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 September 30, 2004

                                       OR

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



                           Commission File No. 0-10394


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





           Washington                                         91-0864123

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



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


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


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes X No

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Act). Yes No X


8,056,049  shares of no par value of the  Registrant's  Common Stock were issued
and outstanding as of November 1, 2004.


<PAGE>

                              DATA I/O CORPORATION

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

                                      INDEX


Part I - Financial Information                                         Page

     Item 1.    Financial Statements (unaudited)                         3

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

     Item 3.    Quantitative and Qualitative Disclosures
                About Market Risk                                       12

     Item 4.    Controls and Procedures                                 13

Part II - Other Information

     Item 1.    Legal Proceedings                                       14

     Item 2.    Unregistered Sales of Equity Securities
                and Use of Proceeds                                     14

     Item 3.    Defaults Upon Senior Securities                         14

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

     Item 5.    Other Information                                       15

     Item 6.    Exhibits                                                15

Signatures                                                              18


<PAGE>


PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

                                                       DATA I/O CORPORATION

                                                    CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                           Sept. 30                    Dec. 31,
                                                                                            2004                         2003
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>                            <C>
(in thousands, except share data)                                                       (unaudited)
ASSETS
CURRENT ASSETS:
     Cash and cash equivalents                                                            $4,936                       $4,380
     Marketable securities                                                                 1,298                        2,354
     Trade accounts receivable, less allowance for
        doubtful accounts of $215 and $196                                                 6,417                        5,054

     Inventories                                                                           3,454                        4,607
     Other current assets                                                                    315                          431
                                                                                   ---------------------           ----------------
        TOTAL CURRENT ASSETS                                                              16,420                       16,826

Property and equipment - net                                                               1,622                        1,151
Other assets                                                                                  29                           11
                                                                                   ---------------------           ----------------
        TOTAL ASSETS                                                                     $18,071                      $17,988
                                                                                   =====================           ================

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
     Accounts payable                                                                     $1,653                       $1,285
     Accrued compensation                                                                    835                        1,186
     Deferred revenue                                                                      1,355                        1,430
     Other accrued liabilities                                                             1,411                        1,543
     Income taxes payable                                                                    198                          350
                                                                                   ---------------------           ----------------
        TOTAL CURRENT LIABILITIES                                                          5,452                        5,794

Deferred gain on sale of property                                                            858                        1,106
                                                                                   ---------------------           ----------------
        TOTAL LIABILITIES                                                                  6,310                        6,900

COMMITMENTS                                                                                    -                            -

STOCKHOLDERS' EQUITY:
     Preferred stock -
        Authorized, 5,000,000 shares, including
           200,000 shares of Series A Junior Participating
        Issued and outstanding, none                                                           -                            -
     Common stock, at stated value -
        Authorized, 30,000,000 shares
        Issued and outstanding, 8,049,706
           and 7,976,296 shares                                                           18,975                       18,797
     Accumulated deficit                                                                  (7,549)                      (8,038)
     Accumulated other comprehensive income                                                  335                          329
                                                                                   ---------------------           ----------------
        TOTAL STOCKHOLDERS' EQUITY                                                        11,761                       11,088
                                                                                   ---------------------           ----------------
        TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                       $18,071                      $17,988
                                                                                   =====================           ================


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


<PAGE>




                                                  DATA I/O CORPORATION

                                          CONSOLIDATED STATEMENTS OF OPERATIONS
                                                       (UNAUDITED)

<TABLE>
<CAPTION>
                                                              Quarters Ended                          Nine Months Ended
------------------------------------------------------------------------------------------------------------------------------------
                                                             Sept. 30,          Sept. 30,         Sept. 30            Sept. 30,
                                                               2004               2003              2004                2003
                                                       ---------------- ------------------------------------------------------------
<S>                                                          <C>                <C>               <C>                 <C>
(in thousands, except per share data)

Net sales                                                      $7,765            $6,360            $21,495            $18,092
Cost of goods sold                                              3,533             3,032             10,040              8,028
Gross margin                                             --------------    --------------      --------------     -------------
                                                                4,232             3,328             11,455            10,064

