================================================================================
                                  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, 2005

                                       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


8,238,596  shares of no par value of the  Registrant's  Common Stock were issued
and outstanding as of August 10, 2005.


                                       1



<PAGE>


                              DATA I/O CORPORATION

                                    FORM 10-Q
                       For the Quarter Ended June 30, 2005

                                      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                                             9

 Item 3. Quantitative and Qualitative Disclosures About Market Risk           15

 Item 4. Controls and Procedures                                              16

Part II - Other Information

 Item 1. Legal Proceedings                                                    16

 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
         of Equity Securities                                                 16

 Item 3. Defaults Upon Senior Securities                                      17

 Item 4. Submission of Matters to a Vote of Security Holders                  17

 Item 5. Other Information                                                    17

 Item 6. Exhibits                                                             17

Signatures                                                                    21


                                       2


<PAGE>


PART I - FINANCIAL INFORMATION

Item 1. Financial Statements


                                          DATA I/O CORPORATION

                                      CONSOLIDATED BALANCE SHEETS

<TABLE>
----------------------------------------------------------------------------------------------------------------
                                                                      June 30,                     Dec. 31,
                                                                        2005                         2004
----------------------------------------------------------------------------------------------------------------
(in thousands, except share data)                                   (unaudited)
<S>                                                                    <C>                          <C>
ASSETS
CURRENT ASSETS:
     Cash and cash equivalents                                       $  3,774                     $  5,534
     Marketable securities                                                850                        1,037
     Trade accounts receivable, less allowance for
        doubtful accounts of $175 and $155                              5,712                        4,489
     Inventories                                                        3,748                        4,139
     Other current assets                                                 497                          652
                                                                ---------------------           ----------------
        TOTAL CURRENT ASSETS                                           14,581                       15,851

Property and equipment - net                                            2,411                        1,970
Other assets                                                               21                           26
                                                                ---------------------           ----------------
        TOTAL ASSETS                                                 $ 17,013                     $ 17,847
                                                                =====================           ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
     Accounts payable                                                $  1,539                     $  1,688
     Accrued compensation                                                 962                          991
     Deferred revenue                                                   1,212                        1,706
     Other accrued liabilities                                          1,076                        1,126
     Accrued costs of business restructuring                               66                           86
     Income taxes payable                                                  95                            4
                                                                ---------------------           ----------------
        TOTAL CURRENT LIABILITIES                                       4,950                        5,601

Deferred gain on sale of property                                         582                          776
                                                                ---------------------           ----------------
        TOTAL LIABILITIES                                               5,532                        6,377

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, 8,202,583
           and 8,064,696 shares                                        19,096                       19,001
     Accumulated deficit                                               (7,926)                      (8,018)
     Accumulated other comprehensive income                               311                          487
                                                                ---------------------           ----------------
        TOTAL STOCKHOLDERS' EQUITY                                     11,481                       11,470
                                                                ---------------------           ----------------
        TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                   $ 17,013                     $ 17,847
                                                                =====================           ================
</TABLE>


See accompanying notes to consolidated financial statements.


                                       3


<PAGE>



                                              DATA I/O CORPORATION

                                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                                   (UNAUDITED)

<TABLE>
                                                                  Three Months Ended                   Six Months Ended
-------------------------------------------------------------------------------------------------------------------------------
                                                              June 30,         June 30,           June 30,          June 30,
                                                                2005             2004               2005              2004
-------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)

<S>                                                             <C>             <C>               <C>               <C>
Net sales                                                     $  6,642        $  6,895           $ 13,379          $ 13,729
Cost of goods sold                                               2,709           3,385              5,432             6,506
                                                             ------------    ------------       ------------      ------------
Gross margin                                                     3,933           3,510              7,947             7,223

Operating expenses:
     Research and development                                    1,350           1,177              2,687             2,381
     Selling, general and administrative                         2,378           2,121              5,010             4,294
     Net provision for business restructuring                       55              70                 55                70
                                                             ------------    ------------       ------------      ------------
         Total operating expenses                                3,783           3,368              7,752             6,745
                                                             ------------    ------------       ------------      ------------
         Operating  income                                         150             142                195               478

Non-operating income (expense):
     Interest income                                                20              13                 44                48
     Interest expense                                               (9)             (6)               (12)               (7)
     Foreign currency exchange                                      (3)             (5)               (24)              (18)
                                                             ------------    ------------       ------------      ------------
         Total non-operating income (expense)                        8               2                  8                23
                                                             ------------    ------------       ------------      ------------
        Income before income taxes                                 158             144                203               501

Income tax expense                                                 105              40                111               102
                                                             ------------    ------------       ------------      ------------
Net  income                                                   $     53        $    104           $     92          $    399
                                                             ============    ============       ============      ============
Basic and diluted earnings per share                          $   0.01        $   0.01           $   0.01          $   0.05
                                                             ============    ============       ============      ============
Weighted average basic shares outstanding                        8,202           8,013              8,178             8,005
                                                             ============    ============       ============      ============
Weighted average diluted shares outstanding                      8,486           8,286              8,518             8,350
                                                             ============    ============       ============      ============
</TABLE>

See accompanying notes to consolidated financial statements.


