UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C.
20549 FORM 10-Q (Mark One)x
QUARTERLY
  REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
  SECURITIES EXCHANGE ACT OF 1934For the
  quarter ended March 31, 2008ORo
TRANSITION
  REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
  SECURITIES EXCHANGE ACT OF 1934Or 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.
  Employerincorporation
  or organization)

Identification
  No.) 6464 185th Ave NE, Suite 101, 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 o Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer or a smaller reporting company. See definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule
12b-2 of the Exchange Act. Large
  accelerated filer o
Accelerated
  filer o
Non-accelerated
  filer o
Smaller
  reporting company x Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No
x 8,809,989 shares of no par value of the Registrants Common
Stock were
issued and outstanding as of May 8, 2008. 1    DATA I/O CORPORATION

FORM 10-Q
For the Quarter Ended March 31, 2008

INDEX

PagePart I - Financial InformationItem 1.

Financial
  Statements (unaudited)

3Item 2.

Managements
  Discussion and Analysis of Financial Condition and Results of Operations

12Item 3.

Quantitative
  and Qualitative Disclosures About Market Risk

17Item 4.

Controls and
  Procedures

17Part II - Other InformationItem 1.

Legal
  Proceedings

18Item 1A.

Risk Factors

18Item 2.

Changes in
  Securities and Use of Proceeds

18Item 3.

Defaults
  Upon Senior Securities

18Item 4.

Submission
  of Matters to a Vote of Security Holders

18Item 5.

Other
  Information

19Item 6.

Exhibits

19Signatures



232

PART I - FINANCIAL INFORMATION

Item 1.
Financial StatementsDATA I/O CORPORATION

CONSOLIDATED BALANCE SHEETS

Mar.
  31,
  2008


Dec.
  31,
  2007(in thousands, except share data)

(unaudited)ASSETSCURRENT ASSETS:Cash and cash
equivalents

$
9,962

$
7,637Trade accounts
receivable, less allowance for doubtful accounts of
  $142 and $130


5,945


5,299Inventories


5,249


4,980Other current
assets


295


323TOTAL CURRENT
ASSETS


21,451


18,239Property and equipment -
net


2,242


2,257Other assets


125


124TOTAL
ASSETS

$
23,818

$
20,620LIABILITIES AND
STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts
payable

$
1,163

$
1,204Accrued
compensation


1,129


1,025Deferred
revenue


1,788


1,715Other accrued
liabilities


1,221


1,104Accrued costs
of business restructuring


2


8Income taxes
payable


34


3Notes
payable


120


118TOTAL CURRENT
LIABILITIES


5,457


5,177Long-term other
payables


15


20Long-term debt


308


337COMMITMENTS





STOCKHOLDERS
EQUITY:Preferred
stock -Authorized, 5,000,000 shares, including 200,000
  shares of Series A Junior ParticipatingIssued and outstanding, none





Common stock,
at stated value -Authorized, 30,000,000 sharesIssued
  and outstanding, 8,786,211and 8,765,767 shares


20,857


20,724Accumulated
deficit


(3,787
)

(6,429
)Accumulated
other comprehensive income


968


791TOTAL
STOCKHOLDERS EQUITY


18,038


15,086TOTAL
LIABILITIES AND STOCKHOLDERS EQUITY

$
23,818

$
20,620See accompanying notes to consolidated
financial statements.

3

DATA I/O CORPORATION

CONSOLIDATED STATEMENTS OF
OPERATIONS(UNAUDITED)

For the three months ended


Mar.
 31,
 2008




Mar.
 31,
 2007(in thousands, except per share data)Net sales


$
6,188




$
6,028Cost of goods sold



2,427





2,708Gross margin



3,761





3,320Operating expenses:Research and
development



1,099





1,370Selling,
general and administrative



2,027





2,538Provision for
business restructure



9





201Total operating
expenses



3,135





4,109Operating
income (loss)



626





(789
)Non-operating income
 (expense):Interest
income



40





22Interest
expense



(8
)




(10
)Gain on
sale



2,115





Foreign
currency exchange



(99
)




(2
)Total
non-operating income (expense)



2,048





10Income (loss) before
 income taxes



2,674





(779
)Income tax expense



32





6Net income (loss)


$
2,642




($
785
)Basic earnings per share


$
0.30




($
0.09
)Diluted earnings per share


$
0.29




($
0.09
)Weighted average shares
 outstanding - basic



8,774





8,491Weighted average and
 potential shares outstanding - diluted



9,033





8,491See accompanying notes to consolidated
financial statements.

4

DATA I/O CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS(UNAUDITED)

  For
          the three months ended
      
      
      Mar.
          31,
          2008
      
      
      
      Mar.
          31,
          2007(in
          thousands)OPERATING
          ACTIVITIES:
      
      
      $
      2,642
      
      
      
      ($
      785
      )Net
          income (loss)Adjustments
          to reconcile net income to net cash provided by (used in) operating
          activities:Depreciation
          and amortization
      
      
      
      98
      
      
      
      
      288Write-off
          of property, plant and equipment
      
      
      
      
      
      
      
      
      1Gain
          on sale of patent
      
      
      
      (2,115
      )
      
      
      
      Equipment
          transferred to cost of goods sold
      
      
      
      105
      
      
      
      
      20Share-based
          compensation
      
      
      
      94
      
      
      
      
      83Net
          change in:Deferred
          revenue
      
      
      
      124
      
      
      
      
      268Trade
          accounts receivable
      
      
      
      (503
      )
      
      
      
      1,562Inventories
      
      
      
      (206
      )
      
      
      
      (201
      )Other
          current assets
      
      
      
      34
      
      
      
      
      75Accrued
          costs of business restructuring
      
      
      
      (6
      )
      
      
      
      200Accounts
          payable and accrued liabilities
      
      
      
      265
      
      
      
      
      (262
      )Net
          cash provided by (used in) operating activities
      
      
      
      532
      
      
      