Operating expenses:
     Research and development                                   1,262             1,294              3,642              3,534
     Selling, general and administrative                        2,405             1,823              6,700              5,551
     Net provision (reversal) for business restructuring          432              -                   502                (27)
                                                        ---------------    --------------      --------------      -------------
         Total operating expenses                               4,099             3,117             10,844              9,058
                                                        ---------------    --------------      --------------      -------------

         Operating  income                                        133               211                611              1,006

Non-operating income (expense):
     Interest income                                               14                20                42                  73
     Interest expense                                              (6)               (4)              (13)                (16)
     Other income (expense)                                       (20)                -                 -                   -
     Foreign currency exchange                                    (27)              (22)              (45)               (103)
                                                            ---------------    --------------    --------------     -------------
         Total non-operating income (expense)                     (39)               (6)              (16)                (46)

                                                            ---------------    --------------    --------------     -------------
        Income before income taxes                                 94               205               595                 960

Income tax expense (benefit)                                        1              (114)              103                 (10)
                                                           ---------------    --------------    --------------     -------------
Net  income                                                       $93              $319              $492                $970
                                                           ===============    ==============    ==============     =============
Basic and diluted earnings per share                            $0.01             $0.04             $0.06               $0.12
                                                           ===============    ==============    ==============     =============

Weighted average shares outstanding                             8,046             7,937             8,019               7,888
                                                           ===============    ==============    ==============     =============

Weighted average and potential shares outstanding               8,384             8,243             8,361               8,026
                                                           ===============    ==============    ==============     =============

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

<PAGE>




                                                  DATA I/O CORPORATION

                                          CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                      (UNAUDITED)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Sept. 30,           Sept. 30,
For the nine months ended                                                                          2004                2003
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                <C>                <C>
(in  thousands)
OPERATING ACTIVITIES:
    Net income                                                                                      $ 492             $ 970
    Adjustments to reconcile net income to net cash provided
     by (used in) operating activities:
       Depreciation and amortization                                                                  502               563
       Net loss on dispositions                                                                       632               201
       Amortization of deferred gain on sale                                                         (247)             (247)
       Net change in:
         Deferred revenue                                                                             (74)              (94)
         Trade accounts receivable                                                                 (1,362)           (1,233)
         Inventories                                                                                1,155               293
         Other current assets                                                                         116               340
         Accrued costs of business restructuring                                                      204              (188)
         Accounts payable and accrued liabilities                                                    (475)               80
                                                                                                ------------      --------------
    Net cash provided by (used in) operating activities                                               943               685

INVESTING ACTIVITIES:
    Purchases of property and equipment                                                            (1,596)             (356)
    Purchase of other assets                                                                          (30)                -
    Purchases of marketable securities                                                               (933)           (3,480)
    Sales of marketable securities                                                                  1,985             2,725
                                                                                                ------------      --------------
       Net cash provided by (used in) investing activities                                           (574)           (1,111)

FINANCING ACTIVITIES:
    Sale of common stock                                                                              154               119
    Proceeds from exercise of stock options                                                            24                 3
                                                                                                ------------      --------------
       Net cash provided by financing activities                                                      178               122

                                                                                                ------------      --------------
Increase/(decrease) in cash and cash equivalents                                                      547              (304)

Effects of exchange rate changes on cash                                                                9               200
Cash and cash equivalents at beginning of year                                                      4,380             4,383
                                                                                                ------------      --------------
Cash and cash equivalents at end of quarter                                                        $4,936            $4,279
                                                                                                ============      ==============

See accompanying notes to consolidated financial statements.