                                       4


<PAGE>


                                      DATA I/O CORPORATION

                              CONSOLIDATED STATEMENTS OF CASH FLOWS
                                           (UNAUDITED)

<TABLE>
------------------------------------------------------------------------------------------------------------
                                                                             June 30,           June 30,
For the six months ended                                                       2005               2004
------------------------------------------------------------------------------------------------------------
(in  thousands)
OPERATING ACTIVITIES:
<S>                                                                          <C>                 <C>
    Net income                                                               $    92             $   399
    Adjustments to reconcile net income to net cash provided
     by (used in) operating activities:
       Depreciation and amortization                                             550                 408
       Write-off of assets                                                        10                   -
       Equipment transferred to cost of goods sold                               326                  84
       Amortization of deferred gain on sale                                    (194)               (164)
       Net change in:
         Deferred revenue                                                       (534)                 74
         Trade accounts receivable                                            (1,399)             (1,531)
         Inventories                                                             199                 701
         Other current assets                                                    128                  45
         Accrued costs of business restructuring                                 (21)                 70
         Accounts payable and accrued liabilities                               (214)               (541)
                                                                           ------------        ------------
    Net cash provided by (used in) operating activities                       (1,057)               (455)

INVESTING ACTIVITIES:
    Purchases of property and equipment                                       (1,313)               (875)
    Purchases of marketable securities                                          (600)               (876)
    Proceeds from sales of marketable securities                                 792                 878
                                                                           ------------        ------------
       Net cash provided by (used in) investing activities                    (1,121)               (873)

FINANCING ACTIVITIES:
    Sale of common stock                                                          70                  81
    Proceeds from exercise of stock options                                       25                  13
                                                                           ------------        ------------
       Net cash provided by (used in) financing activities                        95                  94
                                                                           ------------        ------------
Increase/(decrease) in cash and cash equivalents                              (2,083)             (1,234)

Effects of exchange rate changes on cash                                         323                 152
Cash and cash equivalents at beginning of period                               5,534               4,380
                                                                           ------------        ------------
Cash and cash equivalents at end of period                                   $ 3,774             $ 3,298
                                                                           ============        ============
</TABLE>

See accompanying notes to consolidated financial statements.


                                       5


<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, 2005 and June 30,
2004,  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,  2004 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 31, 2005 are not necessarily indicative of
the results  that may be expected for the year ending  December 31, 2005.  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, 2004.

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.  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>
                                                                     Three Months Ended             Six Months Ended
                                                                  June 30,        June 30,       June 30,         June 30,
                                                                    2005            2004           2005             2004
                                                                ------------    ------------   ------------     ------------
<S>                                                                 <C>             <C>            <C>               <C>
Net income - as reported                                            $53             $104           $92               $399

Deduct: Total stock-based employee compensation expense
determined under fair value based method for awards granted,
modified, or settled, net of related tax effects                    (95)             (77)         (186)              (157)
                                                                ------------    ------------   ------------     ------------
Net income (loss) - pro forma                                      ($42)             $27          ($94)              $242
                                                                ============    ============   ============     =============

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


NOTE 2 - RECLASSIFICATIONS

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

NOTE 3 - INVENTORIES

Inventories consisted of the following components (in thousands):

                                 June 30,                  Dec. 31,
                                   2005                      2004
                              ----------------          ----------------
      Raw material                $1,995                    $2,381
      Work-in-process              1,024                       899
      Finished goods                 729                       859
                              ----------------          ----------------
                                  $3,748                    $4,139
                              ================          ================


                                       6



<PAGE>

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.

NOTE 4 - PROPERTY AND EQUIPMENT

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

                                            June 30,              Dec. 31,
                                              2005                  2004
                                         ----------------      ----------------
    Leasehold improvements                  $    340              $    291
    Equipment                                 10,786                10,065
                                         ----------------      ----------------
                                              11,126                10,356
    Less accumulated depreciation              8,715                 8,386
                                         ----------------      ----------------
    Property and equipment - net            $  2,411              $  1,970
                                         ================      ================

NOTE 5 - BUSINESS RESTRUCTURING

For  fiscal  year  2004,  we took  restructuring  related  charges  of  $562,000
primarily  related to severance and a small office  closure.  These actions were
taken to lower  production  and  operating  costs to reduce the level of revenue
required for our net income breakeven point, particularly in view of the reduced
margins in the second  quarter of 2004;  the continued  need to control costs in
North America and Europe;  and the need to build staff serving China and Eastern
Europe. At December 31, 2004, $86,000 remained accrued as restructure charges.

During  the  second  quarter  of 2005,  we  accrued  an  additional  $55,000  of
restructuring  charges  primarily  related to  severance.  As of June 30,  2005,
restructuring  charges of $66,000 remain accrued,  which are expected to be paid
in 2005.

NOTE 6 - OTHER ACCRUED LIABILITIES

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

                                                June 30,             Dec. 31,
                                                  2005                 2004
                                           -------------------   ---------------

     Product warranty liability                $   484              $   494
     Sales return reserve                          200                  250
     Other                                         392                  382
                                           -------------------   ---------------
     Other accrued liabilities                 $ 1,076              $ 1,126
                                           ===================   ===============

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

                                                  June 30,
                                                    2005
                                            ------------------

        Liability, beginning balance                $494
        Net expenses                                 416
        Warranty claims                             (416)
        Accrual revisions                            (10)
                                            ------------------
        Liability, ending balance                   $484
                                            ==================



                                       7


<PAGE>


NOTE 7 - EARNINGS PER SHARE

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


<TABLE>
                                                                      Three Months Ended            Six Months Ended
                                                                           June 30,                     June 30,
                                                                  ---------------------------- ----------------------------
                                                                     2005         2004             2005          2004
                                                                  -----------  ------------    ------------  -------------
<S>                                                                   <C>         <C>               <C>          <C>
Numerator for basic and diluted earnings per share:
       Net income                                                   $   53       $  104           $   92        $  399
                                                                  -----------  ------------    ------------  -------------

Denominator:
        Denominator for basic earnings per share -
          weighted-average shares                                    8,202        8,013            8,178         8,005
        Employee stock options                                         284          273              340           345
                                                                  -----------  ------------    ------------  -------------
        Denominator for diluted earnings per share -
          Adjusted weighted-average shares and
            assumed conversions of stock options                     8,486        8,286            8,518         8,350
                                                                  -----------  ------------    ------------  -------------
Basic and diluted earnings per share
         Total basic and diluted earnings per share                 $ 0.01       $ 0.01           $ 0.01        $ 0.05
                                                                  ===========  ==============  ============  ==============
</TABLE>

At  June  30,  2005  and  2004  there  were  1,407,106  and  1,534,617   shares,
respectively, of outstanding options potentially issueable as common stock.