      
      1,249INVESTING
          ACTIVITIES:Purchases
          of property and equipment
      
      
      
      (43
      )
      
      
      
      (303
      )Net
          proceeds from sale of patent
      
      
      
      2,115
      
      
      
      
      Net
          cash provided by (used in) investing activities
      
      
      
      2,072
      
      
      
      
      (303
      )FINANCING
          ACTIVITIES:Proceeds
          from issuance of common stock
      
      
      
      39
      
      
      
      
      62Payment
          of capital lease obligation
      
      
      
      (27
      )
      
      
      
      (25
      )Net
          cash provided by (used in) financing activities
      
      
      
      12
      
      
      
      
      37Increase/(decrease)
          in cash and cash equivalents
      
      
      
      2,616
      
      
      
      
      983Effects
          of exchange rate changes on cash
      
      
      
      (291
      )
      
      
      
      (70
      )Cash
          and cash equivalents at beginning of year
      
      
      
      7,637
      
      
      
      
      2,478Cash
          and cash equivalents at end of quarter
      
      
      $
      9,962
      
      
      
      $
      3,391See accompanying notes to consolidated financial
statements.

5

DATA I/O CORPORATIONNOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(UNAUDITED)



NOTE 1 - FINANCIAL STATEMENT PREPARATION

Data I/O prepared the
financial statements as of March 31, 2008 and 2007, 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,
2007 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 three months ended March
31, 2008 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2008. 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, 2007.

Revenue
Recognition

Data I/O recognizes revenue
at the time of shipment. When arrangements include multiple elements, we use
objective evidence of fair value to allocate revenue to the elements pursuant
to EITF 00-21, Revenue Arrangements with Multiple Deliverables, and recognize
revenue when the criteria for revenue recognition have been met for each
element according to SAB 104, Revenue Recognition. The amount of revenue
recognized is affected by our judgments as to the collectibility of the
transaction or whether an arrangement includes multiple elements and if so,
whether specific objective evidence of fair value exists for those elements.

Installation that is
considered perfunctory includes any installation that can be performed by other
parties, such as distributors, other vendors, or in most cases the customers
themselves. This takes into account the complexity, skill, and training needed
as well as customer expectations regarding installation. The revenue related to
products requiring installation that is perfunctory is recognized at the time
of shipment provided that persuasive evidence of an arrangement exists,
shipment has occurred, the price is fixed or determinable, and collectibility
is reasonably assured. We measure the standalone fair value of the product versus
the service installation value component by the amount paid to independent
representative service groups or the amount of additional discount given to
independent distributors to provide the service installation.

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. We have a stated return policy that
customers can return standard products for any reason within 30 days after
delivery, provided that the returned product is received in its original
condition, including all packaging materials, for a refund of the price paid
less a restocking charge of 30% of the total amount invoiced for the product
returned, unless such restocking charge is waived in writing by Data I/O.

Data I/Os software products
are not normally sold separately from sales of programming systems. However, on
those occasions where we sell software separately, we recognize revenue when a
sales agreement exists, when delivery has occurred, when the fee is fixed or
determinable, and when collection is probable.

Stock-Based
Compensation Expense

On January 1, 2006, the
Company adopted Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based Payment, (SFAS 123(R)) and the Securities and Exchange
Commission issued Staff Accounting Bulleting No. 107 (SAB 107) requiring the
measurement and recognition of compensation expense for all share-based payment
awards, including employee stock options, stock awards, and employee stock
purchases, based on estimated fair values on the grant dates. The Company
adopted SFAS 123(R) using the modified prospective method, which required the
application of the accounting standard as of January 1, 2006. Total share-based
compensation for the three months ended March 31, 2008 and 2007 was $94,000 and
$83,000, respectively.

Income
Tax

The Company adopted the
Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes(FIN
48) on January 1, 2007. FIN 48 clarifies the accounting and disclosure for
uncertainty in income taxes by prescribing the minimum recognition threshold a
tax position is required to meet before being recognized in the financial
statements. It also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting for interim

6

periods, disclosure and
transition, and clearly scopes income taxes out of Financial Accounting
Standards Board Statement No. 5, Accounting
for Contingencies.

Historically, the Company
has not incurred any interest or penalties associated with tax matters and no
interest or penalties were recognized during the three months ended March 31,
2008. However, the Company has adopted a policy whereby amounts related to
interest and penalties associated with tax matters are classified as general
and administrative expense when incurred.

The Company has incurred net
operating losses in certain past years. The Company continues to maintain a
valuation allowance for the full amount of the net deferred tax asset balance
associated with its net operating losses as sufficient uncertainty exists
regarding its ability to realize such tax assets in the future. There was
$66,000 of unrecognized tax benefits related to uncertain tax positions as of
March 31, 2008. The Company expects the amount of the net deferred tax asset
balance and full valuation allowance in future periods to decrease if we have
future net income or increase if we incur future net operating losses.

Tax years that remain open
for examination include 2004, 2005, 2006, and 2007 in the United States of America.
In addition, tax years from 1999 to 2003 may be subject to examination in the
event that the Company utilizes the NOLs or other carry forwards from those
years in its current or future year tax return.

Recent
Accounting Pronouncements

In September 2006, the FASB
issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair
Value Measurements, which establishes guidelines for measuring fair value and
expands disclosures regarding fair value measurements. SFAS No. 157 does not
require any new fair value measurements but rather it eliminates
inconsistencies in the guidance found in various prior accounting
pronouncements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. Earlier adoption is encouraged, provided the company has not
yet issued financial statements, including for interim periods, for that fiscal
year. The implementation of this standard did not have a material impact on our
consolidated financial statements.

In February 2007, the FASB
issued Statement 159, The Fair Value Option for Financial Assets and Financial
Liabilities. This Statement permits entities to elect to measure certain
financial instruments and other items at fair value through earnings. The fair
value option may be applied on an instrument by instrument basis, is
irrevocable and is applied only to entire instruments. SFAS 159 requires
additional financial statement presentation and disclosure requirements for
those entities that elect to adopt the standard and is effective for fiscal
years beginning after November 15, 2007. The implementation of this standard
relating to the assets and liabilities carried at fair value on a recurring
basis did not have a material impact on our consolidated financial statements.

