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


                                    FORM 10-Q
          (Mark One)

              ( X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                   OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the quarter ended June 30, 2004

                                       OR

              ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                  OF THE SECURITIES EXCHANGE ACT OF 1934
                  Or the transition period from ___________ to ______________



                           Commission File No. 0-10394


                              DATA I/O CORPORATION
             (Exact name of registrant as specified in its charter)




            Washington                                   91-0864123

  (State or other jurisdiction of                     (I.R.S. Employer
  incorporation or organization)                     Identification No.)



               10525 Willows Road N.E., Redmond, Washington, 98052
          (Address of principal executive offices, including zip code)


                                 (425) 881-6444
              (Registrant's telephone number, including area code)



Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities 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  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Act). Yes No X


8,043,611  shares of no par value of the  Registrant's  Common Stock were issued
and outstanding as of August 7, 2004.

<PAGE>

                              DATA I/O CORPORATION

                                    FORM 10-Q
                       For the Quarter Ended June 30, 2004

                                      INDEX


Part I - Financial Information                                         Page

     Item 1.    Financial Statements (unaudited)                         3

     Item 2.    Management's Discussion and Analysis of
                Financial Condition and Results of Operations            8

     Item 3.    Quantitative and Qualitative Disclosures
                About Market Risk                                        12

     Item 4.    Controls and Procedures                                  13

Part II - Other Information

     Item 1.    Legal Proceedings                                        14

     Item 2.    Changes in Securities, Use of Proceeds and
                Issuer Purchases of Equity Securities                    14

     Item 3.    Defaults Upon Senior Securities                          14

     Item 4.    Submission of Matters to a Vote of Security Holders      14

     Item 5.    Other Information                                        14

     Item 6.    Exhibits and Reports on Form 8-K                         14

Signatures                                                               18



<PAGE>


PART I - FINANCIAL INFORMATION

Item 1.           Financial Statements

                                                       DATA I/O CORPORATION

                                                   CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                         June 30,                     Dec. 31,
                                                                                           2004                         2003
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>                           <C>
(in thousands, except share data)                                                      (unaudited)
ASSETS
CURRENT ASSETS:
     Cash and cash equivalents                                                            $3,298                       $4,380
     Marketable securities                                                                 2,343                        2,354
     Trade accounts receivable, less allowance for
        doubtful accounts of $208 and $202                                                 6,528                        5,054

     Inventories                                                                           3,877                        4,607
     Other current assets                                                                    384                          431
                                                                                   ---------------------           ----------------
        TOTAL CURRENT ASSETS                                                              16,430                       16,826

Property and equipment - net                                                               1,437                        1,151
Other assets                                                                                   3                           11
                                                                                   ---------------------           ----------------
        TOTAL ASSETS                                                                     $17,870                      $17,988
                                                                                   =====================           ================

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
     Accounts payable                                                                     $1,554                       $1,285
     Accrued compensation                                                                    982                        1,186
     Deferred revenue                                                                      1,516                        1,430
     Other accrued liabilities                                                             1,115                        1,543
     Income taxes payable                                                                    278                          350
                                                                                   ---------------------           ----------------
        TOTAL CURRENT LIABILITIES                                                          5,445                        5,794

Deferred gain on sale of property                                                            941                        1,106
                                                                                   ---------------------           ----------------
        TOTAL LIABILITIES                                                                  6,386                        6,900

COMMITMENTS                                                                                    -                            -

STOCKHOLDERS' EQUITY:
     Preferred stock -
        Authorized, 5,000,000 shares, including
           200,000 shares of Series A Junior Participating
        Issued and outstanding, none                                                           -                            -
     Common stock, at stated value -
        Authorized, 30,000,000 shares
        Issued and outstanding, 8,012,998
           and 7,976,296 shares                                                           18,891                       18,797
     Accumulated deficit                                                                  (7,647)                      (8,038)
     Accumulated other comprehensive income                                                  240                          329
                                                                                   ---------------------           ----------------
        TOTAL STOCKHOLDERS' EQUITY                                                        11,484                       11,088
                                                                                   ---------------------
                                                                                                                   ----------------
        TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                       $17,870                      $17,988
                                                                                   =====================           ================


See accompanying notes to consolidated financial statements.
</TABLE>


<PAGE>



                                                  DATA I/O CORPORATION

                                          CONSOLIDATED STATEMENTS OF OPERATIONS
                                                      (UNAUDITED)
<TABLE>
<CAPTION>

                                                                       Quarters Ended                     Six Months Ended
---------------------------------------------------------- --------------- -- -------------- -- -------------- --- -------------
                                                              June 30,         June 30,           June 30,          June 30,
                                                                2004             2003               2004              2003
---------------------------------------------------------- ---------------  -------------- -- --------------       -------------
<S>                                                           <C>              <C>                <C>               <C>
(in thousands, except per share data)

Net sales                                                       $6,895          $5,578            $13,729            $11,733
Cost of goods sold                                               3,385           2,279             6,506              4,997
                                                           ---------------    --------------    --------------     -------------
Gross margin                                                     3,510           3,299             7,223              6,736

Operating expenses:
     Research and development                                    1,177           1,078             2,381              2,239
     Selling, general and administrative                         2,121           1,801             4,294              3,729
     Net provision (reversal) for business restructuring            70             -                 70                 (27)
                                                           ---------------    --------------    --------------     -------------
         Total operating expenses                                3,368           2,879             6,745              5,941
                                                           ---------------    --------------    --------------     -------------

         Operating  income                                         142            420                478               795

Non-operating income (expense):
     Interest income                                                13             20                 48                53
     Interest expense                                               (6)            (7)                (7)              (11)
     Foreign currency exchange                                      (5)            (7)               (18)              (82)
                                                           ---------------    --------------    --------------     -------------
         Total non-operating income (expense)                        2              6                 23               (40)

                                                           ---------------    --------------    --------------     -------------
        Income before income taxes                                 144            426                501               755

Income tax expense                                                  40             94                102               105
                                                           ---------------    --------------    --------------     -------------

Net  income                                                       $104           $332               $399              $650
                                                           ===============    ==============    ==============     =============


Basic and diluted earnings per share                             $0.01          $0.04              $0.05              $0.08
                                                           ===============    ==============    ==============     =============

Weighted average shares outstanding                              8,013          7,883              8,005              7,864
                                                           ===============    ==============    ==============     =============

Weighted average and potential shares outstanding                8,286          7,988              8,350              7,917
                                                           ===============    ==============    ==============     =============

See accompanying notes to consolidated financial statements.
</TABLE>

<PAGE>



                                                  DATA I/O CORPORATION

                                          CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                      (UNAUDITED)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
                                                                                                 June 30,           June 30,
For the six months ended                                                                           2004               2003
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                              <C>                <C>
(in  thousands)
OPERATING ACTIVITIES:
    Net income                                                                                      $ 399             $ 650
    Adjustments to reconcile net income to net cash provided
     by (used in) operating activities:
       Depreciation and amortization                                                                  382               381
       Net loss on dispositions                                                                        84               220
       Amortization of deferred gain on sale                                                         (164)             (165)
       Net change in:
         Deferred revenue                                                                              87                60
         Trade accounts receivable                                                                 (1,477)             (266)
         Inventories                                                                                  729              (206)
         Other current assets                                                                          47               249
         Accrued costs of business restructuring                                                       70              (187)
         Accounts payable and accrued liabilities                                                    (505)             (126)
                                                                                                ------------      --------------
    Net cash provided by (used in) operating activities                                              (348)              610

INVESTING ACTIVITIES:
    Purchases of property and equipment                                                              (742)             (277)
    Net from purchase and sale of marketable securities                                                 2               341
                                                                                                ------------      --------------
       Net cash provided by (used in) investing activities                                           (740)               64

FINANCING ACTIVITIES:
    Sale of common stock                                                                               81                58
    Proceeds from exercise of stock options                                                            13                 2
                                                                                                 -----------      --------------
       Net cash provided by financing activities                                                       94                60

                                                                                                 -----------      --------------
Increase/(decrease) in cash and cash equivalents                                                     (994)              734

Effects of exchange rate changes on cash                                                              (88)              184
Cash and cash equivalents at beginning of year                                                      4,380             4,383
                                                                                                 -----------      --------------
Cash and cash equivalents at end of quarter                                                        $3,298            $5,301
                                                                                                 ===========      ==============

See accompanying notes to consolidated financial statements.
</TABLE>



<PAGE>


                              DATA I/O CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE 1 - FINANCIAL STATEMENT PREPARATION

Data I/O  prepared  the  financial  statements  as of June 30, 2004 and June 30,
2003,  according to the rules and  regulations  of the  Securities  and Exchange
Commission  ("SEC").  These  statements  are  unaudited  but,  in the opinion of
management,  include all adjustments (consisting of normal recurring adjustments
and accruals) necessary to present fairly the results for the periods presented.
The  balance  sheet at  December  31,  2003 has been  derived  from the  audited
financial  statements  at  that  date.  We have  condensed  or  omitted  certain
information and footnote  disclosures  normally included in financial statements
prepared in accordance  with  accounting  principles  generally  accepted in the
United States of America according to such SEC rules and regulations.  Operating
results for the six months ended June 30, 2004 are not necessarily indicative of
the results  that may be expected for the year ending  December 31, 2004.  These
financial  statements  should be read in  conjunction  with the  annual  audited
financial  statements and the accompanying  notes included in the Company's Form
10-K for the year ended December 31, 2003.