</TABLE>

<PAGE>



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


NOTE 1 - FINANCIAL STATEMENT PREPARATION

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

Stock-Based Compensation

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

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

<TABLE>
<CAPTION>

                                                                      Quarters Ended                  Nine Months Ended
                                                                 Sept. 30,        Sept. 30,      Sept. 30,        Sept. 30,
                                                                    2004             2003           2004            2003
                                                                -------------     -----------    -----------    --------------
<S>                                                              <C>              <C>            <C>              <C>
Net income (loss) - as reported                                     $93             $ 319           $492            $970

Deduct:  Total  stock-based   employee   compensation  expense
determined  under fair value based method for awards  granted,
modified, or settled, net of related tax effects                   (105)              (68)          (268)           (239)
                                                                -------------     -----------    -----------    --------------
Net income  - pro forma                                            ($12)             $251           $224            $731
                                                                =============     ===========    ===========    ==============

Basic and diluted income  per share - as reported                 $0.01             $0.04          $0.06           $0.12
Basic and diluted income  per share - pro forma                   $0.00             $0.03          $0.03           $0.09
</TABLE>

NOTE 2 - CLASSIFICATIONS

Certain prior periods' 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):
<TABLE>
<CAPTION>

                                                                Sept. 30,                  Dec. 31,
                                                                  2004                       2003
<S>                                                            <C>                         <C>
                                                            ----------------          ----------------
                  Raw material                                   $1,999                    $2,100
                  Work-in-process                                   860                     1,411
                  Finished goods                                    595                     1,096
                                                            ----------------          ----------------
                                                                 $3,454                    $4,607
                                                            ================          ================

</TABLE>

NOTE 4 - PROPERTY AND EQUIPMENT

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

                                                                      Sept. 30,                    Dec. 31,
                                                                        2004                         2003
                                                                   ----------------           ----------------
<S>                                                                   <C>                          <C>
                  Leasehold improvements                                 $ 278                       $259
                  Equipment                                             12,069                     12,016
                                                                   ----------------           ----------------
                                                                        12,347                     12,275
                  Less accumulated depreciation                         10,725                     11,124
                                                                   ----------------           ----------------
                  Property and equipment - net                         $ 1,622                    $ 1,151
                                                                   ================           ================
</TABLE>

NOTE 5 - BUSINESS RESTRUCTURING

During the third quarter of 2004, we incurred an additional restructuring charge
of $432,000  associated  primarily  with severance  related  charges and a small
office  closure,  with an  effective  date of  August  2, 2004 for most of these
actions.  The total  restructuring  charges  incurred  for the nine months ended
September 30, 2004 are $502,000.  The accrued  restructure  balance remaining at
September  30, 2004 is  $204,000.  The  restructure  actions were taken to lower
production and operating  costs to reduce our breakeven  point,  particularly in
view of our reduced margins in the second quarter; the continued need to control
costs in North America and Europe; and the need to build staff serving China and
Eastern Europe.

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

NOTE 6 - WARRANTY

Data I/O  records a  liability  for an estimate of costs that we expect to incur
under our basic limited warranty. Changes in the warranty reserve are as follows
(in thousands):
<TABLE>
<CAPTION>

                                                                              For the third quarter       For the first nine months
                                                                           --------------------------   ---------------------------
                                                                               2004          2003              2004         2003
                                                                           ----------- --------------   -------------- ------------
<S>                                                                            <C>          <C>               <C>           <C>
Liability, beginning balance                                                  $493.4        $520.5             $562.9       $519.0
                                                                           ----------- --------------    -------------- -----------
Net expense (income, accrual revisions and warranty claims                       1.8          40.2              (67.7)        41.7
                                                                           ----------- --------------    -------------- -----------
Liability, ending balance                                                      495.2         560.7              495.2        560.7
                                                                           =========== ==============    ============== ===========
</TABLE>

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>
<CAPTION>
                                                                              For the third quarter      For the first nine months
                                                                          --------------------------    ---------------------------
                                                                              2004         2003             2004          2003
                                                                          ----------- --------------    ------------ --------------
<S>                                                                           <C>          <C>              <C>           <C>
Numerator for basic and diluted earnings per share:
       Net income                                                             $93          $319             $492          $970
                                                                          ----------- --------------    ------------ --------------

Denominator:
        Denominator for basic earnings per share -
         weighted-average shares                                            8,046         7,937            8,019         7,888
        Employee stock options                                                338           306              342           138
                                                                          ----------- --------------    ------------ --------------
         Denominator for diluted earnings per share -
                  adjusted weighted-average shares and
                  assumed conversions of stock options                      8,384         8,243            8,361         8,026
                                                                          ----------- --------------    ------------ --------------
Basic and diluted earnings per share
         Total basic and diluted earnings per share                         $0.01         $0.04            $0.06         $0.12
                                                                          =========== ==============    ============ ==============
</TABLE>

At  September  30,  2004 and 2003 there were  1,462,711  and  1,339,462  shares,
respectively, of outstanding options potentially issueable as common stock.