In December 2007, the FASB
issued Statement No. 141(Revised 2007), Business
Combinations(Statement. No. 141R), which establishes principles
and requirements for the reporting entity in a business combination, including
recognition and measurement in the financial statements of the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest in
the acquiree. This statement also establishes disclosure requirements to enable
financial statement users to evaluate the nature and financial effects of the
business combination. Statement No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008, and
interim periods within those fiscal years. We have not yet evaluated the effect
the adoption of Statement No. 141R could have on our consolidated financial
statements, if any.

NOTE 2 - RECLASSIFICATIONS

Certain prior period
balances may have been reclassified to conform to the presentation used in the
current period.

NOTE 3 - INVENTORIES

Inventories consisted of the
following components (in thousands):

Mar.
 31,
 2008

Dec.
 31,
 2007Raw material


$
2,994



$
3,047Work-in-process



1,200




1,125Finished goods



1,055




808Inventories


$
5,249



$
4,9807

NOTE 4  PROPERTY AND EQUIPMENT, NET

Property and
equipment consisted of the following components (in thousands):

Mar. 31,
2008



Dec. 31,
2007Leasehold
 improvements


$
391


$
389Equipment



9,056



8,8539,447



9,242Less
 accumulated depreciation



7,205



6,985Property and
 equipment - net


$
2,242


$
2,257NOTE 5  BUSINESS RESTRUCTURING

During 2007, we continued our
restructuring activities during the first and second quarters, to further
improve our operating results and the effectiveness of our sales and marketing
organization and sales channels. During the first quarter of 2007, we recorded
restructuring charges of approximately $200,000 primarily related to severance
charges. During the second quarter of 2007, we recorded an additional $632,000
of restructuring charges. These actions included re-engineering some internal
processes, integrating some activities, transferring some activities to our
lower cost base of operations in China, reducing resources applied to declining
legacy products, moving some engineering positions to production, reducing the
number of taxable entities, outsourcing some functions such as payroll,
combining some positions, eliminating some functions, and shifting some
responsibilities and resources to our channels. During the third quarter of
2007, we recorded a net expense reversal of $107,000 comprised of $54,000 of
additional expense, primarily relating to facilities, and a reversal of
$161,000 of previously accrued severance primarily because certain employees
who had been scheduled for termination had their termination notice rescinded.
At March 31, 2008, $2,000 remains accrued and is expected to be paid out during
the next quarter.

An analysis of
the restructuring is as follows (in thousands):

  Description
      
      Reserve
          Balance
          12/31/06
      
      2007
          Expenses
      
      2007
          Payments/
          Write-offs
      
      Reserve
          Balance
          12/31/07
      
      2008
          Expenses
      
      2008
          Payments/
          Write-offs
      
      Reserve
          Balance
          3/31/08Downsizing
          US operations:Employee
          severance
      
      $ 2
      
      $ 411
      
      $ 413
      
      $ 
      
      $ 9
      
      $  9
      
      $ Facility
          & other costs
      
      
      
      5
      
      5
      
      
      
      
      
      
      
      Downsizing
          foreign operations:Employee
          severance
      
      
      
      204
      
      199
      
      5
      
      
      
      5
      
      Facility
          & other costs
      
      
      
      105
      
      102
      
      3
      
      
      
      1
      
      2Total
      
      $ 2
      
      $ 725
      
      $ 719
      
      $   8
      
      $ 9
      
      $ 15
      
      $   2NOTE 6  OTHER ACCRUED LIABILITIES

Other accrued
liabilities consisted of the following components (in thousands):

Mar. 31,
2008


Dec. 31,
2007Product
 warranty liability


$
408


$
401Sales return
 reserve



158



158Accrued rent



181



187Other taxes



108



65Other



366



293Other
 accrued liabilities


$
1,221


$
1,1048

The changes in
Data I/Os product warranty liability are as follows (in thousands):

Mar. 31, 2008Liability,
 beginning balance

$
401Net expenses


173Warranty
 claims


(173
)Accrual
 revisions


7Liability,
 ending balance

$
408NOTE 7  OPERATING LEASE AND OTHER
COMMITMENTS

Data I/O has
purchase obligations for inventory and production costs as well as other obligations
such as capital expenditures, service contracts, marketing, and development
agreements. Arrangements are considered purchase obligations if a contract
specifies all significant terms, including fixed or minimum quantities to be
purchased, a pricing structure and approximate timing of the transaction. Most
arrangements are cancelable without a significant penalty, and with short
notice, typically less than 90 days. At March 31, 2008, the purchase and other
obligations totaled $630,000. Any amounts reflected on the balance sheet as
accounts payable, accrued liabilities, and notes payable are excluded from the
below table. Data I/O has commitments under non-cancelable operating leases and
other agreements, primarily for factory and office space, with initial or
remaining terms of one year or more as follows:

Future annual lease payments at March 31, 2008 (in thousands):

Operating
leases2009


$
1,1812010



9152011



8622012



142Total


$
3,100NOTE 8  CONTINGENCIES

As of March
31, 2008, Data I/O was not a party to any legal proceedings, the adverse
outcome of which in managements opinion, individually or in the aggregate,
would have a material adverse effect on our results of operations or financial
position except as described below.