Stock-Based Compensation

Data I/O has stock-based  employee  compensation plans. We apply APB Opinion 25,
Accounting  for Stock  Issued  to  Employees,  and  related  Interpretations  in
accounting for our plans.  Stock expense for the second quarter of 2004 and 2003
would have been the result of options  issued with an  exercise  price below the
underlying  stock's market price. The following table  illustrates the effect on
net  income  and  earnings  per  share if Data I/O had  applied  the fair  value
recognition  provisions  of  FASB  Statement  123,  Accounting  for  Stock-Based
Compensation.

Data I/O's pro forma information follows (in thousands, except per share data):

<TABLE>
<CAPTION>

                                                                     Quarters Ended                  Six Months Ended
                                                                  June 30,        June 30,       June 30,         June 30,
                                                                    2004            2003           2004             2003
                                                                -------------    -------------  -----------     --------------
<S>                                                               <C>             <C>            <C>              <C>
Net income (loss) - as reported                                       $104          $ 332          $399            $650

Deduct:  Total  stock-based   employee   compensation  expense
determined  under fair value based method for awards  granted,
modified, or settled, net of related tax effects                        77          (65)          (157)             145
                                                                -------------     ----------    -----------    --------------
Net income (loss) - pro forma                                          $27          $267           $242            $505
                                                                =============     ==========    ===========    ==============

Basic and diluted income (loss) per share - as reported              $0.01          $0.04         $0.05           $0.08
Basic and diluted income (loss) per share - pro forma                $0.00          $0.03         $0.03           $0.06
</TABLE>


NOTE 2 - INVENTORIES

Inventories consisted of the following components (in thousands):
<TABLE>
<CAPTION>

                                                                June 30,                  Dec. 31,
                                                                  2004                      2003
                                                            ----------------          ----------------
<S>                                                              <C>                       <C>
                  Raw material                                   $2,121                    $2,100
                  Work-in-process                                   925                     1,411
                  Finished goods                                    831                     1,096
                                                            ----------------          ----------------
                                                                 $3,877                    $4,607
                                                            ================          ================
</TABLE>

We  continued to reduce the overall  level of inventory  based upon the level of
sales we have been  experiencing and are forecasting.  During the quarter we did
not significantly change the net carrying values of our inventory.


<PAGE>


NOTE 3 - PROPERTY AND EQUIPMENT

Property and equipment consisted of the following components (in thousands):
<TABLE>
<CAPTION>

                                                                      June 30,                   Dec. 31,
                                                                        2004                       2003
                                                                   ----------------           ----------------
<S>                                                                   <C>                       <C>
                  Leasehold improvements                                 $ 276                       $259
                  Equipment                                             12,566                     12,016
                                                                   ----------------           ----------------
                                                                        12,842                     12,275
                  Less accumulated depreciation                         11,405                     11,124
                                                                   ----------------           ----------------
                  Property and equipment - net                         $ 1,437                    $ 1,151
                                                                   ================           ================
</TABLE>

NOTE 4 - BUSINESS RESTRUCTURING

During the second quarter of 2004, we accrued a restructuring  charge of $70,000
associated  primarily with severance related charges.  As a result of subsequent
actions in the third quarter of 2004, we anticipate having further restructuring
related  charges  of  approximately  $500,000  that  are  primarily  related  to
severance and a small office  closure,  with an effective date of August 2, 2004
for most of these actions. The restructure related savings are projected to save
about $1.2 million per year.  These actions were taken to lower  production  and
operating  costs to reduce  our  breakeven  point,  particularly  in view of our
reduced  margins in the second  quarter;  the continued need to control costs in
North America and Europe;  and the need to build staff serving China and Eastern
Europe.

During the first  quarter of 2003, we completed  most of the remaining  2001 and
2002 previously  accrued  restructure  charges  associated with actions taken to
reduce our breakeven  point and realign Data I/O with our market  opportunities.
These   payments   were  $27,000  less  than   anticipated   from  the  original
restructuring  related  charges that totaled $1.8 million  during 2001 and 2002.
Accordingly, included in the results for 2003 was a reversal of these previously
over-accrued  restructure  charges.  At December  31,  2003,  all  restructuring
actions  associated with the activities from the 2001 and 2002 actions had been
completed.

NOTE 5 - EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per
share (in thousands except per share data):
<TABLE>
<CAPTION>
                                                                                  For the second quarter    For the first six months
                                                                                --------------------------  ------------------------
                                                                                   2004         2003           2004          2003
                                                                                ----------- --------------  ------------ -----------
<S>                                                                                <C>          <C>            <C>           <C>
Numerator for basic and diluted earnings per share:
       Net income                                                                  $104         $ 332            $399          $650
                                                                                ----------- --------------    ------------ ---------

Denominator:
        Denominator for basic earnings per share -
         weighted-average shares                                                  8,013         7,883           8,005         7,864
        Employee stock options                                                      273           105             345            53
                                                                                ----------- --------------    ------------ ---------
         Denominator for diluted earnings per share -
                       adjusted weighted-average shares and
                  assumed conversions of stock options                            8,286         7,988           8,350         7,917
                                                                                ----------- --------------    ------------ ---------
Basic and diluted earnings per share
         Total basic and diluted earnings per share                               $0.01         $0.04           $0.05         $0.08
                                                                                =========== ==============    ============ =========
</TABLE>

At  June  20,  2004  and  2003  there  were  1,534,617  and  1,384,775   shares,
respectively, of outstanding options potentially issueable as common stock.

NOTE 6 - ACCOUNTING FOR INCOME TAXES

The Company's  effective tax rate for the first six months of 2004 differed from
the statutory 34% tax rate  primarily due to  utilization  of net operating loss
carryforwards.  The tax valuation allowance  increased by approximately  $20,000
during the quarter ended June 30, 2004.  As of June 30, 2004,  the Company has a
valuation allowance of $9,803,000.


<PAGE>


NOTE 7 - COMPREHENSIVE INCOME

During the second quarter of 2004 and 2003 total comprehensive income (loss) was
comprised of the following (in thousands):
<TABLE>
<CAPTION>

                                                                    For the second quarter            For the first six months
                                                                 ------------------------------    -------------------------------
                                                                      2004             2003             2004              2003
                                                                 -------------     ------------    -------------     -------------
<S>                                                                   <C>              <C>              <C>              <C>
           Net income                                                   $104          $332              $399                $650
           Foreign currency translation gain (loss)                      (33)           17               (89)                 74
                                                                 -------------     ------------    -------------     -------------
           Total comprehensive income                                   $ 71          $349              $310                $724
                                                                 =============     ============    =============     =============
</TABLE>


NOTE 8 - FOREIGN CURRENCY TRANSLATION AND DERIVATIVES

Data I/O  translates  assets  and  liabilities  of foreign  subsidiaries  at the
exchange  rate on the  balance  sheet date.  We  translate  revenues,  costs and
expenses of foreign  subsidiaries at average rates of exchange prevailing during
the  year.  We  charge or credit  translation  adjustments  resulting  from this
process to stockholders' equity, net of taxes. Realized and unrealized gains and
losses  resulting  from the effects of changes in  exchange  rates on assets and
liabilities  denominated  in foreign  currencies  are included in  non-operating
expense as foreign currency transaction gains and losses.

Data I/O accounts for its hedging  activities in  accordance  with SFAS No. 133,
Accounting for Derivatives and Hedging  Activities.  This statement  establishes
accounting  and reporting  standards  for  derivative  instruments  and requires
recognition  of  derivatives  as  assets  or  liabilities  in the  statement  of
financial position and measurement of those instruments at fair value.

Data I/O utilizes  forward  foreign  exchange  contracts to reduce the impact of
foreign currency exchange rate risks where natural hedging  strategies cannot be
effectively employed.  All hedging instruments held by us are fair value hedges.
Generally,  these contracts have maturities less than one year and require us to
exchange  foreign  currencies for U.S.  dollars at maturity.  The change in fair
value of the open hedge  contracts as of June 30, 2004 is an unrealized  loss of
$13,259 and is included in accounts payable on the balance sheet.