NOTE 8 - ACCOUNTING FOR INCOME TAXES

The Company's effective tax rate for the first nine months of 2004 differed from
the statutory 34% tax rate  primarily due to deferred tax timing  difference and
utilization of net operating  loss  carryforwards.  The tax valuation  allowance
decreased by approximately $426,281 during the quarter ended September 30, 2004.
As of September 30, 2004, the Company has a valuation allowance of $9,377,000.

NOTE 9 - COMPREHENSIVE INCOME

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

                                                                     For the third quarter           For the first nine months
                                                                 ------------------------------    -------------------------------
                                                                      2004             2003             2004              2003
                                                                 -------------     ------------    -------------     -------------
                                                                      <S>              <C>              <C>               <C>
           Net income                                                  $93             $319             $492              $970
           Foreign currency translation gain                            94               16                5               163
                                                                 -------------     ------------    -------------     -------------
           Total comprehensive income                                $ 187             $335             $497            $1,133
                                                                 =============     ============    =============     =============
</TABLE>

NOTE 10 - FOREIGN CURRENCY TRANSLATION AND DERIVATIVES

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

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

Data I/O utilizes  forward  foreign  exchange  contracts to reduce the impact of
foreign currency exchange rate risks where natural hedging  strategies cannot be
effectively employed.  All hedging instruments held by us are fair value hedges.
Generally,  these contracts have maturities less than one year and require us to
exchange  foreign  currencies for U.S.  dollars at maturity.  The change in fair
value of the open hedge contracts as of September 30, 2004 is an unrealized loss
of $29,105 and is included in accounts payable on the balance sheet.

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

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

General

FORWARD-LOOKING STATEMENTS

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

OVERVIEW

Our goal is to continue to focus on managing the business to achieve  profitable
operations,  while  developing  and  enhancing  products  to drive  revenue  and
earnings  growth.  Our  challenge  continues to be  operating  in the  uncertain
economic  environment,  while  positioning  Data  I/O to  take  advantage  of an
anticipated recovery in capital spending.  We expect that demand for programming
capacity  should  improve,  in part based on forecasted  increased 2004 and 2005
unit  sales  for the  semiconductor  industry,  which  should  provide  improved
business opportunities for Data I/O.

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

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

RESTRUCTURE ACTIONS

During the second quarter of 2004, we accrued a restructuring  charge of $70,000
associated  primarily with severance  related  charges.  In the third quarter of
2004,  we  incurred  further  restructuring  related  charges  of  approximately
$432,000  that are primarily  related to severance  and a small office  closure,
with an effective date of August 2, 2004 for most of these actions. At September
30, 2004, $204,000 remained as accrued but unpaid restructure  charges,  most of
which  is  expected  to be paid in 2004  with  the  balance  paid in  2005.  The
restructure  related  savings are projected to save about $1.1 million per year.
These actions were taken to lower  production and operating  costs to reduce our
breakeven  point,  particularly  in view of our  reduced  margins  in the second
quarter;  the continued  need to control costs in North America and Europe;  and
the need to build staff serving China and Eastern Europe.

CRITICAL ACCOUNTING POLICY JUDGMENTS AND ESTIMATES

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

We  believe  the  following  critical   accounting   policies  affect  the  more
significant  judgments and estimates  used in the  preparation  of 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.  We
recognize  revenue from other product  sales at the time of shipment.  We record
revenue from the sale of service and update contracts as deferred revenue and we
recognize it on a  straight-line  basis over the  contractual  period,  which is
typically one year. We establish a reserve for sales returns based on historical
trends in product  returns and  estimates  for new items.  If the actual  future
returns differ from historical levels, our revenue could be adversely affected.

