I signed a rental agmt for a townhouse beginning 4/1/12, for 1 year. I was notified by certified letter 6/21/12, that my landlord had not mortgage pymts since 11/2012. Knowing that they sought me as a renter and signed an agmt knowing they faced possible foreclosure, trustee sale is scheduled for 10/26/12. My question is do I have any legal base to break my lease to to seek a more stable living situation for my family and still get my deposits back?

No, assuming you are in the U.S. https://www.askmehelpdesk.com/real-estate-law/paying-rent-when-property-foreclosure-316199.html

The buyer at the foreclosure sale will have to honor your lease. Furthermore, the buyer must give you at least a 90-day notice and, in your case, a notice to quit by no earlier than 4/1/13.

I would contact your present landlord and demand an assurance that the deposit is safely tucked away. See an attorney about this, because if the money isn't in a secure escrow account it may be possible to credit the deposit against the last month's rent otherwise payable to the present landlord.

Unless you are in CA this is not illegal. As noted any buyer will have to honor your lease.

No you can not break the lease, they are not required to use your payment to pay the house loan. Morally yes of course they should, but legally they may rent it and expect their payment till the day it is sold at foreclosure.