Data I/O does not hold or issue  derivative  financial  instruments  for trading
purposes.  The purpose of our hedging  activities is to reduce the risk that the
valuation of the underlying  assets,  liabilities and firm  commitments  will be
adversely  affected by changes in exchange rates.  Our derivative  activities do
not create foreign currency exchange rate risk because fluctuations in the value
of the instruments  used for hedging  purposes are offset by fluctuations in the
value of the underlying exposures being hedged.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Operations

General

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes  forward-looking  statements  within
the meaning of the Private  Securities  Litigation  Reform Act of 1995. This Act
provides a "safe harbor" for  forward-looking  statements to encourage companies
to provide  prospective  information  about  themselves as long as they identify
these statements as forward-looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results.  All statements other than statements of historical fact made
in this  Quarterly  Report  on Form  10-Q are  forward-looking.  In  particular,
statements  herein  regarding  industry  prospects or trends;  expected level of
expense;  future results of operations or financial  position;  changes in gross
margin;  integration of acquired  products and operations;  market acceptance of
our  newly  introduced  or  upgraded  products;  development,  introduction  and
shipment of new products;  restructure costs and savings; and any other guidance
on future periods are  forward-looking  statements.  Forward-looking  statements
reflect management's current expectations and are inherently uncertain. Although
Data I/O  believes  that the  expectations  reflected  in these  forward-looking
statements  are  reasonable,  we  cannot  guarantee  future  results,  levels of
activity,  performance,  achievements, or other future events. Moreover, neither
Data  I/O  nor  anyone  else  assumes   responsibility   for  the  accuracy  and
completeness of these forward-looking  statements.  Data I/O is under no duty to
update any of these  forward-looking  statements  after the date of this report.
The Reader should not place undue reliance on these forward-looking  statements.
The discussions in the section entitled  "Business - Cautionary Factors That May
Affect Future Results" in Item 1 in the Company's Annual report on Form 10-K for
the year ended  December 31, 2003,  and in Exhibit 99.1 of this report  describe
some, but not all, of the factors that could cause these differences.

OVERVIEW

Our goal is to continue to focus on managing the business to achieve  profitable
operations,  while  developing  and  enhancing  products  to drive  revenue  and
earnings  growth.  Our  challenge  continues  to be  operating  in the  weak and
uncertain economic environment with its limited capacity related demand and weak
capital spending, while positioning Data I/O to take advantage of an anticipated
recovery in capital  spending.  We expect that demand for  programming  capacity
should  improve,  in part based on forecasted  increased 2004 unit sales for the
semiconductor industry, which should provide improved business opportunities for
Data I/O.

We are  continuing  our  efforts  to  balance  increasing  costs  and  strategic
investments  in our  business  with the level of demand and mix of  business  we
expect.  We are focusing our research and  development  efforts in our strategic
growth markets,  namely new programming technology,  in-system programming,  and
automated  programming systems for the manufacturing  environment,  particularly
extending the  capabilities  and support for our FlashCORE  architecture and the
ProLINE-RoadRunner and PS families. During the beginning of the third quarter of
2004,  we  obtained  the  rights  to  certain  in-system   programming   ("ISP")
technology.  We expect to incorporate  this  technology  into our ISP product in
development,  and will be  required  to pay a 4%  royalty  on  product  revenues
associated with such technology until March 31, 2007. Revenues from ISP products
are expected to start later this year, but related royalties are not expected to
be a  material  amount  in  2004.  To  better  support  our  customers  in their
geographic  areas and time zones, we have expanded device support  operations in
Germany  and India and are in the  process of  setting  up a new device  support
center in Shanghai, China.

Our  customer  focus  has  been  on  strategic  high  volume  manufacturers  and
programming centers and supporting NAND Flash and  microcontrollers on our newer
products  to  gain  new   accounts   and  break  into  new   markets,   such  as
microcontrollers  for the automotive  market.  We are finalizing the operational
set up for our new subsidiaries in China and Brazil.  We are expanding our China
operations  to take  advantage of the growth of  manufacturing  in China and are
establishing a service  operation in Brazil.  We continue our efforts to partner
with the semiconductor manufacturers to better serve our mutual customers.

RESTRUCTURE ACTIONS

During the second quarter of 2004, we accrued a restructuring  charge of $70,000
associated  primarily with severance related charges.  As a result of subsequent
actions in the third quarter of 2004, we anticipate having further restructuring
related  charges  of  approximately  $500,000  that  are  primarily  related  to
severance and a small office  closure,  with an effective date of August 2, 2004
for most of these actions. The restructure related savings are projected to save
about $1.2 million per year.  These actions were taken to lower  production  and
operating  costs to reduce  our  breakeven  point,  particularly  in view of our
reduced  margins in the second  quarter;  the continued need to control costs in
North America and Europe;  and the need to build staff serving China and Eastern
Europe.

CRITICAL ACCOUNTING POLICY JUDGMENTS AND ESTIMATES

The preparation of financial statements in accordance with accounting principles
generally  accepted in the United  States  requires  that we make  estimates and
judgments,  which affect the reported amounts of assets,  liabilities,  revenues
and expenses,  and related disclosures of contingent assets and liabilities.  On
an on-going basis,  we evaluate our estimates,  including those related to sales
returns, bad debts, inventories,  investments,  intangible assets, income taxes,
warranty obligations,  restructuring charges,  contingencies such as litigation,
and contract terms that have multiple elements and other complexities typical in
the  telecommunications  equipment industry. We base our estimates on historical
experience  and other  assumptions  that we  believe  are  reasonable  under the
circumstances.  Actual results may differ from these  estimates  under different
assumptions or conditions.

We  believe  the  following  critical   accounting   policies  affect  the  more
significant  judgments and estimates  used in the  preparation  of its financial
statements.

Revenue Recognition:  Sales of our semiconductor  programming equipment products
requiring  installation  by us that is other than  perfunctory are recorded when
installation   is  complete,   or  at  the  later  of  customer   acceptance  or
installation,  if an  acceptance  clause is  specified  in the sales  terms.  We
recognize  revenue from other product  sales at the time of shipment.  We record
revenue from the sale of service and update contracts as deferred revenue and we
recognize it on a  straight-line  basis over the  contractual  period,  which is
typically one year. We establish a reserve for sales returns based on historical
trends in product  returns and  estimates  for new items.  If the actual  future
returns differ from historical levels, our revenue could be adversely affected.

Allowance for Doubtful  Accounts:  We base the  allowance for doubtful  accounts
receivable on our assessment of the collectibility of specific customer accounts
and the aging of accounts  receivable.  If there is a  deterioration  of a major
customer's  credit  worthiness  or actual  defaults  are higher than  historical
experience,  our  estimates  of the  recoverability  of amounts  due us could be
adversely affected.

Inventory  Provisions:  We base inventory  purchases and commitments upon future
demand  forecasts  and historic  usage.  If there is a  significant  decrease in
demand for our  products  or there is a higher  risk of  inventory  obsolescence
because of rapidly  changing  technology  and customer  requirements,  we may be
required to increase our inventory  provision  adjustments  and our gross margin
could be adversely affected.

Warranty  Accruals:  We accrue for warranty costs based on the expected material
and labor  costs to  fulfill  our  warranty  obligations.  If we  experience  an
increase in warranty  claims,  which are higher than our historical  experience,
our gross margin could be adversely affected.

Deferred  Taxes:  We have incurred tax losses in each of the last four years and
have net  operating  loss and tax credit  carryforwards  that begin  expiring in
2019. We have provided a full valuation allowance against our tax assets,  given
the  uncertainty as to their  realization.  In future years,  these benefits are
available to reduce or eliminate taxes on future taxable income.

Results of Operations
<TABLE>
<CAPTION>
NET SALES
-----------------------------------------------------------------------------------------------------------------------------------
 (in thousands)


                                                            Second Quarter                                First Six Months
                                              -------------------------------------------   ---------------------------------------
 Net sales by product line                         2004        % Change        2003          2004         % Change          2003
 ----------------------------------------------------------------------------------------   ---------------------------------------
<S>                                                <C>          <C>            <C>         <C>           <C>               <C>
 Non-automated programming systems                 $2,400       (13.0%)        $2,758        $4,982         (6.2%)         $5,310

 Automated programming systems                     $4,495        59.4%          2,820        $8,747         36.2%           6,423
                                              -------------------------------------------   ---------------------------------------
Total programming systems                          $6,895        23.6%         $5,578       $13,729         17.0%         $11,733
                                              ===========================================   =======================================

</TABLE>

<TABLE>
<CAPTION>
                                                          Second Quarter                                First Six Months
                                              -------------------------------------------   ---------------------------------------
 Net sales by location                              2004       % Change         2003         2004         % Change           2003
----------------------------------------------------------------------------------------   ---------------------------------------
<S>                                               <C>           <C>            <C>           <C>         <C>               <C>
 United States                                    $1,509         (1.8%)       $1,536            $2,899       (13.5%)        $3,351

    % of total                                     21.9%                       27.5%             21.1%                       28.6%

 International                                    $5,386         33.3%        $4,042           $10,830        29.2%         $8,382

    % of total                                     78.1%                       72.5%             78.9%                       71.4%

 -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Revenues  for the  second  quarter  of 2004  increased  by  approximately  23.6%
compared  to the second  quarter of 2003.  The revenue  increase  relates to our
increased sales of automated systems.  During the quarter we had the first sales
of our new PS 288FC automated  system we introduced at the APEX tradeshow during
the first  quarter.  We had the highest unit  shipments  of Pro-LINE  RoadRunner
since the end of 2000, which we believe is due to additional  capacity needs, as
well as lowering the price on certain versions. Our revenue growth is due to the
increased  sales in Asia and Latin  America.  During the second quarter of 2004,
our backlog of orders  increased  from $820,000 to $1.2  million.  This level of
orders for the  quarter  is the  highest  we have  experienced  since the fourth
quarter of 2000.