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

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

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

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

Results of Operations

NET SALES
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
(in thousands)

                                                     Third Quarter                                 First Nine Months
                                       -------------------------------------------   ----------------------------------------------
 Net sales by product line                  2004          % Change         2003            2004      % Change         2003
 ----------------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>           <C>              <C>             <C>       <C>              <C>
 Non-automated programming systems          $2,694        12.4%          $2,396          $7,676            0%        $7,705

 Automated programming systems              $5,071        27.9%          $3,964         $13,819         33.0%        10,387
                                       ----------------   --------------------------- ---------------------------------------------
 Total programming systems                  $7,765        22.1%          $6,360         $21,495         18.8%       $18,092
                                       ===========================================   ==============================================


                                                     Third Quarter                                 First Nine Months
                                       -------------------------------------------   ----------------------------------------------

 Net sales by location                       2004         % Change        2003             2004       % Change        2003
 --------------------------------------------------------------------------------------------   -----------------------------------

 United States                             $1,480         (27.5%)       $2,040           $4,378        (18.8%)       $5,391

    % of total                              19.1%                        32.1%            20.4%                       29.8%

 International                             $6,285          45.5%        $4,320          $17,117         34.8%       $12,702

    % of total                              80.9%                        67.9%            79.6%                       70.2%

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

Revenues  for the third  quarter of 2004  increased  by  approximately  13% over
second  quarter  revenues and increased 22% over the third quarter of last year.
The revenue  increase  results from  increased  deliveries of PS-300 and the new
PS-288FC  automated  systems.  Sales of our traditional  programmers also showed
growth recovery during the quarter. We also shipped the first product in the new
ISP  product  line to a  customer  in the  third  quarter.  International  sales
continued to be strong and  represented  81% of total sales for the quarter with
Asia and Europe being responsible for the revenue growth. Our order level during
the quarter  was again  higher than  shipments,  increasing  the backlog to $1.4
million at September 30, 2004.

Data I/O  continues  to  experience  a trend in its sales mix towards  increased
international sales and believes that, with the economic situation in the United
States and with the  electronics  industry trend toward  offshore and outsourced
manufacturing, this trend is likely to continue.

GROSS MARGIN
<TABLE>
<CAPTION>
                                                               Third Quarter                             First Nine Months
                                                 ----------------------------------------------------------------------------------
 (in thousands)                                          2004                   2003                2004                 2003
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                    <C>                 <C>                  <C>
Gross Margin                                            $4,232                 $3,328              $11,455              $10,064

Percentage of net sales                                  54.5%                  52.3%                53.3%                55.6%
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Gross margin increased in dollars and increased as a percentage of sales for the
third quarter of 2004 compared with the same period of 2003. The increased gross
margin was  primarily due to a higher  percentage of our products  being shipped
through  direct  channels and a shift to a more  favorable  product mix. We also
realized  the  benefit  of lower  costs that we had  negotiated  with a critical
supplier and reduced overhead costs resulting from lower inventory levels. Gross
margins for the nine months ended  September 30, 2004  decreased as a percentage
of sales as a result of more indirect  sales than direct sales, a product mix of
somewhat  lower margin  products  and  unfavorable  labor and overhead  variance
associated with a reduction in inventory.

RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
                                                               Third Quarter                              First Nine Months
                                                  ---------------------------------------------------------------------------------
 (in thousands)                                          2004                   2003                 2004                   2003
 ----------------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                     <C>                 <C>                    <C>
 Research and development                               $1,262                  1,294               $3,642                 $3,534

 Percentage of net sales                                 16.3%                  20.3%                16.9%                  19.5%
 ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Research  and  development  ("R&D")  spending  for the third  quarter of 2004 as
compared to the third quarter of 2003 was slightly less in dollars and less as a
percentage of sales.  This  decrease in spending was  primarily  related to less
spending on R&D subcontractors, offset by increased spending on the ISP project.
During  the  second  quarter,  we  began  shipping  the new  PS-288FC  automated
programming  system.  We plan to increase our engineering  development  spending
during  the  fourth  quarter of 2004 due to  development  projects  and with the
hiring  of  additional  new  engineering  positions  in our new  Shanghai  based
subsidiary in China formed in April of 2004.