On January 22,
2008, our former landlord, (now known as Rowley Properties, Inc.), filed a
Complaint in the Superior Court of Washington for King County (No. 08-2-03518-2
SEA) against Data I/O, Robert/Barbara Hiester and Steven/Jane Doe Hiester. The
claims against Data I/O include breach of agreement, waste, and an
environmental remediation claim for contribution under RCW 70.105D.080. No
claim amount is specified in the Complaint. The claims relate to a former circuit
board fabrication business that Data I/O operated from 1978 to October 1988. We
sold that business to Circuit Partners whose officers and principal
shareholders were Robert and Barbara Heister. As stated in Data I/Os 1988
10-K: An environmental and regulatory compliance audit was performed prior to
the sale, per the guidelines of the Comprehensive Environmental Response
Compensation and Liability Ace (Cercla/Superfund) Section 107. Audit results
indicated no heavy metals or volatile organics in excess of existing or
proposed Washington State or federal remedial action levels. We are in the
very early stages of investigating and responding to this claim and have
engaged counsel to represent us on this matter. We filed an Answer to the
Complaint on March 12, 2008. At this time, we are not able to determine the
probable outcome of this legal proceeding or if it will have an adverse effect
on the results of operations or financial position of Data I/O. We intend to
defend this claim vigorously and are in the process of determining the
insurance coverage for this claim.

9

NOTE 9  LONG-TERM DEBT

On September
27, 2006, the Company entered into a five year capital lease agreement in the
amount of $591,145. The imputed interest rate is 7.69%.

At March 31, 2008
scheduled maturities of the capital lease obligation for the years ending
December 31 are as follows (in thousands):

2008

1052009

1402010

1402011

106Total
 minimum lease payments

491Less: Amount
 representing interest

(63
)Present
 value of capital lease obligation

428Current
 portion long-term debt

(120
)Non-current
 portion long-term debt

$     308NOTE 10  EARNINGS (LOSS) PER SHARE

Basic earnings
(loss) per share is calculated based on the weighted average number of common
shares outstanding during each period. Diluted earnings per share is calculated
based on these same weighted average shares outstanding plus the effect of
potential shares issuable upon assumed exercise of stock options based on the
treasury stock method. Potential shares issuable upon the exercise of stock
options are excluded from the calculation of diluted earnings per share to the
extent their effect would be antidilutive.

The following
table sets forth the computation of basic and diluted earnings per share (in
thousands, except per share data):

Three Months Ended 
Mar. 31,2008


2007Numerator for basic and diluted
earnings
 per share:Net income
(loss)

$
2,642


($
785
)Denominator:Denominator for
basic earnings per share
 - weighted-average shares


8,774



8,491Employee stock
options


259



Denominator for
diluted earnings per share
 - adjusted weighted-average shares and assumed conversions of stock options


9,033



8,491Total basic
earnings (loss) per share

$
0.30


($
0.09
)Total diluted
earnings (loss) per share

$
0.29


($
0.09
)The computation
for the three months ended March 31, 2008 and March 31, 2007 excludes 246,923
and 1,025,960 options, respectively, to purchase common stock as their effect
is anitdilutive.

10

NOTE 11  SHARE-BASED COMPENSATION

The impact on
our results of operations of recording share-based compensation for the three
month period ended March 31, 2008 and March 31, 2007 are as follows (in
thousands):

Three Months Ended
Mar. 31,2008

2007Cost of
 goods sold

$
5

$
5Research and
 development


12


12Selling,
 general and administrative


77


66Total
 share-based compensation

$
94

$
83Impact on
 net income (loss) per share:

$
0.01

$
0.01Basic and
 dilutedThe fair value
of share-based awards for employee stock options is estimated using the
Black-Scholes valuation model. The volatility and expected life of the option
used in calculating the fair value of share-based awards excludes certain
periods of historical data that we considered atypical and not likely or rare
to occur in future periods.

NOTE 12  COMPREHENSIVE INCOME (LOSS)

During the
first quarter of 2008 and 2007 total comprehensive income (loss) was comprised
of the following (in thousands):

Three Months Ended
Mar. 31,2008

2007Net income
 (loss)

$
2,642


($785
)Foreign
 currency translation loss


177


24Total
 comprehensive income (loss)

$
2,819


($761
)NOTE 13  PATENT SALE

On March 18,
2008, the Company completed the sale of selected patents and patent
applications to Leannoux Properties AG L.L.C. Net proceeds were approximately
$3.3 million with a net gain of approximately $2.1 million.

NOTE 14  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
our credit translation adjustments resulting from this process to other
comprehensive income (a component of 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.

11

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. At March 31, 2008, we
had a notional value of approximately $567,958 in four foreign exchange
contracts outstanding. We recorded the estimated loss in fair value as a
non-operating expense and a liability of approximately $14,000. The Euro rates
range from 1.5285 to 1.5580, all scheduled to be due within the next quarter
and the value at that date of $566,337.

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 OperationsGeneral

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 revenues; expected
level of expense; future results of operations, restructuring implications;
breakeven point, 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; 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 above and in the
section in Item 1A. Risk Factors Cautionary Factors That May Affect Future
Results in the Companys Annual report on Form 10-K for the year ended
December 31, 2007 describe some, but not all, of the factors that could cause
these differences.

OVERVIEW

Our primary
goal is to manage the business to achieve profitable operations, while
developing and enhancing products to drive revenue and earnings growth. Our challenge
continues to be operating in a seasonal, cyclical, and challenging industry
environment, while positioning Data I/O to take advantage of any growth in
capital spending and growth in market segments, as well as any opportunities to
improve programming processes or performance. We saw a downturn in capital
spending during the first six months of 2007, but saw a recovery in capital
spending during the second half of 2007. In 2008, we experienced a typical
seasonally weak first quarter for orders, but have seen strong orders so far in
the second quarter of 2008. We anticipate that demand for programming capacity
may continue to improve in 2008, in part based on third party forecasted
increased 2008 capacity for certain manufacturing segments, and market growth
for the flash market, and for certain target customer segments. Tempering this
view is the current economic uncertainty regarding forecast business in certain
geographic and customer segments.