Data I/O  continues  to  experience  a trend in its sales mix towards  increased
international sales and believes that, with the economic situation in the United
States and with the  electronics  industry trend toward  offshore and outsourced
manufacturing,  this  trend is  likely  to  continue.  We  expect  that with the
increased  backlog and business  outlook,  revenues in the third quarter of 2004
should be 5% higher than in the second quarter of 2004.

GROSS MARGIN
<TABLE>
<CAPTION>
                                                               Second Quarter                            First Six Months
                                                  ---------------------------------------------------------------------------------
 (in thousands)                                          2004                   2003                2004                 2003
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                    <C>                 <C>                  <C>
Gross Margin                                            $3,510                 $3,299              $7,223               $6,736

Percentage of net sales                                  50.9%                  59.1%               52.6%                57.4%
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Gross  margins  increased in dollars but  decreased as a percentage of sales for
the second  quarter of 2004  compared  with the same  period of 2003.  The lower
gross margins were  primarily a result of more indirect  sales than direct sales
in the  quarter,  a product  mix shift to somewhat  lower  margin  products  and
unfavorable  labor  and  overhead  variances  associated  with  a  reduction  in
inventory. We expect the gross margin percentage to improve in the third quarter
of 2004 by two percentage  points from the second  quarter's  level,  because we
expect a return to a more typical distribution sales channel mix and do not plan
a  reduction  in  inventory.  Sales  to  distributors  are  recorded  net of the
distributor  discount  allowed and  contribute  less to gross margin than direct
sales. Sales by representative  firms and our direct sales force are recorded at
direct customer pricing and have a representative commission or sales commission
that is included in selling expense;  as a result there is a higher gross margin
associated with these sales.

RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
                                                               Second Quarter                              First Six Months
                                                  ---------------------------------------------------------------------------------
 (in thousands)                                          2004                   2003                 2004                   2003
 ----------------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                     <C>                 <C>                    <C>
 Research and development                               $1,177                  1,078               $2,381                 $2,239

 Percentage of net sales                                 17.1%                  19.3%                17.3%                  19.1%
 ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Research  and  development  ("R&D")  spending  for the  second  quarter  2004 as
compared to the second  quarter 2003 was slightly  more in dollars but less as a
percentage of sales.  This increase in spending was primarily related to our new
development  initiative in In-System  Programming (ISP).  During the quarter, we
began  shipping  the  new  PS-288FC  automated  programming  system.  We plan to
increase our engineering  development  spending during the remainder of 2004 due
to  development  projects  and with the  hiring of  additional  new  engineering
positions in our new Shanghai based subsidiary in China formed in April of 2004.

SELLING, GENERAL AND ADMINISTRATIVE
<TABLE>
<CAPTION>
                                                               Second Quarter                            First Six Months
                                                  ---------------------------------------------------------------------------------
 (in thousands)                                          2004                   2003                 2004                   2003
 ----------------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                     <C>                 <C>                    <C>
 Selling, general & administrative                      $2,121                 $1,801               $4,294                 $3,729

 Percentage of net sales                                 30.8%                  32.3%                31.3%                  31.8%
 ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Selling,  general and administrative ("SG&A") expenses for the second quarter of
2004 were $320,000 more compared with the same period in 2003,  primarily due to
our strategic investments in Asia and the hiring of additional key personnel, as
well as the unfavorable  currency translation impact of European based operating
costs.  In addition,  we incurred  higher  commission  costs based on the higher
sales volume and a higher mix of representative sales than distributor sales.

INTEREST
<TABLE>
<CAPTION>
                                                               Second Quarter                              First Six Months
                                                  ---------------------------------------------------------------------------------
 (in thousands)                                          2004                   2003                 2004                   2003
 ----------------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>                    <C>                  <C>                    <C>
 Interest income                                         $13                    $21                  $48                    $53

 Interest expense                                        ($6)                   ($7)                 ($7)                  ($11)
 ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Interest income decreased slightly in the second quarter of 2004 compared to the
same period in 2003 due to decreased funds invested.

INCOME TAXES

<TABLE>
<CAPTION>

                                                               Second Quarter                              First Six Months
                                                  -----------------------------------------    ------------------------------------
 (in thousands)                                         2004                    2003                 2004                   2003
 ----------------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                     <C>                  <C>                    <C>
 Income tax expense (benefit)                           $40                     $94                  $102                   $105
 ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Tax expense  recorded for the second  quarter of 2004 was due to foreign  taxes.
Tax valuation  reserves  increased by approximately  $20,000 during the quarter.
Data I/O has valuation reserves of $9,803,000 as of June 30, 2004.
<PAGE>

Financial Condition

LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>

                                                                June 30,                March 31, 2004                   Dec. 31,
(in thousands)                                                    2004        Change                       Change          2003
---------------------------------------------------------- -------------- ------------- --------------- -------------- ------------
<S>                                                             <C>            <C>         <C>             <C>           <C>
Working capital                                                 $10,985        $17         $10,968         ($66)         $11,032
---------------------------------------------------------- -------------- ------------- --------------- -------------- ------------
</TABLE>

Working capital increased slightly during the second quarter of 2004. Cash, cash
equivalents  and  marketable  securities  decreased  approximately  $0.4 million
during this period;  inventory  decreased $0.2 million:  and accounts receivable
increased $0.9 million.  The change in inventory  relates to our continued focus
on reducing the amount of inventory  relative to our business  level.  We do not
expect to further reduce inventory in the next quarter. Our receivables increase
is due in part to the increased mix of international sales, which typically have
longer sales terms and collection  periods,  and a large proportion of the sales
taking  place at  quarter  end.  Should  our  business  grow  significantly,  we
anticipate  that we  will  need to  utilize  existing  liquidity  to  carry  the
increased receivables and inventory expected to be associated with sales growth.
As of June 30, 2004, Data I/O had no debt outstanding.

Data I/O estimates that capital  expenditures for property,  plant and equipment
during  the  remainder  of  2004  will  be  approximately  $400,000,   excluding
expenditures for strategic purposes. Data I/O's future capital requirements will
depend on a number of  factors  including  international  operations  expansion,
decisions to invest in new systems and technology  equipment,  costs  associated
with R&D,  successful  launch of new products and the potential use of funds for
strategic  purposes.  We expect to fund capital  expenditures  from existing and
internally  generated funds or we may lease capital  equipment.  The restructure
charges taken in the second  quarter and  anticipated  for the third quarter are
expected to be mostly paid out during the third quarter.  This will be funded by
existing  and  internally  generated  funds.  The savings  from the  restructure
actions,  anticipated  to be $1.2  million per year,  are expected to offset the
impact of the charge by the end of the year. We believe that we have  sufficient
working  capital  available  under our operating plan to fund our operations and
capital requirements for at least 12 months.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

We are exposed to financial  market  risks,  including  fluctuations  in foreign
exchange rates and interest rates.

INTEREST RATE RISK

We invest our cash in a variety of short-term financial  instruments,  including
government  bonds,  commercial  paper and money  market  instruments,  which are
classified as available-for-sale. Our investments are made in accordance with an
investment  policy  approved  by  our  board  of  directors.  Our  portfolio  is
diversified and consists  primarily of investment  grade  securities to minimize
credit risk. Cash balances in foreign  currencies are operating balances and are
invested in demand or short-term deposits of the local operating bank.

Investments  in both fixed rate and floating rate interest  earning  instruments
carry a degree of interest rate risk.  Fixed rate securities may have their fair
market  value  adversely  impacted  because of a rise in interest  rates,  while
floating rate securities may produce less income than expected if interest rates
fall. Due in part to these factors,  our future investment income may fall short
of expectations  because of changes in interest rates or we may suffer losses in
principal if forced to sell  securities that have seen a decline in market value
because of changes in interest  rates.  We do not attempt to reduce or eliminate
our  exposure to interest  rate risk  through  the use of  derivative  financial
instruments due to the short-term nature of the investments.

<PAGE>

The table below provides information about our marketable securities,  including
principal  cash  flows  and the  related  weighted  average  interest  rates (in
thousands):
<TABLE>
<CAPTION>
                                                 Principal         Estimated Fair         Principal        Estimated Fair
                                                Cash Flows            Value at           Cash Flows           Value at
                                                 For 2004          June 30, 2004         For Q2 2004        December 31,
                                                                                                                2003
                                              ----------------    ------------------    --------------     ----------------
<S>                                             <C>                <C>                   <C>                <C>
          Corporate Bonds                           $236              $1,040                $  754           $   754
                                                   1.310%                                    1.315%
          Euro-dollar bonds                          303                 303                     -                 -
                                                   1.290%
          Taxable Auction Securities                 500                 500                   500               500
                                                   1.369%                                    1.136%
          Tax Advantaged Auction Securities          500                 500                 1,100             1,100
                                                   1.572%                                    1.286%
                                              ----------------    ------------------    --------------     ----------------
          Total portfolio value                   $1,539              $2,343                $2,354            $2,354
                                              ================    ==================    ==============     ================
</TABLE>

FOREIGN CURRENCY RISK

We have operations in Germany,  Canada,  and China and are setting up operations
in  Brazil.  Therefore,  we are  subject to risks  typical  of an  international
business including,  but not limited to, differing economic conditions,  changes
in  political   climate,   differing  tax  structures,   other  regulations  and
restrictions  and foreign  exchange  rate  volatility.  Accordingly,  our future
results  could be  materially  adversely  affected  by changes in these or other
factors.