SELLING, GENERAL AND ADMINISTRATIVE
<TABLE>
<CAPTION>
                                                               Third Quarter                             First Nine Months
                                                  ---------------------------------------------------------------------------------
 (in thousands)                                          2004                   2003                 2004                   2003
 ----------------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>                   <C>                  <C>                    <C>
 Selling, general & administrative                      $2,405                 $1,823               $6,700                 $5,551

 Percentage of net sales                                 31.0%                  28.7%                31.2%                  30.7%
 ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Selling,  general and administrative  ("SG&A") expenses for the third quarter of
2004 were $582,000 more compared with the same period in 2003,  primarily due to
our strategic investments in Asia and the hiring of additional key personnel, as
well as the unfavorable  currency translation impact of European based operating
costs.  In addition,  we incurred  higher  commission  costs based on the higher
sales volume and a higher mix of  representative  sales than distributor  sales.
During the fourth quarter and throughout 2005, we anticipate increasing spending
related to documenting and testing our internal  control  procedures in order to
satisfy the requirement of Section 404 of the Sarbanes Oxley Act of 2002.

Interest
<TABLE>
<CAPTION>
                                                               Third Quarter                               First Nine Months
                                                  ---------------------------------------------------------------------------------
 (in thousands)                                          2004                   2003                 2004                   2003
 ----------------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>                    <C>                  <C>                    <C>
 Interest income                                          $14                    $20                 $42                     $73

 Interest expense                                         ($6)                   ($4)               ($13)                   ($16)
 ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Interest income decreased slightly during the third quarter of 2004 compared to
the same period in 2003 due to decreased funds invested.

INCOME TAXES
<TABLE>
<CAPTION>
                                                               Third Quarter                              First Nine Months
                                                  -----------------------------------------    ------------------------------------
 (in thousands)                                         2004                    2003                 2004                   2003
 ----------------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                     <C>                  <C>                    <C>
 Income tax expense (benefit)                            $1                    ($114)                $103                   ($10)
 ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Tax expense recorded for the third quarter of 2004 was due to foreign taxes. Tax
valuation reserves decreased by approximately  $426,281 during the quarter. Data
I/O has valuation reserves of $9,377,000 as of September 30, 2004.

FINANCIAL CONDITION

Liquidity and Capital Resources
<TABLE>
<CAPTION>
                                                               Sept. 30,                   June 30,                       Dec. 31,
(in thousands)                                                   2004           Change       2004           Change         2003
------------------------------------------------------------- -------------- ------------- --------------- -------------- ---------
<S>                                                           <C>               <C>        <C>              <C>           <C>
Working capital                                               $10,968           ($17)      $10,985          ($47)         $11,032
------------------------------------------------------------- -------------- ------------- --------------- -------------- ---------
</TABLE>

Working capital decreased  slightly during the third quarter of 2004. Cash, cash
equivalents  and  marketable  securities  increased  approximately  $0.6 million
during the third quarter;  inventory  decreased  approximately  $0.4 million and
accounts receivable  decreased $0.1 million.  The change in inventory relates to
our continued focus on reducing the amount of inventory relative to our business
level. We do not expect to further reduce inventory in the next quarter.  Should
our business  grow  significantly,  we  anticipate  that we will need to utilize
existing liquidity to carry the increased  receivables and inventory expected to
be associated with sales growth.  As of September 30, 2004, Data I/O had no debt
outstanding.

Data I/O estimates that capital  expenditures for property,  plant and equipment
during  the  remainder  of  2004  will  be  approximately  $500,000,   excluding
expenditures for strategic purposes. Data I/O's future capital requirements will
depend on a number of  factors  including  international  operations  expansion,
decisions to invest in new systems and technology  equipment,  costs  associated
with R&D,  successful  launch of new products and the potential use of funds for
strategic  purposes.  We expect to fund capital  expenditures  from existing and
internally  generated funds or we may lease capital  equipment.  The restructure
charges  taken in the second  quarter  and third  quarter  were  mostly paid out
during the third quarter.  This was funded by existing and internally  generated
funds. The savings from the restructure actions,  anticipated to be $1.1 million
per year,  are expected to  approximately  offset the impact of the  restructure
charges taken in the second and third quarter of 2004 by the end of the year. We
believe that we have sufficient  working  capital  available under our operating
plan to fund our operations and capital requirements for at least 12 months.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