NOTE 8 - ACCOUNTING FOR INCOME TAXES

Tax  expense  for the second  quarter of 2005  relates to foreign  and state tax
obligations.  The Company's  effective tax rate for the first six months of 2005
differed  from the  statutory  34% tax rate  primarily  due to the tax valuation
allowances  and domestic net  operating  loss  carryforwards.  The tax valuation
allowance  increased by approximately  $50,000 during the quarter ended June 30,
2005. As of June 30, 2005, the Company has a valuation allowance of $9,853,000.

NOTE 9 - COMPREHENSIVE INCOME

Total comprehensive income (loss) was comprised of the following (in thousands):

<TABLE>
                                                                      Three Months Ended                  Six Months Ended
                                                                            June 30,                          June 30,
                                                                 ------------------------------    -------------------------------
                                                                      2005             2004             2005              2004
                                                                 -------------     ------------    -------------     -------------
           <S>                                                        <C>              <C>              <C>               <C>
           Net income                                                 $53              $104             $92               $399
           Foreign currency translation gain/(loss)                   (90)              (33)           (181)               (89)
           Unrealized gain on marketable securities                     2                 -               5                  -
                                                                 -------------     ------------    -------------     -------------
           Total comprehensive income/(loss)                         ($35)              $71            ($84)              $310
                                                                 =============     ============    =============     =============
</TABLE>


NOTE 10 - FOREIGN CURRENCY TRANSLATION AND DERIVATIVES

We translate 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  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.

We  account  for our  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.

We utilize  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, 2005 is an unrealized  gain of
$3,063 and is included in accounts payable on the balance sheet.

We do 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.


                                       8



<PAGE>


NOTE 11 - RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued SFAS No. 123R,  "Share-Based  Payments."  SFAS
No. 123R requires  employee  stock  options and rights to purchase  shares under
stock  participation  plans to be accounted for under the fair value method, and
eliminates  the ability to account  for these  instruments  under the  intrinsic
value method  prescribed  by APB Opinion No. 25, and allowed  under the original
provisions of SFAS No. 123. SFAS No. 123R requires the use of an option  pricing
model for estimating fair value,  which is amortized to expense over the service
periods.  In March 2005, the SEC issued SAB 107,  "Share-Based  Payments," which
gives  guidance on the  application  of SFAS No.  123R and extends the  required
adoption  date to January 1, 2006 for Data I/O. The adoption of SFAS No. 123R is
expected to have a significant effect on the consolidated  financial  statements
of Data I/O.  See Note 1 for the pro forma  impact on net  earnings  (loss)  and
earnings  (loss) per share from  calculating  stock-related  compensation  costs
under the fair value  alternative of SFAS No. 123.  However,  the calculation of
compensation cost for share-based payment  transactions after the effective date
of SFAS No.  123R and under SAB 107 may be  different  from the  calculation  of
compensation  cost under SFAS No. 123. Such potential  differences  have not yet
been  quantified.  Also, past usage of option plans and stock purchase plans may
not reflect our practices in future periods.

In March  2005,  the  Securities  and  Exchange  Commission  announced  that the
compliance date for non-accelerated  filers and foreign private issuers pursuant
to Section 404 of the  Sarbanes-Oxley  Act has been  extended.  Under the latest
extension,  a company  that is not  required  to file its annual  and  quarterly
reports on an accelerated  basis must begin to comply with the  requirements for
the  assessment and the reporting on internal  control over financial  reporting
for its first fiscal year ending on or after July 15,  2006.  This is a one-year
extension from the previously  established  July 15, 2005 compliance  date. Data
I/O  expects  that it will  continue to be a  non-accelerated  filer and that it
will,  therefore,  be required to comply with Section 404 of the  Sarbanes-Oxley
Act as of December 31, 2006.

In May 2005, the FASB issued  Statement No. 154,  "Accounting  Changes and Error
Corrections." This Statement replaces APB Opinion No. 20, "Accounting  Changes,"
and FASB Statement No. 3,  "Reporting  Accounting  Changes in Interim  Financial
Statements, and changes the requirements for the accounting for and reporting of
a change in accounting principle.  Statement No. 154 is effective for accounting
changes and  corrections of errors made in fiscal years beginning after December
15, 2005.

In June 2005, the FASB issued staff position ("FSP") FSP FAS 143-1,  "Accounting
for  Electronic  Equipment  Waste  Obligations  Pursuant  to  a  European  Union
Directive." FSP FAS 143-1 provides guidance related to the costs associated with
historical  electrical and electronic  waste  equipment  ("WEEE"),  based on the
European  Union  Directive.  The  guidance  takes  effect the later of the first
reporting  period  ending after June 8, 2005,  or, for an  applicable  EU-member
country,  upon the adoption of a law that  complies with the  Directive.  We are
currently  assessing  the guidance  provided by FSP FAS 143-1 and  reviewing the
impact of the new  statement.  The  adoption of FSP FAS 143-1 is not expected to
have a significant effect on our consolidated financial statements.


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;  effect of implementing a new information  system; and
any  other   guidance  on  future   periods  are   forward-looking   statements.
Forward-looking  statements reflect  management's  current  expectations and are
inherently  uncertain.  Although we believe 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 we nor anyone else assumes responsibility for the accuracy and
completeness of these forward-looking statements. We are 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


                                       9


<PAGE>


the year ended  December 31, 2004,  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  uncertain
economic environment, while positioning Data I/O through new product development
to take advantage of market opportunities in our strategic market segments,  and
with our new ISP business and service operation.