Our sales and corresponding  receivables are substantially in U.S. dollars other
than sales made in our subsidiaries in Germany,  Canada, and China.  Through our
operations in Germany,  Canada,  and China and soon in Brazil,  we incur certain
product costs;  research and  development;  customer  service and support costs;
selling,  general  and  administrative  expenses  in  local  currencies.  We are
exposed,  in the normal course of business,  to foreign  currency risks on these
expenditures  and on related foreign  currency  denominated  monetary assets and
liabilities.  We have evaluated our exposure to these risks and believe that our
only significant exposure to foreign currencies at the present time is primarily
related to Euro-based receivables. We use forward contracts to hedge and thereby
minimize the currency risks associated with certain transactions  denominated in
Euros.

If our actual currency  requirement or timing in the period  forecasted  differs
materially from the notional amount of our forward  contracts and/or the natural
balancing of receivables and payables in foreign  currencies  during a period of
currency  volatility  or if we do not continue to manage our exposure to foreign
currency  through  forward   contracts  or  other  means,  we  could  experience
unanticipated  foreign  currency  gains or  losses.  In  addition,  our  foreign
currency  risk   management   policy  subjects  us  to  risks  relating  to  the
creditworthiness  of the  commercial  banks  with  which we enter  into  forward
contracts.  If one of these banks cannot honor its obligations,  we may suffer a
loss. We also invest in our international  operations,  which will likely result
in increased future operating expenses denominated in those local currencies. In
the future,  our  exposure to foreign  currency  risks from these other  foreign
currencies may increase and if not managed  appropriately,  we could  experience
unanticipated foreign currency gains and losses.

The  purpose of our foreign  currency  risk  management  policy is to reduce the
effect of exchange rate  fluctuation  on our results of  operations.  Therefore,
while our foreign  currency  risk  management  policy may reduce our exposure to
losses  resulting from unfavorable  changes in currency  exchange rates, it also
reduces or eliminates our ability to profit from  favorable  changes in currency
exchange rates.

At June 30, 2004,  we had four  forward  contracts to sell Euros in exchange for
$676,317 with rates ranging from 1.1754 to 1.2025 all scheduled to be due within
the next quarter and the value at that date of $663,058.

Item 4.  Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

Under the supervision and with the  participation  of our management,  including
our Chief Executive Officer and Chief Financial Officer,  Data I/O evaluated the
effectiveness  of the  design  and  operation  of our  disclosure  controls  and
procedures (as defined in Rule  13a-15(e) and Rule 15d-15(e)  under the Exchange
Act) as of the end of the period covered by this report (the "Evaluation Date").
Based upon that  evaluation,  the Chief  Executive  Officer and Chief  Financial
Officer  concluded that, as of the Evaluation Date, our disclosure  controls and
procedures  were effective in timely  alerting them to the material  information
relating to Data I/O (or its consolidated  subsidiaries) required to be included
in our periodic SEC filings and Form 8-K reports.

(b) Changes in internal controls.

There were no  significant  changes  made in our  internal  controls  or, to our
knowledge,  in other  factors that could  significantly  affect  these  controls
subsequent to the date of their evaluation.

Our  management,  including  the Chief  Executive  Officer  and Chief  Financial
Officer, does not expect that its disclosure controls and procedures or internal
control over financial reporting 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  Data I/O 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.

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

         None

Item 2.  Changes in Securities, Use of Proceeds and Issuer Purchases of
         Equity Securities

         None

Item 3.  Defaults Upon Senior Securities

         None

Item 4.  Submission of Matters to a Vote of Security Holders

At our Annual Meeting of Shareholders  held on May 20, 2004,  there were present
in person or by proxy the holders of 7,714,912  (96.33%)  shares of Common Stock
of Data I/O  thereby  constituting  a  quorum.  The  following  are the  matters
approved and the voting results:

(a) Election of a Board of Directors consisting of the following seven (7)
directors:
               Name                        Votes For    Votes Withheld

               Glen F. Ceiley              7,640,550          74,357
               Daniel A. DiLeo             7,598,200         116,712
               Paul A. Gary                7,643,201          71,711
               Frederick R. Hume           7,643,255          71,657
               Edward D. Lazowska          7,613,775         101,137
               Steven M. Quist             7,618,000          96,912
               William R. Walker           7,615,800          99,112


(b) Approval to amend the Data I/O Corporation 2000 Stock Compensation Incentive
Plan as  described  in the Proxy  Statement  for the 2004  Annual  Meeting.  The
amendment passed as follows:  3,253,866 votes for;  398,056 against;  and 57,099
abstain.

(c) The  proposal to ratify the  selection  of Grant  Thornton LLP as Data I/O's
independent  auditors  passed as follows:  7,642,880 for;  40,843  against;  and
31,189 abstain.

Item 5.  Other Information

         None

Item 6.  Exhibits and Reports on Form 8-K

(a)      Exhibits

The  following  list is a subset  of the list of  exhibits  described  below and
contains all compensatory plans, contracts or arrangements in which any director
or  executive  officer  of Data  I/O is a  participant,  unless  the  method  of
allocation of benefits  thereunder is the same for management and non-management
participants:

(1)  Amended and Restated 1982 Employee Stock Purchase Plan.  See Exhibit 10.7,
     10.22, and 10.24.

(2)  Amended and Restated Retirement Plan and Trust Agreement. See Exhibit 10.2,
     10.3, 10.4, 10.11, 10.14, 10.15, 10.16 and 10.25.

(3)  Summary of Amended and Restated Management Incentive Compensation Plan.
     See Exhibit 10.12.

(4)  Amended and Restated 1983 Stock Appreciation Rights Plan. See Exhibit 10.1.

(5)  Amended and Restated 1986 Stock Option Plan.  See Exhibit 10.19.

(6)  Form of Change in Control Agreements. See Exhibit 10.5.

(7)  1996 Director Fee Plan.  See Exhibit 10.6 and 10.17.

(8)  Letter Agreement with Frederick R. Hume. See Exhibit 10.20.

(9)  Amended and Restated 2000 Stock Compensation Incentive Plan.
     See Exhibit 10.21 and 10.23.

          3    Articles of Incorporation:

          3.1  Data I/O's restated  Articles of Incorporation  filed November 2,
               1987 (Incorporated by reference to Exhibit 3.1 of Data I/O's 1987
               Annual Report on Form 10-K (File No. 0-10394)).

          3.2  Data I/O's Bylaws as amended and restated as of October 2003.

          3.3  Certificate of  Designation,  Preferences  and Rights of Series A
               Junior  Participating  Preferred Stock (Incorporated by reference
               to Exhibit 1 of Data  I/O's  Registration  Statement  on Form 8-A
               filed March 13, 1998 (File No. 0-10394)).

          4    Instruments  Defining the Rights of Security  Holders,  Including
               Indentures:

               4.1  Rights  Agreement,  dated as of April 4, 1998,  between Data
                    I/O Corporation and ChaseMellon Shareholder Services, L.L.C.
                    as Rights Agent, which includes:  as Exhibit A thereto,  the
                    Form of Right  Certificate;  and, as Exhibit B thereto,  the
                    Summary of Rights to Purchase Series A Junior  Participating
                    Preferred  Stock  (Incorporated  by  reference to Data I/O's
                    Current Report on Form 8-K filed on March 13, 1998).

               4.2  Rights Agreement,  dated as of March 31, 1988,  between Data
                    I/O  Corporation  and First Jersey  National Bank, as Rights
                    Agent,  as amended by Amendment  No. 1 thereto,  dated as of
                    May 28, 1992 and Amendment  No. 2 thereto,  dated as of July
                    16, 1997  (Incorporated by reference to Data I/O's Report on
                    Form 8-K filed on March 13, 1998).

               4.3  Amendment  No. 1, dated as of February 10,  1999,  to Rights
                    Agreement,  dated  as of  April 4,  1998,  between  Data I/O
                    Corporation and ChaseMellon Shareholder Services,  L.L.C. as
                    Rights  Agent  (Incorporated  by reference to Exhibit 4.1 of
                    Data I/O's Form 8-A/A dated February 10, 1999).

          10   Material Contracts:

               10.1 Amended and  Restated  1983 Stock  Appreciation  Rights Plan
                    dated February 3, 1993 (Incorporated by reference to Exhibit
                    10.23 of Data  I/O's 1992  Annual  Report on Form 10-K (File
                    No. 0-10394)).

               10.2 Amended and Restated  Retirement  Plan and Trust  Agreement.
                    (Incorporated  by reference  to Exhibit  10.26 of Data I/O's
                    1993 Annual Report on Form 10-K (File No. 0-10394)).

               10.3 First Amendment to the Data I/O Tax Deferred Retirement Plan
                    (Incorporated  by reference  to Exhibit  10.21 of Data I/O's
                    1994 Annual Report on Form 10-K (File No. 0-10394)).

               10.4 Second  Amendment  to the Data I/O Tax  Deferred  Retirement
                    Plan  (Incorporated  by reference  to Exhibit  10.26 of Data
                    I/O's 1995 Annual Report on Form 10-K (File No. 0-10394)).