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

INTEREST RATE RISK

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

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

<PAGE>

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

<TABLE>
<CAPTION>

                                                                        Estimated Fair          Principal        Estimated Fair
                                     Principal         Principal           Value at           Cash Flows to        Value at
                                     Cash Flows        Cash Flows        September 30,         September 30       December 31,
                                      For 2005        For Q4 2004            2004                 2004               2003
                                   ---------------    -------------     ----------------      -------------     -----------------
<S>                                  <C>                <C>             <C>                    <C>               <C>
     Corporate Bonds                  $798              $   -             $   798                $  754              $  754
                                       1.559%
     Euro-dollar bonds                   -                  -                   -                     -                   -

     Taxable Auction                     -                  -                   -                   500                 500
        Securities

     Tax Advantaged                      -               500                  500                 1,100               1,100
        Auction Securities                               1.952%
                                   ---------------    -------------     ----------------      -------------     -----------------
     Total portfolio value            $798              $500               $1,298                $2,354              $2,354
                                   ===============    =============     ================      =============     =================
</TABLE>

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

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

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

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

At September  30, 2004,  we had six forward  contracts to sell Euros in exchange
for $1.23  million with rates  ranging from 1.1938 to 1.2296 all scheduled to be
due within the next quarter and the value at maturity of $1.21 million.

Item 4.  Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

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

(b) Changes in internal controls.

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

Our  management,  including  the Chief  Executive  Officer  and Chief  Financial
Officer, does not expect that its disclosure controls and procedures or internal
control over financial reporting will prevent all error and all fraud. A control
system, no matter how well conceived and operated,  can provide only reasonable,
not  absolute,  assurance  that the  objectives  of the control  system are met.
Further,  the design of a control  system  must  reflect the fact that there are
resource  constraints,  and the benefits of controls must be considered relative
to their costs.  Because of the inherent  limitations in all control systems, no
evaluation of controls can provide  absolute  assurance  that all control issues
and  instances  of fraud,  if any,  within  Data I/O have been  detected.  These
inherent limitations include the realities that judgments in decision-making can
be faulty,  and that  breakdowns  can occur  because of simple error or mistake.
Additionally,  controls  can be  circumvented  by the  individual  acts  of some
persons,  by collusion of two or more people,  or by management  override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving  its stated goals under all  potential
future  conditions;  over time, control may become inadequate because of changes
in conditions,  or the degree of compliance  with the policies or procedures may
deteriorate.  Because of the inherent  limitations in a  cost-effective  control
system, misstatements due to error or fraud may occur and not be detected.

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

         None

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

         None

Item 3.  Defaults Upon Senior Securities

         None

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

         None

Item 5.  Other Information

         None

Item 6.  Exhibits


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

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

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

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

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

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

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

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

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

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

          3   Articles of Incorporation:

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

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

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

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

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

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

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

          10   Material Contracts:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

<PAGE>

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

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

          99   Other Exhibits
               99.1  Risk Factors                                          23

<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:   November 12, 2004


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




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

<PAGE>


Exhibit 31.1

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

2.   Based on my knowledge, this report does not contain any untrue statement of
     a material  fact or omit to state a  material  fact  necessary  to make the
     statements made, in light of the circumstances  under which such statements
     were made,  not  misleading  with  respect  to the  period  covered by this
     report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included  in  this  report,  fairly  present  in all  material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this report;

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

     a)   Designed  such  disclosure  controls  and  procedures,  or caused such
          disclosure   controls  and   procedures  to  be  designed   under  our
          supervision,  to ensure  that  material  information  relating  to the
          registrant,  including its consolidated subsidiaries, is made known to
          us by others within those entities,  particularly during the period in
          which this report is being prepared;

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

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

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

     a)   All significant  deficiencies and material weaknesses in the design or
          operation  of internal  control over a 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  November 12, 2004         /s/ FREDERICK R. HUME
                                Frederick R. Hume
                                President and Chief Executive Officer
                                (Principal Executive Officer)