Following our
losses during the first two quarters of 2007, we decided to take additional
expense reductions to lower our expected quarterly revenue breakeven point to
below $5.3 million when fully implemented during 2007. During the fourth
quarter of 2007, we successfully completed these actions consisting of a
combination of margin improvements and expense reductions. We have taken
actions to improve the effectiveness of our sales and marketing organization.
We have reduced expenses by reducing personnel costs, re-engineering some
internal processes, and transferring some activities to our lower cost base of
operations in China. During the first quarter of 2008, we confirmed the target
business model of our restructuring actions by achieving our calculated
quarterly revenue breakeven point of below $5.3 million.

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, and automated programming systems for the manufacturing
environment, particularly the new FLX500 desktop automated programming system,
and extending the capabilities and support for our FlashCORE architecture and
the

12

ProLINE-RoadRunner
and PS families. We are also continuing to implement our new applications
innovation strategy. This strategy provides complete solutions to target
customers business problems. These solutions will expand beyond what we have
considered as products in the past. These solutions will have a larger software
element, may involve third-party components, and in many cases, will be
developed to address a specific customers requirements. We believe by adding
these features to our strategic product platforms, we will be able to set
ourselves apart from other product suppliers and elevate our relationships with
our customers.

Our customer focus has been on strategic high
volume manufacturers in key market segments - wireless, automotive, industrial
controls and programming centers - supporting NAND Flash and microcontrollers
on our newer products to gain new accounts and to break into new markets, such
as microcontrollers for the automotive market. We continue to address the
effectiveness of our sales and marketing organization and sales channels. With
the sales decline we experienced in the first half of 2007 in China, we
recognized the need to diversify our customer base there and are taking steps
to broaden our channels of distribution in China to reach a greater number of
customers. This decision, made at the end of the first quarter of 2007,
included the elimination of some China direct selling expenses and increased
use of agents that have established relationships with the desired customers.
We have also added additional Asian sales channel management to drive Asia
sales and manage this important region. During the first quarter of 2008, we
added three new channels and expect that we will continue to add sales channels
throughout the year to provide greater and more effective sales coverage
globally. We continue our efforts to partner with the semiconductor
manufacturers to better serve our mutual customers and members of the Preferred
Partnership Program. The Preferred Partnership Program formalizes our mutual
support relationship and is designed to increase collaboration between the semi
conductor vendor and Data I/O to better serve customers.

On March 18,
2008, the Company completed the sale of selected patents and patent
applications to Leannoux Properties AG L.L.C. Net proceeds were approximately
$3.3 million with a net gain of approximately $2.1 million.

BUSINESS RESTRUCTURING

In 2007, we
continued our restructuring activities in view of the declining revenues and
gross margins during the first and second quarters of 2007, to further improve
our operating results and our effectiveness of the sales and marketing
organization and sales channels. During the first quarter of 2007, we recorded
restructuring charges of approximately $200,000 primarily related to severance
charges. During the second quarter of 2007, we recorded an additional $632,000
of restructuring charges. These actions included reengineering some internal
processes, integration of some activities, transferring some activities to our
lower cost base of operations in China, reducing resources applied to declining
legacy products, moving some engineering positions to production, reducing the
number of taxable entities, outsourcing some functions such as payroll,
combining some positions, eliminating some functions, and shifting some
responsibilities and resources to our channels. During the third quarter of
2007, we recorded a net expense reversal of $107,000 comprised of $54,000 of
additional expense, primarily relating to facilities, and a reversal of
$161,000 of previously accrued severance primarily due to certain employees who
had been scheduled for termination had their termination notice rescinded. At
March 31, 2008, we have completed the previously planned restructuring actions
and only $2,000 remains accrued and is expected to be paid out during the next
quarter.

13

CRITICAL
ACCOUNTING POLICY JUDGMENTS AND ESTIMATES

The Companys critical
accounting policies are disclosed in the Companys Form 10-K for the year ended
December 31, 2007 and have not materially changed as of March 31, 2008.

Results of Operations

NET SALES(in
 thousands)First
 QuarterNet sales by product line

2008

%
 Change
2007Automated programming
 systems

$
3,528


2.1
%
$
3,455Non-automated programming
 systems


2,660


3.4
%

2,573Total programming systems

$
6,188


2.7
%
$
6,028First
 QuarterNet sales by location

2008

%
 Change
2007United States

$
969


(27.7
%)
$
1,340% of
total


15.7
%




22.2
%International

$
5,219


11.3
%
$
4,688% of
total


84.3
%




77.8
%The revenue increase for the
first quarter of 2008 compared to the first quarter of 2007 is primarily due to
higher sales of our ProLINE-RoadRunner, FLX500, FlashPAK and adapter products.
In particular, we achieved our highest sales ever of our FLX500 system which
included additional orders from a large handset manufacturer for our Flash
Media Duplications solution built on the FLX500 platform. Sales were favorably
impacted by a higher percentage of sales that were taken as direct sales versus
indirect sales that include certain channel discounts. Offsetting these
increases in part was a decrease in our PS Series, reflecting a decline in
sales to programming centers. Also, the continuing trend of decreased sales of
our legacy, older non-automated product lines occurred during the first
quarter of 2008 compared to the first quarter in 2007. Orders booked during the
first quarter of 2008 decreased approximately 5% from the first quarter of
2007, which management believes was due to certain customers delaying placing
expected large orders. Because we received a number of these large orders just
after quarter end, we are starting off the second quarter with strong orders
totaling more than $2.5 million through April 23, 2008, as stated in our first
quarter earnings release. The backlog of orders totaled $1.5 million at the end
of the first quarter of 2008, a slight decrease compared with the backlog
amount at March 31, 2007.

During the first quarter of
2008, sales in the United States decreased approximately 28% compared to the
same period in 2007, reflecting what we believe to be a continued shift to
international markets of manufacturing capacity related demand and continued
decline of sales of legacy product related business. International sales for
the first quarter of 2008 increased by approximately 11% compared to the same
period in 2007 primarily due to a 22% increase in sales in Asia, particularly
in China. Order bookings increased approximately 61% in Asia in the first
quarter of 2008 compared to the same period in 2007. This success we are
experiencing in Asia provides confirmation that the changes we made during 2007
to our Asian channels and management are proving effective. During the first
quarter of 2008, we added three new sales channels and expect to add additional
sales channels throughout the year to provide greater and more effective sales
globally.