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 ("ISP")
ImageWriter technology,  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.  To better
support our customers in their  geographic  areas and time zones, we continue to
invest in tools and device support operations in Germany,  India,  Shanghai, and
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  increasing  our focus on
service and aftermarket  opportunities.  We finalized the operational set up for
our new  subsidiaries in China and Brazil.  We expanded our China  operations to
take advantage of the growth of  manufacturing  in China and have  established a
service  operation in Brazil.  We also  increased  our efforts to recapture  the
Japanese  market and are  considering  establishing  a subsidiary  in Japan.  We
continue our efforts to partner with the  semiconductor  manufacturers to better
serve our mutual customers.

Restructure Actions

For fiscal year 2004,  we accrued  restructuring  charges that totaled  $562,000
with a remaining  balance of $86,000 at December  31,  2004.  The  restructuring
charges related primarily to severance and a small office closure. These actions
were  taken to lower  production  and  operating  costs to  reduce  the level of
revenue required for our net income breakeven point, particularly in view of our
reduced  margins  during  2004;  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 six months of 2005,  approximately $75,000 was paid out
and an  additional  $55,000  was  accrued in the second  quarter  for  severance
related  charges.  The  balance  accrued at June 30,  2005 is  $66,000  which is
expected to be paid out in 2005.

Critical Accounting Policy Judgments and Estimates

The preparation of financial statements in accordance with accounting principles
generally  accepted  in the  United  States  of  America  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,  Data I/O  evaluates  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 our 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.
Installation that is considered  perfunctory  includes any installation that can
be performed by other parties,  such as distributors,  other vendors, or in most
cases customers themselves.  This takes into account the complexity,  skill, and
training needed as well as customer  expectations  regarding  installation.  The
revenue  related to these  products is  recognized  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.


                                       10


<PAGE>


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  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.

Tax Valuation  Allowances:  Given the  uncertainty  created by our loss history,
Data I/O expects to continue to limit the recognition of net deferred tax assets
and maintain the tax valuation allowances.  We expect, therefore, that reversals
of the tax valuation allowance will take place for the next few years only as we
are able to take  advantage of the  underlying  tax loss or other  attributes in
carry forward. The transfer pricing and expense or cost sharing arrangements are
complex  areas  where  judgments,  such  as  the  determination  of  arms-length
arrangements, can be subject to challenges by different tax jurisdictions.

Results of Operations
---------------------

<TABLE>
Net Sales
-----------------------------------------------------------------------------------------------------------------------------
(in thousands)

                                                 Three Months Ended                              Six Months Ended
                                     -------------------------------------------   ------------------------------------------

                                        June 30,                    June 30,         June 30,                      June 30,
Net sales by product line                 2005         % Change       2004             2005       % Change           2004
-------------------------------------------------------------------------------   -------------------------------------------
<S>                                      <C>            <C>          <C>             <C>           <C>              <C>
Automated programming systems            $4,090         (9.0%)       $4,495          $8,107        (7.3%)           $8,747

Non-automated programming systems        $2,552          6.3%         2,400          $5,272         5.8%            $4,982
                                     ------------------------------------------   -------------------------------------------
Total programming systems                $6,642         (3.7%)       $6,895         $13,379        (2.5%)          $13,729
                                     ==========================================   ===========================================
</TABLE>


<TABLE>
                                                 Three Months Ended                              Six Months Ended
                                     -------------------------------------------   ------------------------------------------

                                        June 30,                    June 30,         June 30,                      June 30,
Net sales by location                     2005         % Change       2004             2005       % Change           2004
-------------------------------------------------------------------------------   -------------------------------------------
<S>                                      <C>            <C>          <C>             <C>           <C>              <C>
United States                            $1,501           (.5%)      $ 1,509         $ 3,738         28.9%          $ 2,899

    % of total                            22.6%                        21.9%           27.9%                          21.1%

International                            $5,141          (4.5%)      $ 5,386         $ 9,641       (11.0%)          $10,830

    % of total                            77.4%                        78.1%           72.1%                          78.9%

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

Revenues  for the second  quarter of 2005  decreased  approximately  4% from the
second quarter of 2004. The revenue decrease  relates  primarily to the decrease
in sales to the wireless handset  manufacturers,  generally our largest customer
segment,  reflecting  a continued  weak  capacity  demand in this  segment.  The
decrease  in  demand  may  also  be   partially   influenced   by  the  industry
consolidation, causing a pause in equipment orders. During the second quarter of
2005, we reduced our backlog of orders from $781,000 to $770,000.

Domestic  sales in the  second  quarter of 2005 were  approximately  the same as
compared  to the  second  quarter  of  2004  with a  slight  variance  of  0.5%.
International  sales decreased  approximately  4.5% primarily as a result of the
decrease in wireless handset segment sales. The U.S. dollar weakened slightly in
the  second  quarter of 2005  compared  to the  second  quarter of 2004,  and in
particular  against the Euro,  offsetting the overall  decrease in international
sales by $58,000.


                                       11


<PAGE>


During the second  quarter of 2005, we shipped our first PS 588 product.  The PS
588 provides our customers, particularly the automotive and consumer electronics
customers,  a much  higher  level of  throughput  for  volume  programming  than
previously  available  at a lower  cost per part.  We  expect  to see  growth in
automated programming product sales in the upcoming quarters. We also introduced
High  Performance  Socket  (HPS)  Adapters  for  our  ProLINE-RoadRunner  and PS
FlashCORE automated programming systems and for our FlashPAK desktop programmer.
Data I/O is the exclusive  provider of these socket  adapters in the programming
market and they are particularly valuable to customers that want to reduce their
levels of scrap and returned  materials as well as improve  process  efficiency.
Like our other socket  adapters,  these are  consumable  items which should help
grow our profitable  aftermarket  business.  Lastly, we completed the operations
transition of the Brazilian  programming services operation and expect to record
increased future revenues as a result.

The  revenue  decline  for the first six  months  of 2005  compared  to 2004 was
primarily  related to the  continued  overall  decrease  in  capacity  demand by
wireless  handset  manufacturers  as noted  earlier,  offset by improved  sales,
especially in the Americas, in the automotive segment.