               10.5 Form  of  Change  in  Control  Agreements  (Incorporated  by
                    reference to Exhibit  10.20 of Data I/O's 1994 Annual Report
                    on Form 10-K (File No. 0-10394)).

               10.6 Data I/O Corporation 1996 Director Fee Plan (Incorporated by
                    reference to Exhibit  10.27 of Data I/O's 1995 Annual Report
                    on Form 10K (File No. 0-10394)).

               10.7 Data I/O  Corporation  1982  Employee  Stock  Purchase  Plan
                    Amended and  Restated  December  11, 1996  (Incorporated  by
                    reference  to  Exhibit  10.1  to  Data  I/O's   Registration
                    Statement of Form S-8 (File No. 333-20657, filed January 29,
                    1997)).

               10.8 Purchase  and  Sale  Agreement  dated  as of  July  9,  1996
                    (Relating to the sale of Data I/O Corporation's headquarters
                    property in Redmond,  Washington consisting of approximately
                    79 acres of land and an  approximately  96,000  square  foot
                    building.  (Portions  of  this  exhibit  have  been  omitted
                    pursuant   to  an   application   for  an   order   granting
                    confidential  treatment.  The  omitted  portions  have  been
                    separately  filed  with  the  Commission)  (Incorporated  by
                    reference to Exhibit  10.32 of Data I/O's 1996 Annual Report
                    on Form 10-K (File No. 0-10394)).

               10.9 Letter dated as of December 20, 1996,  First  Amendment  and
                    extension of the Closing  Date under that  certain  Purchase
                    and Sale  Agreement  dated as of July 9, 1996.  (Portions of
                    this exhibit have been  omitted  pursuant to an  application
                    for an order granting  confidential  treatment.  The omitted
                    portions  have been  separately  filed with the  Commission)
                    (Incorporated  by reference  to Exhibit  10.33 of Data I/O's
                    1996 Annual Report on Form 10-K (File No. 0-10394)).

              10.10 Letter dated as of February 17, 1997,  Second  Amendment and
                    extension of the Closing  Date under that  certain  Purchase
                    and Sale  Agreement  dated as of July 9, 1996.  (Portions of
                    this exhibit have been  omitted  pursuant to an  application
                    for an order granting  confidential  treatment.  The omitted
                    portions  have been  separately  filed with the  Commission)
                    (Incorporated  by reference  to Exhibit  10.34 of Data I/O's
                    1996 Annual Report on Form 10-K (File No. 0-10394)).

              10.11 Third  Amendment  to the  Data I/O Tax  Deferred  Retirement
                    Plan  (Incorporated  by reference  to Exhibit  10.35 of Data
                    I/O's 1996 Annual Report on Form 10-K (File No. 0-10394)).

              10.12 Amended and Restated Management Incentive  Compensation Plan
                    dated January 1, 1997  (Incorporated by reference to Exhibit
                    10.25 of Data  I/O's 1997  Annual  Report on Form 10-K (File
                    No. 0-10394)).

              10.13 Amended and Restated  Performance  Bonus Plan dated  January
                    1, 1997  (Incorporated by reference to Exhibit 10.26 of Data
                    I/O's 1997 Annual Report on Form 10-K (File No. 0-10394)).

              10.14 Fourth  Amendment  to the Data I/O Tax  Deferred  Retirement
                    Plan  (Incorporated  by reference  to Exhibit  10.27 of Data
                    I/O's 1997 Annual Report on Form 10-K (File No. 0-10394)).

              10.15 Fifth  Amendment  to the  Data I/O Tax  Deferred  Retirement
                    Plan  (Incorporated  by reference  to Exhibit  10.28 of Data
                    I/O's 1997 Annual Report on Form 10-K (File No. 0-10394)).

              10.16 Sixth  Amendment  to the  Data I/O Tax  Deferred  Retirement
                    Plan  (Incorporated  by reference  to Exhibit  10.29 of Data
                    I/O's 1997 Annual Report on Form 10-K (File No. 0-10394)).

              10.17 Amended and Restated Data I/O Corporation  1996 Director Fee
                    Plan  (Incorporated  by reference  to Exhibit  10.32 of Data
                    I/O's 1997 Annual Report on Form 10-K (File No. 0-10394)).

              10.18 Amended and  Restated  1986 Stock  Option Plan dated May 12,
                    1998  (Incorporated  by reference  to Exhibit  10.37 of Data
                    I/O's 1998 Annual Report on Form 10-K (File No. 0-10394)).

              10.19 Sublease   dated   December   22,  1999   between  Data  I/O
                    Corporation and Imandi.com, Inc.

              10.20 Letter Agreement with Fred R. Hume dated January 29, 1999.

              10.21 Amended and Restated 2000 Stock Compensation  Incentive Plan
                    dated May 19, 2000. (Incorporated by reference to Data I/O's
                    2000 Proxy Statement dated March 27, 2000.)

              10.22 Amended and  Restated  1982  Employee  Stock  Purchase  Plan
                    dated May 16, 2001  (Incorporated by reference to Data I/O's
                    2001 Proxy Statement dated March 28, 2001.)

              10.23 Amended and Restated 2000 Stock Compensation  Incentive Plan
                    dated May 19, 2000. (Incorporated by reference to Data I/O's
                    2002 Proxy Statement dated April 19, 2002.)

              10.24 Amended and  Restated  1982  Employee  Stock  Purchase  Plan
                    dated May 16, 2001. (Incorporated by reference to Data I/O's
                    2003 Proxy Statement dated March 31, 2003.)

              10.25 Amended and Restated Data I/O Tax Deferred  Retirement  Plan
                    (Incorporated  by reference  to Exhibit  10.25 of Data I/O's
                    Quarterly  Report on Form 10-Q for the  quarter  ended March
                    31, 2004 (File No. 0-10394)).

<PAGE>

          31   Certification - Section 302:
               31.1  Chief Executive Officer Certification                  19
               31.2  Chief Financial Officer Certification                  20

          32   Certification - Section 906:
               32.1  Chief Executive Officer Certification                  21
               32.2  Chief Financial Officer Certification                  22

          99   Other Exhibits
               99.1  Risk Factors                                           23

               (b) Reports on Form 8-K

Data I/O  furnished a copy of a press  release  made on April 23, 2004  entitled
"Data I/O Reports  Sixth  Consecutive  Quarter of  Profitability"  on a Form 8-K
under Item 12. The  information  furnished  in the Form 8-K  pursuant to Item 12
shall not be deemed filed under the Securities Exchange Act of 1934, as amended.

<PAGE>


                                   SIGNATURES


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



                                    DATA I/O CORPORATION
                                         (REGISTRANT)
DATED:   August 13, 2004


                                    By://S//Joel S. Hatlen
                                       Joel S. Hatlen
                                       Vice President - Finance
                                       Chief Financial Officer
                                       Secretary and Treasurer
                       (Principal Financial Officer and Duly Authorized Officer)




                                    By://S//Frederick R. Hume
                                       Frederick R. Hume
                                       President
                                       Chief Executive Officer
                       (Principal Executive Officer and Duly Authorized Officer)



<PAGE>


Exhibit 31.1

Section 302 Certification
I, Frederick R. Hume, certify that:
1.   I have reviewed this quarterly report on Form 10-Q of Data I/O Corporation;

2.   Based on my knowledge, this 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
     report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included  in  this  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 report;

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

     a)   Designed  such  disclosure  controls  and  procedures,  or caused such
          disclosure   controls  and   procedures  to  be  designed   under  our
          supervision,  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 report is being prepared;

     b)   Evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures and presented in this report our conclusions  about the
          effectiveness of the disclosure controls and procedures, as of the end
          of the period covered by this report based on such evaluation; and

     c)   Disclosed  in this  report  any  change in the  registrant's  internal
          control over financial reporting that occurred during the registrant's
          most recent fiscal quarter (the registrant's  fourth fiscal quarter in
          the case of an annual  report)  that has  materially  affected,  or is
          reasonably  likely to materially  affect,  the  registrant's  internal
          control over financial reporting; and

5.   The registrant's other certifying officer(s) and I have disclosed, based on
     our most recent evaluation of internal control over financial reporting, to
     the registrant's auditors and the audit committee of the registrant's board
     of directors (or persons performing the equivalent functions):

     a)   All significant  deficiencies and material weaknesses in the design or
          operation  of internal  control  over  financial  reporting  which are
          reasonably  likely to  adversely  affect the  registrant's  ability to
          record, process, summarize and report financial information; and

     b)   Any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          control over financial reporting.