As noted above, FLX500 sales
were particularly strong during the first quarter and we expect that momentum
to continue. We also are increasing our emphasis on automotive electronics
accounts. This business is tied to increasing functionality across all models
independent of overall production and annual model changes. We are developing
new solutions for this sector that will be introduced this year and believe
that this business should grow for us in 2008.

14

GROSS MARGIN

First
 Quarter(in thousands)

2008




2007Gross Margin

$
3,761


13.3%

$
3,320Percentage of net sales


60.8
%




55.1
%Gross margins during the
first quarter of 2008 increased in both dollars and as a percentage of sales
compared to the first quarter of 2007. The overall gross margin increase in
dollars and as a percentage of sales was primarily due to the favorable product
and channel mix of approximately $176,000, as well as operations variances. The
overall gross margin percentage increase also relates to restructuring actions
taken during 2007 which lowered factory costs and provided savings from
transferring our adapter production to China. We also increased prices on
certain products where we had demonstrated substantial improvements in customer
value and increased sales of our support contracts. We had favorable operations
variances compared to the first quarter of 2007 of approximately $211,000
including reduced scrap and material usage; more depreciated cost on used
system sales; and more favorable standard cost purchase price variances.
Partially offsetting the favorable operations variance comparisons were higher
inventory charges by $20,000, as well as higher freight, and euro denominated
costs. We expect to continue to focus on achieving our 60% target gross margin
and improving our inventory investment turnover through a focused initiative on
improving factory controls and operating ratios.

RESEARCH
AND DEVELOPMENT

First
 Quarter(in thousands)

2008




2007Research and development

$
1,099




$
1,370Percentage of net sales


17.8
%




22.7
%Research and development
(R&D) spending for the first quarter of 2008 compared to the first
quarter of 2007 decreased by approximately $270,000 primarily due to the
restructure actions and the re-engineering of internal processes. R&D as a
percentage of net sales decreased in part due to the increase in sales for the
first quarter of 2008. We expect that R&D should moderate as a percentage
of sales with expected increases in revenues as the development of new
platforms are completed and the engineering focus moves from significant
platform development to product and application enhancements and extensions as
part of our application innovation focus.

SELLING,
GENERAL AND ADMINISTRATIVE

First
 Quarter(in thousands)

2008




2007Selling, general &
 administrative

$
2,027




$
2,538Percentage of net sales


32.8
%




42.1
%Selling, general and
administrative (SG&A) expenses decreased approximately $510,000 for the
first quarter of 2008 compared to the first quarter of 2007 due primarily to a
decrease in net personnel costs of approximately $345,000 related to the 2007
restructure. We also experienced decreased professional service costs of
approximately $86,000 and decreased marketing costs of approximately $76,000.
Offsetting these decreased amounts was an increase of approximately $100,000 of
higher bonus expense.

15

INTEREST

First
 Quarter(in thousands)

2008




2007Interest income

$
40




$
22Interest expense

($
8
)



($
10
)Interest income increased
during the first quarter of 2008 compared to the same period in 2007 due to the
increase in cash balance from the patent sale and from cash collected from a
distributor and increased amounts invested during the quarter. Interest expense
decreased in the first quarter of 2008 compared to the same period in 2007 due
to the lower balance on the equipment capital lease.

INCOME
TAXES

First
 Quarter(in thousands)

2008




2007Income tax expense
 (benefit)

$
32




$
6Income tax expense recorded
for the first quarter of 2008 and 2007 resulted from foreign and state taxes.
The tax effective rate differed from the statutory tax rate primarily due to
the effect of valuation allowances and state taxes. Data I/O has a valuation
allowance of $8,811,000 as of March 31, 2008. Our deferred tax assets and
valuation allowance were reduced by $66,000 associated with the requirements of
FIN 48 accounting for uncertain tax positions.

Financial Condition

LIQUIDITY
AND CAPITAL RESOURCES

(in
thousands)

Mar.
 31,
 2008

Change

Dec.
 31,
 2007Working
capital

$
15,994

$
2,932

$
13,062At March 31, 2008, Data
I/Os principal sources of liquidity consisted of existing cash and cash
equivalents. Our working capital increased by $2,932,000 from December 31, 2007
and our current ratio increased from 3.5 at December 31, 2007 to 3.9 at March
31, 2008.

Our cash and cash
equivalents increased by approximately $2 million during the three months ended
March 31, 2008 primarily due to the cash received in association with the
patent sale and a gain of approximately $2.1 million. Cash provided by
operations primarily included a $500,000 increase in accounts receivable due to
late sales during the quarter. Cash provided by operations also included a
$200,000 increase in inventory.

We expect that we will
continue to make capital expenditures to support our business and we anticipate
that present working capital will be sufficient to meet our operating
requirements throughout at least the next twelve months. Capital expenditures
are expected to be funded by existing and internally generated funds or lease
financing.

As a result of our
significant product development, customer support, international expansion and
selling and marketing efforts, we have required substantial working capital to
fund our operations. Over the last few years, we restructured our operations to
lower our costs and operating expenditures in some geographic regions, while
investing in other regions, and to lower the level of revenue required for our
net income breakeven point, to preserve our cash position and to focus on
profitable operations. We believe that we have sufficient working capital
available under our operating plan to fund our operations and capital
requirements through at least the next one year period. Any substantial
inability to achieve our current business plan could have a material adverse
impact on our financial position, liquidity, or results of operations and may
require us to reduce expenditures and/or seek additional financing.

16

LONG-TERM
DEBT

(in thousands)

Mar. 31,
  2008

Change

Dec. 31,
  2007Long-term debt


$
308



($
29
)


$
337During the third quarter of
2006, the Company entered into a five year capital lease agreement in the
amount of $591,145. The lease was used to fund new equipment and installation
associated with our move to the new facility in July of 2006. See Note 9,
Long-Term Debt.