In 2004, we introduced  the PS 588 and PS 288  FlashCORE  automated  programming
systems,  ImageWriter, our ISP solution, eDSS tool suite for device support, and
a version of our  ProLINE-RoadRunner  designed for Panasonic CM402 machines.  We
began shipping Beta units in 2004 of our ImageWriter,  and in the second quarter
of 2005 began volume shipments including  delivering  demonstration units to the
field.  We expect these  products to increase our revenues;  however,  partially
offsetting  this expected  increase is the continued trend of declining sales of
certain older non-automated product lines.


Gross Margin

<TABLE>
                                       Three Months Ended                          Six Months Ended
                            -----------------------------------------------------------------------------------

 (in thousands)                June 30, 2005          June 30, 2004       June 30, 2005        June 30, 2004
---------------------------------------------------------------------------------------------------------------

<S>                               <C>                    <C>                 <C>                  <C>
Gross Margin                      $3,933                 $3,510              $7,947               $7,223

Percentage of net sales            59.2%                  50.9%               59.4%                52.6%
---------------------------------------------------------------------------------------------------------------
</TABLE>

Gross margins increased in both dollars and as a percentage of sales compared to
the second quarter of 2004. The overall gross margin increase  primarily relates
to the  product and channel mix  including  a favorable  average  selling  price
variance  of  approximately  $183,000  and a  favorable  mix volume  variance of
approximately  $147,000.  Finally,  the  restructuring  activities  in the third
quarter of 2004  lowered  our labor and  overhead  costs in our U.S.  and Canada
operations. We expect the margin percentages for the third quarter to be in line
with current quarter's level.

Gross  margin  for the first six months of 2005 has  increased  over 2004 due to
increased  product  average  selling  price and  channel  mix as well as savings
related to the business restructuring.

Research and Development

<TABLE>
                                            Three Months Ended                            Six Months Ended
                                --------------------------------------------------------------------------------------

 (in thousands)                    June 30, 2005          June 30, 2004       June 30, 2005           June 30, 2004
 ---------------------------------------------------------------------------------------------------------------------

<S>                                   <C>                     <C>                 <C>                    <C>
 Research and development             $1,350                  1,177               $2,687                 $2,381

 Percentage of net sales               20.3%                  17.1%                20.1%                  17.3%
 ---------------------------------------------------------------------------------------------------------------------
</TABLE>

Research and  development  ("R&D")  spending for both the second quarter and the
six month period of 2005 compared to the second quarter and the six month period
of 2004  increased in both dollars and a percentage  of sales.  This increase in
spending  primarily  relates to our new product  initiatives,  particularly  the
ImageWriter,   our  new  in-system  programming  solution,  the  new  automation
solution,  and the start of engineering  operations in China.  During the second
quarter of 2005, we began volume  shipments of our  ImageWriter  200 product and
expect to be adding new options and  capabilities to the family in the third and
fourth quarters of 2005.


                                       12


<PAGE>


Selling, General and Administrative

<TABLE>
                                               Three Months Ended                          Six Months Ended
                                     -------------------------------------------------------------------------------------

 (in thousands)                        June 30, 2005          June 30, 2004       June 30, 2005           June 30, 2004
 -------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>                    <C>                  <C>                    <C>
 Selling, general & administrative        $2,378                 $2,121               $5,010                 $4,294

 Percentage of net sales                   35.8%                  30.8%                37.4%                  31.3%
 -------------------------------------------------------------------------------------------------------------------------
</TABLE>

Selling,  general and administrative ("SG&A") expenses increased by $257,000, or
12%, for the second  quarter of 2005 compared to the second quarter of 2004. The
increase  relates  primarily  to the  hiring of  additional  key  personnel  and
expenses associated with the purchase of the new information  system,  resulting
in a combined increase of approximately $80,000. In addition, we had a reduction
of allocated facility costs totaling $70,000, investor relation costs of $30,000
and incentive compensation of $20,000. We also incurred an additional $21,000 in
administration costs related to the China operations.

The increase in SG&A expenses for the six month period also relates primarily to
the hiring of additional key personnel,  reduction of allocated  facility costs,
Sarbanes-Oxley  internal control related costs, and investor  relations costs as
noted earlier.

Interest

<TABLE>
                                           Three Months Ended                            Six Months Ended
                                --------------------------------------------------------------------------------------

 (in thousands)                    June 30, 2005          June 30, 2004       June 30, 2005           June 30, 2004
 ---------------------------------------------------------------------------------------------------------------------
<S>                                     <C>                    <C>                 <C>                     <C>
 Interest income                        $20                    $13                 $44                     $48

 Interest expense                       ($9)                   ($6)               ($12)                    ($7)
 ---------------------------------------------------------------------------------------------------------------------
</TABLE>

Interest  income  increased in the second  quarter of 2005  compared to the same
period in 2004 due to higher yields.  For the six month period,  interest income
decreased due to decreased amounts of funds invested in marketable securities.

Income Taxes

<TABLE>
                                              Three Months Ended                            Six Months Ended
                                   -----------------------------------------    -----------------------------------------

 (in thousands)                     June 30, 2005            June 30, 2004       June 30, 2005           June 30, 2004
 ------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>                      <C>                 <C>                    <C>
 Income tax expense (benefit)            $105                     $40                 $111                   $102
 ------------------------------------------------------------------------------------------------------------------------
</TABLE>

Tax  expense  for the second  quarter of 2005  relates to foreign  and state tax
obligations. The Company's effective tax rate for the second quarter and for the
first six months of 2005 differed from the statutory 34% tax rate  primarily due
to the tax valuation  allowances and domestic net operating loss  carryforwards.
The tax  valuation  allowance  increased  by  approximately  $50,000  during the
quarter  ended June 30, 2005 and $46,000 for the first six months of 2005. As of
June 30, 2005, the Company has a valuation allowance of $9,853,000.