Date  August 13, 2004            /s/ FREDERICK R. HUME
                                     Frederick R. Hume
                                     President and Chief Executive Officer
                                     (Principal Executive Officer)



<PAGE>


Exhibit 31.2

Section 302 Certification
I, Joel S. Hatlen, certify that:
1.   I have reviewed this quarterly report on Form 10-Q of Data I/O Corporation;

2.   Based on my knowledge, this 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
     report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included  in  this  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 report;

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

     a)   Designed  such  disclosure  controls  and  procedures,  or caused such
          disclosure   controls  and   procedures  to  be  designed   under  our
          supervision,  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 report is being prepared;

     b)   Evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures and presented in this report our conclusions  about the
          effectiveness of the disclosure controls and procedures, as of the end
          of the period covered by this report based on such evaluation; and

     c)   Disclosed  in this  report  any  change in the  registrant's  internal
          control over financial reporting that occurred during the registrant's
          most recent fiscal quarter (the registrant's  fourth fiscal quarter in
          the case of an annual  report)  that has  materially  affected,  or is
          reasonably  likely to materially  affect,  the  registrant's  internal
          control over financial reporting; and

5.   The registrant's other certifying officer(s) and I have disclosed, based on
     our most recent evaluation of internal control over financial reporting, to
     the registrant's auditors and the audit committee of the registrant's board
     of directors (or persons performing the equivalent functions):

     a)   All significant  deficiencies and material weaknesses in the design or
          operation  of internal  control  over  financial  reporting  which are
          reasonably  likely to  adversely  affect the  registrant's  ability to
          record, process, summarize and report financial information; and

     b)   Any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          control over financial reporting.

Date  August 13, 2004             /s/ JOEL S. HATLEN
                                      Joel S. Hatlen
                                      Vice President and Chief Financial Officer
                                      (Principal Financial Officer)




<PAGE>


          Exhibit 32.1
          Certification by Chief Executive Officer
          Pursuant to 18 U.S.C. Section 1350
          As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


          In connection with the quarterly  Report of Data I/O Corporation  (the
          "Company")  on Form 10-Q for the period  ended June 30,  2004 as filed
          with the  Securities  and Exchange  Commission on the date hereof (the
          "Report"),  I,  Frederick  R.  Hume,  Chief  Executive  Officer of the
          Company,  certify, that pursuant to 18 U.S.C. Section 1350, as adopted
          pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

          (1)  The Report fully complies with the  requirements of Section 13(a)
               or  15(d) of the  Securities  Exchange  Act of 1934; and
          (2)  The information  contained in the Report fairly presents,  in all
               material  respects,   the  financial  condition  and  results  of
               operations of the Company.


           /s/ Frederick R. Hume
           Frederick R. Hume
           Chief Executive Officer
           (Principal Executive Officer)
           August 13, 2004


<PAGE>


          Exhibit 32.2
          Certification by Chief Financial Officer
          Pursuant to 18 U.S.C. Section 1350
          As Adopted Pursuant to
          Section 906 of the Sarbanes-Oxley Act of 2002

          In connection with the quarterly  Report of Data I/O Corporation  (the
          "Company")  on Form 10-Q for the period  ended June 30,  2004 as filed
          with the  Securities  and Exchange  Commission on the date hereof (the
          "Report"),  I, Joel S. Hatlen, Chief Financial Officer of the Company,
          certify,  that pursuant to 18 U.S.C. Section 1350, as adopted pursuant
          to Section 906 of the Sarbanes-Oxley Act of 2002, that:

          (1)  Report fully complies with the  requirements  of Section 13(a) or
               15(d) of the Securities Exchange Act of 1934; and
          (2)  The information  contained in the Report fairly presents,  in all
               material  respects,   the  financial  condition  and  results  of
               operations of the Company.


           /s/ Joel S. Hatlen
           Joel S. Hatlen
           Chief Financial Officer
           (Principal Financial Officer)
           August 13, 2004


<PAGE>



                  Exhibit 99.1

Cautionary Factors That May Affect Future Results
--------------------------------------------------------------------------------

Data I/O's  disclosure  and  analysis in this  Quarterly  Report  contains  some
forward-looking  statements.  Forward-looking  statements  include  our  current
expectations  or  forecasts  of future  events.  The reader can  identify  these
statements by the fact that they do not relate strictly to historical or current
facts.  In  particular,  these  include  statements  relating to future  action,
prospective products, new technologies, future performance or results of current
and anticipated  products,  sales efforts,  expenses,  outsourcing of functions,
outcome of contingencies, and financial results.

Any or all of the forward-looking  statements in this Quarterly Report or in any
other public  statement  made may turn out to be wrong.  They can be affected by
inaccurate   assumptions   we  might  make,   or  known  or  unknown  risks  and
uncertainties can affect these forward-looking  statements.  Many factors -- for
example,  product  competition  and product  development -- will be important in
determining future results.  Moreover,  neither Data I/O nor anyone else assumes
responsibility  for the  accuracy  and  completeness  of  these  forward-looking
statements. Actual future results may materially vary.

We undertake no obligation  to publicly  update any  forward-looking  statements
after the date of this Quarterly Report, whether as a result of new information,
future events or otherwise.  The reader should not place undue  reliance on such
forward-looking  statements.  The reader is  advised,  however,  to consult  any
future  disclosures Data I/O makes on related subjects in our 10-Q, 8-K and 10-K
reports to the SEC and press  releases.  Also,  note that Data I/O  provides the
following cautionary discussion of risks,  uncertainties and possible inaccurate
assumptions  relevant to our  business.  These are  factors  that we think could
cause  Data  I/O's  actual  results  to  differ  materially  from  expected  and
historical results. Other factors besides those listed here could also adversely
affect  Data  I/O.  This  discussion  is  permitted  by the  Private  Securities
Litigation Reform Act of 1995.

RISK FACTORS

Development, Introduction and Shipment of New Products

Data I/O  currently is developing  new  engineering  and  automated  programming
systems.  Significant technological,  supplier,  manufacturing or other problems
may delay the development, introduction or production of these products.

For example, we may encounter these problems:

o technical problems in the development of a new programming system platform or
  the robotics for new automated handing systems

o inability to hire qualified personnel

o delays or failures to perform by third parties involved in our development
  projects

Delays in the development, completion and shipment of new products, or failure
of customers to accept new products, may result in a decline in sales in 2004.

Variability in Quarterly Operating Results

Data I/O's operating  results tend to vary from quarter to quarter.  Our revenue
in each quarter  substantially depends upon orders received within that quarter.
Conversely,  our  expenditures  are based on  investment  plans and estimates of
future revenues. We may, therefore,  be unable to quickly reduce our spending if
our revenues decline in a given quarter. As a result, operating results for that
quarter  will  suffer.  Our  results of  operations  for any one quarter are not
necessarily indicative of results for any future periods.

Other factors, which may cause our quarterly operating results to fluctuate,
include:

o increased competition

o timing of new product announcements

o product releases and pricing changes by us or our competitors

o market acceptance or delays in the introduction of new products

o production constraints

o labor or material shortages

o the timing of significant orders

o the sales channel mix of direct vs. indirect distribution

o war or terrorism

o health issues (such as SARS)

o customers' budgets

o adverse movements in exchange rates, interest rates or tax rates

o cyclical nature of demand for our customers' products

o general economic conditions in the countries where we sell products

Due  to all of the  foregoing  factors,  it is  possible  that  in  some  future
quarters,  our  operating  results  will be below  expectations  of analysts and
investors.

Rapid Technological Change

Product technology in Data I/O's industry evolves rapidly, making timely product
innovation  essential to success in the marketplace.  Introducing  products with
improved  technologies or features may render our existing products obsolete and
unmarketable.  Technological  advances that may  negatively  impact our business
include:

o new device package types, densities, and technologies requiring hardware and
  software changes in order to be programmed by our products

o electronics equipment manufacturing practices, such as widespread use of
  in-circuit programming

o customer software platform preferences different from those on which our
  products operate

o more rigid industry standards, which would decrease the value-added element of
  our products and support services

If we cannot  develop  products  in a timely  manner  in  response  to  industry
changes,  or if our products do not perform  well,  our  business and  financial
condition will be adversely affected. Also, our new products may contain defects
or errors  that give rise to product  liability  claims  against us or cause our
products to fail to gain market  acceptance.  Our future success  depends on our
ability to successfully  compete with other  technology  firms in attracting and
retaining key technical personnel.

Economic and Market Conditions

Our business is highly impacted by capital spending plans and other economic
cycles that affect the users and manufacturers of ICs. These industries are
highly cyclical and are characterized by rapid technological change, short
product life cycles, fluctuations in manufacturing capacity and pricing and
gross margin pressures. As we experienced in recent years, our operations may in
the future reflect substantial fluctuations from period-to-period as a
consequence of these industry patterns, general economic conditions affecting
the timing of orders from major customers, and other factors affecting capital
spending. These factors could have a material adverse effect on our business and
financial condition.

History of Losses

We have  incurred  net losses in two of our last  three  fiscal  years.  We will
continue  to examine our level of  operating  expense  based upon our  projected
revenues.  Any planned  increases  in  operating  expenses  may result in larger
losses in future periods if projected revenues are not achieved. As a result, we
may need to  generate  greater  revenues  than we have  recently  to achieve and
maintain  profitability.  However, we cannot provide assurance that our revenues
will  increase  and our  strategy  may not be  successful,  resulting  in future
losses.

Affects of Restructuring Activities

Our restructuring plans may yield unanticipated consequences,  such as increased
burden on our administrative, operational, and financial resources and increased
responsibilities  for our  management  personnel.  As a result,  our  ability to
respond to  unexpected  challenges  may be impaired and we may be unable to take
advantage of new opportunities.

