tax. It is our policy to classify interest and penalties related to income tax as income taxes in our financial statements. The following tax years that remain subject to examination by major tax jurisdictions are as follows: Federal - 2005, 2006 and 2007; and California (State) - 2004, 2005, 2006 and 2007.

Overview

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

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

Our core strategy of electronic components fulfillment, however, consists of carrying a substantial quantity and variety of products in inventory to meet the rapid delivery requirements of our customers. This strategy allows us to fill customer orders immediately from stock on hand. Although we believe better market conditions may return, we are focused on lowering our inventory balances and increasing our cash holdings. Our long-term strategy is to rely not only on our core strategy of component fulfillment service, but also the value-added engineering and turn-key services.

In accordance with Generally Accepted Accounting Principles, we have classified inventory as a current asset in our September 30, 2008, consolidated financial statements representing approximately 81% of current assets and 60% of total assets. However, if all or a substantial portion of the inventory was required to be immediately liquidated, the inventory would not be as readily marketable or liquid as other items included or classified as a current asset, such as cash. We cannot assure you that demand in the discrete semiconductor market will increase and that market conditions will improve. Therefore, it is possible that further declines in our carrying values of inventory may result.

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

Results of Operations

Third quarter of 2008 versus third quarter of 2007.

Net sales in the third quarter of 2008 totaled $1,778,000 versus $1,908,000 in the comparable period for 2007, a decrease of $130,000 or 6.8% over the same period last year. The overall decrease came from a decrease in demand for our products.

Gross profit for the third quarter of 2008 was $403,000 versus $506,000 in the comparable period for 2007, and gross margin percentage of net sales was 22.7% in the third quarter of 2008 versus 26.5 % in the comparable period for 2007. The overall decrease came from selling at lower product prices to our customers resulting in lower margins as compared to the same period last year.

Selling, general and administrative ("SG&A") expenses in the third quarter of 2008 totaled $672,000 versus $688,000 in the comparable period for 2007. The decrease was primarily attributed to decreases in salaries and benefit expenses. Also, effective January 1, 2006, we adopted SFAS 123(R) and such had a $6,000 financial impact to our SG&A for the third quarter of 2008, as compared to $7,000 financial impact for the same period last year.

Interest expense, net of interest income, was $4,000 for the third quarter of 2008 versus net interest income of $2,000 in the comparable period for 2007.

Other income, net of other losses, in the three months ended September 30, 2008 was $9,000 versus net other loses of $7,000 in the comparable period for 2007.

Income tax provision was $0 for the third quarter of 2008 and $2,000 in the comparable period for 2007, as we do not expect significant taxable income for fiscal year 2008.

Net loss was $264,000 for the third quarter of 2008 versus $189,000 in the comparable period for 2007, an increase of $75,000 resulting from the reasons discussed above.

Nine Months Ended September 30, 2008 versus Nine Months Ended September 30, 2007.

Net sales in the nine months ended September 30, 2008 was $5,812,000 versus $5,386,000 in the comparable period for 2007, an increase of $426,000 or 7.9% over the same period last year. The overall increase came from sales of our ICs and ODM products, when comparing $700,000 and $554,000, respectively, in the nine month ended September 30, 2008, versus $435,000 and $284,000, respectively, in the comparable period for 2007.

Gross profit for the nine months ended September 30, 2008 was $1,566,000 versus $1,458,000 in the comparable period for 2007, and gross margin percentage of net sales was approximately 26.9% for the nine months ended September 30, 2008 and 27.1% for 2007, respectively.

Selling, general and administrative ("SG&A") expenses in the nine months ended September 30, 2008 totaled $2,057,000 versus $2,082,000 in the comparable period for 2007. The decrease was primarily attributed to decreases in salaries and benefit expenses. Also, effective January 1, 2006, we adopted SFAS 123(R) and such had a $17,000 financial impact to our SG&A for the nine months ended September 30, 2008 versus $21,000 in the comparable period for 2007.

Interest income, net of interest expense, was $0 for the nine months ended September 30, 2008 versus $16,000 in the comparable period for 2007. The net interest income for the nine months ended September 30, 2008 was offset by interest expense due on our borrowings, as compared to investment income from cash on hand in the prior period.

Other income, net of other losses, in the nine months ended September 30, 2008 was $99,000 versus other losses of $1,000 in the comparable period for 2007. The increase came primarily from rental income of $70,000 in the nine months ended September 30, 2008, compared to $0 in the comparable period for 2007.

Income tax provision was $1,000 for the nine months ended September 30, 2008 versus $5,000 in the comparable period for 2007.

Net loss was $393,000 for the nine months ended September 30, 2008 versus $614,000 in the comparable period for 2007, a decrease of $221,000 resulting from the reasons discussed above.

Liquidity and Capital Resources

We have satisfied our liquidity requirements principally through cash generated
from operations and commercial loans. A summary of our cash flows resulting from
our operating, investing and financing activities for the nine months ended
September 30, 2008 are as follows:

                           Nine months ended September 30,
                            2008                   2007
                         (Unaudited)            (Unaudited)
Operating activities           538,000                (305,000 )
Investing activities           (48,000 )              (519,000 )
Financing activities           158,000                (553,000 )

Cash flows provided by (used in) operating activities were $538,000 and $(305,000) for the nine months ended September 30, 2008 and 2007, respectively.
The increase of $843,000 in cash flows provided by operations compared with the prior period resulted from changes in operating assets and liabilities, primarily reduction of inventory.

Cash flows used in investing activities were $48,000 and $519,000 for the nine months ended September 30, 2008 and 2007, respectively. The 2007 outflows primarily came from our $305,000 marketable securities investment in the preferred stock of Zowie Technology Corporation. Also, in 2007 we invested $147,000 in land purchase contract for deposit on land in Yangzhou, China.

Cash flows provided by (used in) in financing activities were $158,000 and $(553,000) for the nine months ended September 30, 2008 and 2007, respectively. The 2008 inflows came primarily from our $500,000 borrowing under promissory note from a related party (see Note 3), offset by our cash dividend payment of $277,000.

Inventory is included in current assets; however, it will take over one year for the inventory to turn. Hence, inventory would not be as readily marketable or liquid as other items included in current assets, such as cash.

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

Off-Balance Sheet Arrangements

As of September 30, 2008, we had no off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk. None.

Item 4T. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in the Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) required by Exchange Act Rules 13a-15(b) or 15d-15(b), as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of that date to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

Evaluation of Changes in Internal Control over Financial Reporting

Pursuant to Rule 13a-15(d) or Rule 15d-15(d) of the Exchange Act, our management, including our Chief Executive and Chief Financial Officer, is responsible for evaluating any change in our internal control over financial reporting (as defined in Rule 13a-15(f) or Rule 15d-15(f) under the Exchange Act), that occurred during each of our fiscal quarters that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Under the supervision and with the participation of our management, including our Chief Executive and Chief Financial Officer, we have determined that, during the period covered by this report, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.