Financial Condition
-------------------

Liquidity and Capital Resources

<TABLE>
                                      June 30,                      March 31,                      Dec. 31,
(in thousands)                          2005          Change          2005          Change          2004
------------------------------------------------------------------------------------------------------------
<S>                                 <C>               <C>           <C>              <C>           <C>
Working capital                     $9,631            ($658)        $10,289          $39           $10,250
------------------------------------------------------------------------------------------------------------
</TABLE>

At June 30, our principal sources of liquidity  consisted of existing cash, cash
equivalents  and marketable  securities.  Our working  capital for the six month
period  decreased  by  $619,000  and our  current  ratio  increased  from 2.8 at
December 31, 2004 to 2.9 at June 30, 2005.

Our cash and cash  equivalents  decreased by $1.8  million  during the first six
months  of 2005  primarily  due to the  increase  in  cash  used  for  operating
activities  including  the funding for the  Brazilian  operation  totaling  $1.1
million.  The $1.1 million of cash used for operations primarily included a $1.4
million increase in accounts  receivable,  $214,000 decrease in accounts payable
and accrued  liabilities,  and a $534,000 decrease in deferred revenue partially
offset by a $199,000 decrease in inventory,  $326,000 of demonstration equipment
transferred   to  cost  of  goods  sold,  and  $550,000  of   depreciation   and
amortization.  The increase in accounts  receivable results from increased sales
especially late in the quarter.


                                       13


<PAGE>


We used $1.1 million of cash in investing  activities  during the second quarter
of 2005,  which  primarily  relates  to the  purchase  of  property,  plant  and
equipment totaling $1.3 million.  The capital purchases  included  approximately
$400,000 related to the Brazilian  operation and approximately  $260,000 related
to the purchase of our new information  system.  During the second  quarter,  we
entered into an agreement to purchase a worldwide information system. As of June
30,  2005,  we  incurred  approximately  $260,000  related to the  software  and
maintenance  for our new  information  system and we expect to incur  additional
hardware,  software and  implementation  costs during the next few quarters.  We
expect  that we will  continue  to make  capital  expenditures  to  support  our
business and anticipate  that present working capital will be sufficient to meet
our operating  requirements.  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  require
substantial working capital to fund our operations.  Over the last few years, we
restructured  our  operations to lower our costs and operating  expenditures  in
geographic 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 June 30, 2006. 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.

Aggregate Contractual Obligations and Commitments
-------------------------------------------------

We have 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. Any amounts reflected on the balance sheet
as accounts  payable and accrued  liabilities are excluded from the below table.
We have no long-term debt. We have 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:

As of June 30, 2005 (in thousands):

   During year                       Purchase                 Operating
  ending June 30,                 obligations                    leases
 ----------------               ----------------          ----------------

      2006                           $1,089                    $1,551
      2007                                -                       820
      2008                                -                       167
      2009                                -                        91
      2010 and thereafter                 -                         -
                                ----------------          ----------------
      Total                          $1,089                    $2,629
                                ================          ================


RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued SFAS No. 123R,  "Share-Based  Payments."  SFAS
No. 123R requires  employee  stock  options and rights to purchase  shares under
stock  participation  plans to be accounted for under the fair value method, and
eliminates  the ability to account  for these  instruments  under the  intrinsic
value method  prescribed  by APB Opinion No. 25, and allowed  under the original
provisions of SFAS No. 123. SFAS No. 123R requires the use of an option  pricing
model for estimating fair value,  which is amortized to expense over the service
periods.  In March 2005, the SEC issued SAB 107,  "Share-Based  Payments," which
gives guidance on the application of FAS 123R and extends the required  adoption
date to January 1, 2006 for Data I/O.  The adoption of SFAS No. 123R is expected
to have a significant  effect on the consolidated  financial  statements of Data
I/O.  See Note 1 for the pro forma  impact on net  earnings  (loss) and earnings
(loss) per share from  calculating  stock-related  compensation  costs under the
fair value alternative of SFAS No. 123. However, the calculation of compensation
cost for share-based  payment  transactions after the effective date of SFAS No.
123R and under SAB 107 may be different  from the  calculation  of  compensation
cost  under  SFAS  No.  123.  Such  potential  differences  have  not  yet  been
quantified.  Also,  past usage of option plans and stock  purchase plans may not
reflect our practices in future periods.

In March  2005,  the  Securities  and  Exchange  Commission  announced  that the
compliance date for non-accelerated  filers and foreign private issuers pursuant
to Section 404 of the  Sarbanes-Oxley  Act has been  extended.  Under the latest
extension,  a company  that is not  required  to file its annual  and  quarterly


                                       14


<PAGE>


reports on an accelerated  basis must begin to comply with the  requirements for
the  assessment and the reporting on internal  control over financial  reporting
for its first fiscal year ending on or after July 15,  2006.  This is a one-year
extension from the previously  established  July 15, 2005 compliance  date. Data
I/O  expects  that it will  continue to be a  non-accelerated  filer and that it
will,  therefore,  be required to comply with Section 404 of the  Sarbanes-Oxley
Act as of December 31, 2006.

In May 2005, the FASB issued  Statement No. 154,  "Accounting  Changes and Error
Corrections." This Statement replaces APB Opinion No. 20, "Accounting  Changes,"
and FASB Statement No. 3,  "Reporting  Accounting  Changes in Interim  Financial
Statements, and changes the requirements for the accounting for and reporting of
a change in accounting principle.  Statement No. 154 is effective for accounting
changes and  corrections of errors made in fiscal years beginning after December
15, 2005.

In June 2005, the FASB issued staff position ("FSP") FSP FAS 143-1,  "Accounting
for  Electronic  Equipment  Waste  Obligations  Pursuant  to  a  European  Union
Directive." FSP FAS 143-1 provides guidance related to the costs associated with
historical  electrical and electronic  waste  equipment  ("WEEE"),  based on the
European  Union  Directive.  The  guidance  takes  effect the later of the first
reporting  period  ending after June 8, 2005,  or, for an  applicable  EU-member
country,  upon the adoption of a law that  complies with the  Directive.  We are
currently  assessing  the guidance  provided by FSP FAS 143-1 and  reviewing the
impact of the new  statement.  The  adoption of FSP FAS 143-1 is not expected to
have a significant effect on our consolidated financial statements.