<PAGE>


Exhibit 31.2

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

2.   Based on my knowledge, this report does not contain any untrue statement of
     a material  fact or omit to state a  material  fact  necessary  to make the
     statements made, in light of the circumstances  under which such statements
     were made,  not  misleading  with  respect  to the  period  covered by this
     report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included  in  this  report,  fairly  present  in all  material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this report;

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

     a)   Designed  such  disclosure  controls  and  procedures,  or caused such
          disclosure   controls  and   procedures  to  be  designed   under  our
          supervision,  to ensure  that  material  information  relating  to the
          registrant,  including its consolidated subsidiaries, is made known to
          us by others within those entities,  particularly during the period in
          which this report is being prepared;

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

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

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

     a)   All significant  deficiencies and material weaknesses in the design or
          operation  of internal  control over a 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  November 12, 2004          /s/ JOEL S. HATLEN
                                 Joel S. Hatlen
                                 Vice President and Chief Financial Officer
                                 (Principal Financial Officer)



<PAGE>

Exhibit 32.1

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

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

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


/s/ Frederick R. Hume
Frederick R. Hume
Chief Executive Officer
(Principal Executive Officer)
November 12, 2004


<PAGE>



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

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

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


/s/ Joel S. Hatlen
Joel S. Hatlen
Chief Financial Officer
(Principal Financial Officer)
November 12, 2004


<PAGE>



Exhibit 99.1

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

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

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

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

RISK FACTORS

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 handing systems

o inability to hire qualified personnel

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

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

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

o  labor or material shortages

o  the timing of significant orders

o  the sales channel mix of direct vs. indirect distribution

o  war or terrorism

o  health issues (such as SARS)

o  customers' budgets

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

o  cyclical nature of demand for our customers' products

o  general economic conditions in the countries where we sell products

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

FAILURE TO ADAPT TO TECHNOLOGY  TRENDS IN OUR INDUSTRY MAY NEGATIVELY IMPACT 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
   custom ISP solutions

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.

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  markets.  We expect  competition to increase from both  established and
emerging  companies.  If we fail to compete  successfully  against  current  and
future sources of competition,  our profitability and financial performance will
be adversely impacted.

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 line up to date and provide end-users with broad and
current  programmable device support.  Our business may be adversely affected if
our relationships with semiconductor manufactures deteriorate.

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.

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

<PAGE>

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
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.

OUR  INTERNATIONAL  OPERATIONS  MAY  EXPOSE  US TO  ADDITIONAL  RISKS  THAT  MAY
ADVERSELY AFFECT OUR BUSINESS.

International sales represented 70% of our net revenue for the fiscal year ended
December  31,  2003 and 80% for the first nine  months of 2004.  We expect  that
international  sales  will  continue  to be a  significant  portion  of our  net
revenue. International sales may fluctuate due to various factors, including:

o  migration of manufacturing to low cost geographies

o  unexpected changes in regulatory requirements

o  tariffs and taxes

o  difficulties in staffing and managing foreign operations

o  longer average payment cycles and difficulty in collecting accounts
   receivable

o  fluctuations in foreign currency exchange rates

o  impact of the Euro

o  compliance with applicable export licensing requirements

o  product safety and other certification requirements

o  difficulties in integrating foreign and outsourced operations

o  political and economic instability

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

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

IF WE ARE UNABLE TO PROTECT  OUR  INTELLECTUAL  PROPERTY  OR  INFRINGE  ON OTHER
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
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 MAY 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 utilize  temporary  workers to adjust  capacity to fluctuating
demand.  Many of our employees are highly skilled and our continued success will
depend in part upon our  ability to attract and retain  employees  who can be in
great demand within the industry.  None of our  employees are  represented  by a
collective  bargaining  unit and we believe  relations  with our  employees  are
favorable  though  no  assurance  can be made  that this will be the case in the
future.  Refer to the section  captioned  "Affects of Restructuring  Activities"
above.

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.  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  requirements and exchange listing standards
may result in actions such as the  delisting of our stock  impacting our stock's
liquidity;  SEC  enforcement  actions;  and  result  in  securities  claims  and
litigation.

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.