OFF-BALANCE SHEET ARRANGEMENTS

Except as noted above in
Note 7, Operating Lease and Other Commitments, Data I/O had no off-balance
sheet arrangements.

RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB
issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair
Value Measurements, which establishes guidelines for measuring fair value and
expands disclosures regarding fair value measurements. SFAS No. 157 does not
require any new fair value measurements but rather it eliminates
inconsistencies in the guidance found in various prior accounting
pronouncements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. Earlier adoption is encouraged, provided the company has not
yet issued financial statements, including for interim periods, for that fiscal
year. The implementation of this standard did not have a material impact on our
consolidated financial statements.

In February 2007, the FASB
issued Statement 159, The Fair Value Option for Financial Assets and Financial
Liabilities. This Statement permits entities to elect to measure certain
financial instruments and other items at fair value through earnings. The fair
value option may be applied on an instrument by instrument basis, is
irrevocable and is applied only to entire instruments. SFAS 159 requires additional
financial statement presentation and disclosure requirements for those entities
that elect to adopt the standard and is effective for fiscal years beginning
after November 15, 2007. The implementation of this standard relating to the
assets and liabilities carried at fair value on a recurring basis did not have
a material impact on our consolidated financial statements.

In December 2007, the FASB
issued Statement No. 141(Revised 2007), Business
Combinations(Statement. No. 141R), which establishes principles
and requirements for the reporting entity in a business combination, including
recognition and measurement in the financial statements of the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest in
the acquiree. This statement also establishes disclosure requirements to enable
financial statement users to evaluate the nature and financial effects of the
business combination. Statement No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008, and
interim periods within those fiscal years. We have not yet evaluated the effect
the adoption of Statement No. 141R could have on our consolidated financial
statements, if any.

Item 3.
Quantitative and Qualitative Disclosures About Market RiskNot applicable.

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 at the reasonable level of assurance level. Disclosure Controls are
controls and procedures designed to reasonably assure that information required
to be disclosed in our reports filed under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the SECs rules
and forms. Disclosure Controls are also designed to reasonably assure that such
information is accumulated and communicated to our management, including the
CEO and CFO, as appropriate to allow timely decisions regarding required
disclosure.

17

This annual report does not
include an attestation report of the companys registered public accounting
firm regarding internal control over financial reporting. Managements report
was not subject to attestation by the companys registered public accounting
firm pursuant to temporary rules of the Securities and Exchange Commission that
permit the company to provide only managements report in this annual report.

(b) Changes in internal
controls.

There were no changes made
in our internal controls during the period covered by this report that has
materially affected or is reasonably likely to materially affect our internal
control over financial reporting.

Our restructuring actions
decreased the number of personnel and reallocated tasks. We did not change our
internal controls, however, these restructure actions may have an impact on our
internal controls operation which we will continue to monitor and evaluate.

PART II - OTHER INFORMATION

Item 1.
Legal ProceedingsAs of March 31, 2008, Data
I/O was not a party to any legal proceedings, the adverse outcome of which in
managements opinion, individually or in the aggregate, would have a material
adverse effect on our results of operations or financial position except as
described below.

On January 22, 2008, our
former landlord, (now known as Rowley Properties, Inc.), filed a Complaint in
the Superior Court of Washington for King County (No. 08-2-03518-2 SEA) against
Data I/O, Robert/Barbara Hiester and Steven/Jane Doe Hiester. The claims
against Data I/O include breach of agreement, waste, and an environmental
remediation claim for contribution under RCW 70.105D.080. No claim amount is
specified in the Complaint. The claims relate to a former circuit board
fabrication business that Data I/O operated from 1978 to October 1988. We sold
that business to Circuit Partners whose officers and principal shareholders
were Robert and Barbara Heister. As stated in Data I/Os 1988 10-K: An
environmental and regulatory compliance audit was performed prior to the sale,
per the guidelines of the Comprehensive Environmental Response Compensation and
Liability Ace (Cercla/Superfund) Section 107. Audit results indicated no
heavy metals or volatile organics in excess of existing or proposed Washington
State or federal remedial action levels. We are in the very early stages of
investigating and responding to this claim and have engaged counsel to
represent us on this matter. We filed an Answer to the Complaint on March 12,
2008. At this time, we are not able to determine the probable outcome of this
legal proceeding or if it will have an adverse effect on the results of
operations or financial position of Data I/O. We intend to defend this claim vigorously
and are in the process of determining the insurance coverage for this claim.

Item 1A.
Risk FactorsIn addition to the other
information set forth in this report, you should carefully consider the factors
discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K
for the year ended December 31, 2007, which could materially affect our
business, financial condition or future results. The risks described in our
Annual Report on Form 10-K are not the only risks facing our Company.
Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or operating results. There are no material
changes to the Risk Factors described in our Annual Report.

Item 2.
Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
  SecuritiesNoneItem 3.
Defaults Upon Senior SecuritiesNoneItem 4.
Submission of Matters to a Vote of Security HoldersNone18

Item 5.
Other InformationNoneItem 6.
Exhibits(a)  ExhibitsThe 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 10.17.(2)
Amended and Restated
  Retirement Plan and Trust Agreement. See Exhibit 10.2, 10.3, 10.4, 10.8,
  10.11, 10.12, and 10.13.(3)
Summary of Amended and
  Restated Management Incentive Compensation Plan. See Exhibit 10.9.(4)
Amended and Restated 1983 Stock
  Appreciation Rights Plan. See Exhibit 10.1.(5)
Amended and Restated 1986
  Stock Option Plan. See Exhibit 10.15.(6)
Form of Change in Control
  Agreements. See Exhibit 10.21 and 10.22.(7)
1996 Director Fee Plan.
  See Exhibit 10.14.(8)
Letter Agreement with
  Frederick R. Hume. See Exhibit 10.16.(9)
Amended and Restated 2000
  Stock Compensation Incentive Plan. See Exhibit 10.18.(10)
Form of Option Agreement.
  See Exhibit 10.20.(11)
Data I/O Corporation Tax
  Deferral Retirement Plan. See Exhibit 10.19, 10.24, 10.32, and 10.33(12)
Harald Weigelt Employment
  Agreement. See Exhibit 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 February 2006 October 2003 (Incorporated by
  reference to Data I/Os 2005 Annual Report on Form 10-K (File No. 0-10394)).3.3
Certificate of
  Designation, Preferences and Rights of Series A Junior Participating
  Preferred Stock (Incorporated by reference to Exhibit A to Exhibit 1 of Data
  I/Os Registration Statement on Form 8-A filed April 4, 1988 (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 Mellon Shareholder
  Services, LLC (formerly 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).19