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.

The table below provides information about our marketable securities,  including
principal  cash  flows  and the  related  weighted  average  interest  rates (in
thousands):

<TABLE>
                                                                           Principal        Estimated Fair
                                  Principal         Estimated Fair        Cash Flows           Value at
                                 Cash Flows            Value at           to June 30,        December 31,
                                 For Q3 2005        June 30, 2005            2005                2004
                               ----------------    ------------------    --------------     ----------------
<S>                                  <C>                 <C>                   <C>                <C>
   Corporate Bonds                     -                   -                  $787               $787

   Taxable Auction Securities        850                 850                   250                250
                                   3.215%                                    2.352%
                               ----------------    ------------------    --------------     ----------------
   Total portfolio value            $850                $850                $1,037             $1,037
                               ================    ==================    ==============     ================
</TABLE>


FOREIGN CURRENCY RISK

We have operations in Germany,  Canada,  China,  and 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,  China,  and 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


                                       15


<PAGE>


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,  2005,  we had two forward  contracts  to sell Euros in exchange for
$335,797 with rates ranging from 1.2024 to 1.2501 all scheduled to be due within
the next quarter and with a value at maturity of $338,859.

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 changes made in our internal controls during the period covered by
this report that have materially affected or are reasonably likely to materially
affect our internal control over financial reporting except as described below.

During the preparation of our 2004 year-end financial statements,  we identified
a calculation  error that had resulted in the  understatement  of  inter-company
expense  eliminations on foreign subsidiary  demonstration  inventory  equipment
depreciation,  with a corresponding  overstatement  of  demonstration  inventory
equipment  accumulated  depreciation.  While  we  believe  the  impacts  of this
calculation error are not material to any previously issued financial statement,
we  determined  that this  calculation  error was most  appropriately  corrected
through restatement of previously issued financial statements.  We have restated
the annual report on Form 10-K for the fiscal year ended December 31, 2003.

Process   changes  have  been   instituted   to   appropriately   eliminate  the
inter-company foreign subsidiary  demonstration inventory equipment depreciation
amounts.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

        None

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

        None


                                       16


<PAGE>


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  7,765,580  (94%)  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              7,058,682         706,787
           Daniel A. DiLeo             7,254,239         511,341
           Paul A. Gary                7,425,175         340,405
           Frederick R. Hume           7,423,488         342,092
           Edward D. Lazowska          7,276,638         488,942
           Steven M. Quist             7,123,174         642,406
           William R. Walker           7,270,113         495,467


     (b)  The  proposal to ratify the  selection  of Grant  Thornton LLP as Data
          I/O's  independent  auditors passed as follows:  7,725,366 for; 27,744
          against; 12,470 abstain; and 0 broker non-votes.

Item 5. Other Information

        None

Item 6. Exhibits

     (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 10.18.

(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)  Change in Control Agreements. See Exhibit 10.22 and 10.23.

(7)  1996 Director Fee Plan. See Exhibit 10.14.

(8)  Letter Agreement with Frederick R. Hume. See Exhibit 10.17.

(9)  Amended and Restated 2000 Stock  Compensation  Incentive  Plan. See Exhibit
     10.19.

(10) Form of Option Agreement. See Exhibit 10.21.

(11) Data I/O Corporation Tax Deferral Retirement Plan. See Exhibit 10.20.


                                       17


<PAGE>

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
          (Incorporated  by reference  to Data I/O's 2003 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 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 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)).


                                       18


<PAGE>


     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)).

     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 Sublease  dated  December 22, 1999 between  Data I/O  Corporation  and
          Imandi.com,  Inc.  (Incorporated by reference to Exhibit 10.34 of Data
          I/O's 1999 Annual Report on Form 10-K (File No. 0-10394)).

    10.17 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)).

    10.18 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).


                                       19


<PAGE>


    10.19 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).

    10.20 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)).

    10.21 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)).

    10.22 Change in Control  Agreement  with Fred R. Hume dated  April 22,  2004
          (Incorporated  by reference to Exhibit 10.22 of Data I/O's 2004 Annual
          Report on Form 10-K (File No. 0-10394)).

    10.23 Change in Control  Agreement  with Joel S. Hatlen dated April 22, 2004
          (Incorporated  by reference to Exhibit 10.23 of Data I/O's 2004 Annual
          Report on Form 10-K (File No. 0-10394)).

31   Certification - Section 302:
     31.1 Chief Executive Officer Certification                               22
     31.2 Chief Financial Officer Certification                               23

32   Certification - Section 906:
     32.1 Chief Executive Officer Certification                               24
     32.2 Chief Financial Officer Certification                               25

99   Other Exhibits
     99.1 Risk Factors                                                        26


                                       20


<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 15, 2005


                                             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)


                                       21


<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  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 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 15, 2005                     /s/ FREDERICK R. HUME

                                          Frederick R. Hume
                                          President and Chief Executive Officer
                                          (Principal Executive Officer)
                                          -----------------------------



                                       22


<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  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 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 15, 2005                 /s/ JOEL S. HATLEN

                                      Joel S. Hatlen
                                      Vice President and Chief Financial Officer
                                      (Principal Financial Officer)
                                      -----------------------------



                                       23

<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, 2005 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 15, 2005



                                       24


<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, 2005 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)  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/ Joel S. Hatlen
Joel S. Hatlen
Chief Financial Officer
(Principal Financial Officer)
August 15, 2005



                                       25


<PAGE>




                                                                    EXHIBIT 99.1

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

Data I/O's  disclosure and analysis in this Report contain 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,  establishing foreign operations, future performance or results of
current and  anticipated  products,  sales  efforts,  expenses,  outsourcing  of
functions,   outcome  of  contingencies,   impact  of  regulatory  requirements,
restructure actions and financial results.