In  addition,  many  of the  employees  that  were  terminated  as a part of our
restructuring  possessed specific knowledge or expertise,  and that knowledge or
expertise  may prove to have been  important  to our  operations.  In that case,
their absence may create significant difficulties,  particularly if our business
experiences  significant growth. Also, the reduction in workforce related to our
restructuring  may subject us to the risk of  litigation,  which could result in
substantial  cost.  Any  failure by us to properly  manage this rapid  change in
workforce  could  impair our  ability to  efficiently  manage our  business,  to
maintain and develop important relationships with third-parties,  and to attract
and retain customers.  It could also cause us to incur higher operating cost and
delays in the  execution of our business plan or in the reporting or tracking of
our financial results.

Need for Additional Funding

Our  past  revenues  have  been  and our  future  revenues  may  continue  to be
insufficient  to support the expense of our  operations and any expansion of our
business. We may therefore need additional equity or debt capital to finance our
operations.  If we are unable to generate  sufficient cash flows from operations
or to obtain funds through  additional debt or equity financing,  we may have to
reduce some or all of our development and sales and marketing  efforts and limit
the expansion of our business.

We believe our existing cash and cash equivalents will be sufficient to meet our
working capital  requirements  for at least the next twelve months.  Thereafter,
depending on the  development of our business,  we may need to raise  additional
cash for working capital or other expenses. We may also encounter  opportunities
for  acquisitions or other business  initiatives  that require  significant cash
commitments,  or  unanticipated  problems  or  expenses  that could  result in a
requirement for additional cash before that time.

Therefore,  we may seek  additional  funding  through  public or private debt or
equity  financing or from other sources.  We have no commitments  for additional
financing,  and we may experience  difficulty in obtaining  funding on favorable
terms,  if at all. Any financing we obtain may contain  covenants  that restrict
our freedom to operate our business or may require us to issue  securities  that
have rights, preferences or privileges senior to our Common Stock and may dilute
your ownership interest.

Competition

Technological  advances have reduced the barriers of entry into the  programming
systems  markets.  We expect  competition to increase from both  established and
emerging  companies.  If we fail to compete  successfully  against  current  and
future sources of competition,  our profitability and financial performance will
be adversely impacted.

Dependence on IC Manufacturers

We work  closely  with  most  semiconductor  manufacturers  to  ensure  that our
programming   systems  comply  with  their  requirements.   In  addition,   many
semiconductor  manufacturers  recommend our programming systems for use by users
of their programmable devices. These working relationships enable us to keep our
programming systems product line up to date and provide end-users with broad and
current  programmable device support.  Our business may be adversely affected if
our relationships with semiconductor manufactures deteriorate.

Dependence on Suppliers

Certain parts used in our products are currently  available from either a single
supplier or from a limited number of suppliers. If we cannot develop alternative
sources of these components,  if sales of parts are discontinued by the supplier
or we experience  deterioration in our relationship with these suppliers,  there
may be delays or reductions  in product  introductions  or shipments,  which may
materially adversely affect our operating results.

Because we rely on a small number of suppliers for certain parts, we are subject
to  possible  price  increases  by these  suppliers.  Also,  we may be unable to
accurately forecast our production schedule. If we under estimate our production
schedule,  suppliers may be unable to meet our demand for components. This delay
in the supply of key components may  materially  adversely  affect our business.
Over  estimation  of  demand  will lead to excess  inventories  that may  become
obsolete.

The non-automated  programming  system products we acquired when we acquired SMS
in  November  1998  are  currently  manufactured  to  our  specifications  by  a
third-party  foreign  contract  manufacturer.  We may not be able  to  obtain  a
sufficient  quantity of these  products if and when needed,  which may result in
lost sales.


<PAGE>


Reliance on Third-Party Distribution Channels

Data  I/O  has  an   internal   sales  force  and  also   utilizes   third-party
representatives,  and distributors.  Therefore, the financial stability of these
distributors is important. Highly skilled professional engineers use most of our
products.  To be effective,  third-party  distributors must possess  significant
technical,  marketing  and sales  resources  and must devote their  resources to
sales  efforts,  customer  education,   training  and  support.  These  required
qualities limit the number of potential third-party  distributors.  Our business
will suffer if we cannot  attract and retain a  sufficient  number of  qualified
third-party distributors to market our products.

International Operations

International sales represented 70% of our net revenue for the fiscal year ended
December  31,  2003 and 79% for the first six  months  of 2004.  We expect  that
international  sales  will  continue  to be a  significant  portion  of our  net
revenue. International sales may fluctuate due to various factors, including:

o migration of manufacturing to low cost geographies

o unexpected changes in regulatory requirements

o tariffs and taxes

o difficulties in staffing and managing foreign operations

o longer average payment cycles and difficulty in collecting accounts receivable

o fluctuations in foreign currency exchange rates

o impact of the Euro

o compliance with applicable export licensing requirements

o product safety and other certification requirements

o difficulties in integrating foreign and outsourced operations

o political and economic instability

The European  Community and European  Free Trade  Association  have  established
certain electronic emission and product safety requirements ("CE"). Although our
products  currently  meet  these  requirements,  failure  to obtain  either a CE
certification  or a waiver for any product may  prevent us from  marketing  that
product in Europe.

We operate  subsidiaries  in Germany,  China and Canada and soon in Brazil.  Our
business and financial  condition is sensitive to currency exchange rates or any
other restrictions imposed on their currencies.  Currency exchange  fluctuations
in Canada,  China, Brazil and Germany may adversely affect our investment in our
subsidiaries.

Protection of Intellectual Property

Data I/O relies on patents,  copyrights, trade secrets and trademarks to protect
our intellectual property, as well as product development and marketing skill to
establish and protect our market  position.  We attempt to protect our rights in
proprietary  software products,  including TaskLink and other software products,
by retaining  the title to and copyright of the software and  documentation,  by
including  appropriate  contractual  restrictions  on use and  disclosure in our
licenses, and by requiring our employees to execute non-disclosure agreements.

Because of the rapidly  changing  technology  in the  semiconductor,  electronic
equipment  and  software  industries,  portions of our products  might  possibly
infringe upon existing patents or copyrights, and we may, therefore, be required
to obtain  licenses or  discontinue  the use of the  infringing  technology.  We
believe that any exposure we may have regarding possible  infringement claims is
a reasonable  business  risk  similar to that assumed by other  companies in the
electronic   equipment   and  software   industries.   However,   any  claim  of
infringement,  with or  without  merit,  could  be  costly  and a  diversion  of
management's attention,  and an adverse determination could adversely affect our
reputation,  preclude  us from  offering  certain  products,  and  subject us to
substantial liability.

Acquisitions

We may pursue  acquisitions  of  complementary  technologies,  product  lines or
businesses. Future acquisitions may include risks, such as:

o burdening management and our operating teams during the integration of the
  acquired entity

o diverting management's attention from other business concerns

o failing to successfully integrate the acquired products

o lack of acceptance of the acquired products by our sales channels or customers

o entering markets where we have no or limited prior experience

o potential loss of key employees of the acquired company

o additional burden of support for an acquired programmer architecture

Future acquisitions may also impact Data I/O's financial position.  For example,
we may use significant  cash or incur  additional  debt,  which would weaken our
balance sheet. We may also capitalize  goodwill and intangible  assets acquired,
the impairment of which would reduce our profitability. We cannot guarantee that
future acquisitions will improve our business or operating results.

Dependence on Key Personnel

We have  employees  located in the U.S.,  Germany,  Canada  and  China.  We also
utilize  independent  contractors for specialty work,  primarily in research and
development,  and utilize  temporary  workers to adjust  capacity to fluctuating
demand.  Many of our employees are highly skilled and our continued success will
depend in part upon our  ability to attract and retain  employees  who can be in
great demand within the industry.  None of our  employees are  represented  by a
collective  bargaining  unit and we believe  relations  with our  employees  are
favorable  though  no  assurance  can be made  that this will be the case in the
future.  Refer to the section  captioned  "Affects of Restructuring  Activities"
above.

Compliance with Regulating Requirements

We are subject to numerous  governmental  and stock exchange  requirements  as a
public company,  which we believe we are in compliance with. The  Sarbanes-Oxley
Act,  the  Securities  and  Exchange  Commission  (SEC) and the  Public  Company
Oversight Accounting Board (PCOAB) have requirements that we may fail to meet by
required  deadlines or we may fall out of compliance  with, such as the internal
controls   assessment,   reporting  and  auditor   attestation   required  under
Sarbanes-Oxley  Act  Section  404 for  which  we are  relying  on not  being  an
accelerated  filer.  Our  failure  to meet  requirements  and  exchange  listing
standards may result in actions such as the delisting of our stock impacting our
stock's liquidity;  SEC enforcement actions; and result in securities claims and
litigation.

Potential Volatility of Stock Price

The stock prices of technology  companies  tend to fluctuate  significantly.  We
believe factors such as  announcements  of new products by us or our competitors
and quarterly variations in financial results may cause the market price of Data
I/O's Common Stock to fluctuate substantially.  In addition,  overall volatility
in the stock market,  particularly in the technology  company  sector,  is often
unrelated  to  the  operating   performance   of  companies.   If  these  market
fluctuations continue in the future, they may adversely affect the price of Data
I/O's Common Stock.