4.2
Rights Agreement, dated as
  of March 31, 1998, 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
  February 10, 1999, to Rights Agreement, dated as of April 4, 1998, between
  Data I/O Corporation and Mellon Investor Services LLC (formerly ChaseMellon
  Shareholder Services, L.L.C) as Rights Agent (Incorporated herein by
  reference to Exhibit 4.1 of Data I/Os Form 8-A/A dated February 10, 1999.4.4
Amendment No. 2 to Rights
  Agreement, dated as of April 3, 2008 between Data I/O Corporation and Mellon
  Investor Services LLC (ChaseMellon Shareholder Services, L.L.C.)
  (Incorporated by reference to Data I/Os Current Report on Form 8-K filed on
  April 4, 2008).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
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)).10.6
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)).10.7
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)).20

10.8
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)).10.9
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)).10.10
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)).10.11
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)).10.12
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)).10.13
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)).10.14
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)).10.15
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)).10.16
Letter Agreement with Fred
  R. Hume dated January 29, 1999 (Incorporated by reference to Exhibit 10.35 of
  Data I/Os 1999 Annual Report on Form 10-K (File No. 0-10394)).10.17
Amended and Restated 1982
  Employee Stock Purchase Plan dated May 16, 2003 (Incorporated by reference to
  Data I/Os 2003 Proxy Statement dated March 31, 2003).10.18
Amended and Restated 2000
  Stock Compensation Incentive Plan dated May 20, 2004 (Incorporated by
  reference to Data I/Os 2004 Proxy Statement dated April 12, 2004).10.19
Data I/O Corporation Tax
  Deferred Retirement Plan, as amended (Incorporated by reference to Exhibit
  10.20 of Data I/Os 2004 Annual Report on Form 10-K (File No. 0-10394)).10.20
Form of Option Agreement
  (Incorporated by reference to Exhibit 10.21 of Data I/Os 2004 Annual Report
  on Form 10-K (File No. 0-10394)).10.21
Change in Control
  Agreement with Fred R. Hume dated March 22, 2007 (Incorporated by reference
  to Data I/Os Current Report on Form 8-K filed on March 28, 2007).10.22
Change in Control
  Agreement with Joel S. Hatlen dated March 22, 2007 (Incorporated by reference
  to Data I/Os Current Report on Form 8-K filed on March 28, 2007).21

10.23
Harald Weigelt Employment
  Agreement (Incorporated by reference to Exhibit 10.23 of Data I/Os 2005
  Annual Report on Form 10K (File No. 0-10394)).10.24
Data I/O Corporation Tax
  Deferral Retirement Plan, as amended (Incorporated by reference to Exhibit
  10.24 of Data I/Os 2005 Annual Report on Form 10-K (File No. 0-10394)).10.25
Lease Termination
  Agreement dated February 28, 2006 (Redmond Headquarters) (Incorporated by
  reference to Exhibit 10.25 of Data I/Os 2005 Annual Report on Form 10-K
  (File No. 0-10394)).10.26
Lease, Redmond East
  Business Campus between Data I/O Corporation and Carr Redmond PLCC dated
  February 28, 2006 (Incorporated by reference to Exhibit 10.26 of Data I/Os
  2005 Annual Report on Form 10-K (File No. 0-10394)).10.27
Amended and Restated 2000
  Stock Compensation Incentive Plan dated May 24, 2006 (Incorporated by
  reference to Data I/Os 2006 Proxy Statement dated April 6, 2006).10.28
Form of Performance Award
  Agreement (incorporated by reference to Exhibit 10.28 of Data I/Os June 30,
  2006 Quarterly Report on Form 10-Q (File No. 0-10394)).10.29
Form of Restricted Stock
  Award Agreement (Incorporated by reference to Exhibit 10.29 of Data I/Os
  June 30, 2006 Quarterly Report on Form 10-Q (File No. 0-10394)).10.30
Patent Purchase Agreement
  (Incorporated by reference to Data I/Os Current Report on Form 8-K filed on
  March 25, 2008).10.31
First Amendment to the
  Patent Purchase Agreement (Incorporated by reference to Data I/Os Current
  Report on Form 8-K filed on March 25, 2008).10.32
Orchard Trust Company
  Defined Contribution Prototype Plan and Trust (Incorporated by reference to
  Exhibit 10.32 of Data I/Os 2007 Annual Report on Form 10K (File No.
  0-10394)).10.33
Orchard Trust Company
  Non-standardized 401(k) Plan (Incorporated by reference to Exhibit 10.33 of
  Data I/Os 2007 Annual Report on Form 10K (File No. 0-10394)).31
Certification
   Section 302:31.1
Chief Executive Officer
  Certification31.2
Chief Financial Officer
  Certification32
Certification
   Section 906:32.1
Chief Executive Officer
  Certification32.2
Chief Financial Officer
  Certification22

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: May
 14, 2008By:
//S//Joel S. HatlenJoel S.
HatlenVice President - FinanceChief Financial OfficerSecretary and Treasurer(Principal
 Financial Officer and Duly Authorized Officer)By:
//S//
Frederick R.
 HumeFrederick R. HumePresidentChief
 Executive Officer(Principal
 Executive Officer and Duly Authorized Officer)23