Any or all of the  forward-looking  statements  in this  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 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

Delays in development, introduction and shipment of new products may result in a
decline in sales.
-----------------

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 handling 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.

Quarterly  fluctuations in our operating  results may adversely affect our stock
price.
------

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


                                       26


<PAGE>


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

o    expenses  and  obtaining  authorizations  in setting up new  operations  or
     locations

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.

Failure  to  adapt  to  technology   trends  in  our  industry  may  hinder  our
competitiveness and financial results.
--------------------------------------

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 may 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.

A decline in economic  and market  conditions  may result in  decreased  capital
spending by our customers.
--------------------------

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.

We have a  history  of recent  operating  losses  and may be unable to  generate
enough revenue to achieve and maintain profitability.
-----------------------------------------------------

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.


                                       27


<PAGE>


Our recent  restructuring  activities  may have a negative  impact on our future
operations.
-----------

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.

We may need to raise  additional  capital  and our  future  access to capital is
uncertain.
----------

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.

We may face increased  competition  and may not be able to compete  successfully
with current and future competitors.
------------------------------------

Technological  advances have reduced the barriers of entry into the  programming
systems  market.  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.

If our relationship with semiconductor manufacturers deteriorates,  our business
may be adversely affected.
--------------------------

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 lines 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 manufacturers deteriorate.

Our  reliance  on a small  number of  suppliers  may result in a shortage of key
components, which may adversely affect our business.
----------------------------------------------------

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.


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<PAGE>


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.

If we are unable to attract and retain qualified third-party  distributors,  our
business may be adversely affected.
-----------------------------------

Data  I/O  has  an   internal   sales  force  and  also   utilizes   third-party
representatives,  and distributors.  Therefore, the financial stability of these
representatives  and  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.
In addition,  global customers require  coordination between these various sales
channels and a lack of responsiveness or coordination could adversely affect our
business with these increasingly global customers.

Our  international  operations  may  expose  us to  additional  risks  that  may
adversely affect our business.
------------------------------

International sales represented 80% of our net revenue for the fiscal year ended
December 31, 2004 and 72% for the six months ended June 30, 2005. 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    changes in regulatory requirements

o    tariffs and taxes

o    difficulties in establishing, staffing and managing foreign operations

o    longer  average  payment  cycles  and  difficulty  in  collecting  accounts
     receivable

o    fluctuations in foreign currency exchange rates

o    compliance with applicable export/import 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   ("EU")  has
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.  The EU also has  directives  concerning  the
Reduction  of  Hazardous  Substances  ("RoHS")  and the  reduction  of  wasteful
consumption of natural  resources  including  waste of electrical and electronic
equipment  ("WEEE") which becomes  effective later in 2005 and 2006.  Failure to
meet the directives may prevent us from marketing certain products in Europe.

We operate subsidiaries in Germany,  China, Canada, and 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.

If we are unable to protect  our  intellectual  property,  we may not be able to
compete effectively or operate profitably.
------------------------------------------

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


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<PAGE>


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.

We may pursue business acquisitions that could impair our financial position and
profitability.
--------------

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.

The loss of key employees may adversely affect our operations.
--------------------------------------------------------------

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 in our Brazilian  operation,  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 "Our recent
restructuring  activities may have a negative  impact on our future  operations"
above.

Failure to comply with regulatory  requirements  may adversely  affect our stock
price and business.
-------------------

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 of 2002, 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 Section
404 of the  Sarbanes-Oxley  Act of 2002 for which we are relying on not being an
accelerated filer. We are in the process of documenting and testing our internal
control  procedures in order to satisfy the  requirements  of Section 404 of the
Sarbanes-Oxley Act of 2002, which requires annual management  assessments of the
effectiveness of our internal controls over financial  reporting and a report by
our Independent  Auditors addressing these assessments.  The compliance date for
non-accelerated  filers has been  extended to the first fiscal year ending on or
after  July  15,  2006.  This  is  a  one-year  extension  from  the  previously
established  July 15, 2005 compliance date. Data I/O assumes it will continue to
have the status of a  non-accelerated  filer based on the aggregate market value
of the voting and non-voting  shares held as of June 30, 2005. During the course
of our  testing  we may  identify  deficiencies  which  we may  not be  able  to
remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act of 2002
for compliance with the requirements of Section 404. In addition,  if we fail to
achieve and maintain the adequacy of our internal  controls,  as such  standards
are modified,  supplemented  or amended from time to time, we may not be able to
ensure that we can conclude on an ongoing basis that we have effective  internal
controls  over  financial  reporting  in  accordance  with  Section  404  of the
Sarbanes-Oxley Act of 2002. Moreover, effective internal controls,  particularly
those related to revenue  recognition,  are necessary for us to produce reliable
financial  reports and are  important to help  prevent  financial  fraud.  If we
cannot provide  reliable  financial  reports or prevent fraud,  our business and
operating  results  could be  harmed,  investors  could lose  confidence  in our
reported  financial  information,  and the trading price of our stock could drop
significantly.  Our failure to meet regulatory 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  securities  claims  and
litigation.


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<PAGE>


Our stock  price may be volatile  and, as a result,  you may lose some or all of
your investment.
----------------

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.

Failure  to  successfully  implement  a new  worldwide  information  system  may
adversely affect our operations and sales.
------------------------------------------

We have recently acquired and are in the process of implementing a new worldwide
information  system.  Our  operations  and financial  results could be adversely
affected  if  we  are  unable  to  implement  the  system  without   significant
interruptions in accounting  systems,  order entry,  billing,  manufacturing and
other customer  support  functions.  In addition,  the costs associated with the
implementation  and training could exceed budgeted  amounts and adversely affect
our  profitability  and  liquidity.  System  implementation  delays  could cause
difficulties in our complying with the internal controls  assessment,  reporting
and auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of
2002.







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