10-K

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

                                    FORM 10-K

(Mark One)

[X   ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934 For the fiscal year ended December 31, 2005

                                       OR

[ ]  TRANSITION  REPORT  PURSUANT  TO SECTION  13 OR 15(d) OF THE  SECURITIES
     EXCHANGE ACT OF 1934 For the 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 Incorporation)                  Employer Identification Number)


                    P.O. Box 97046, 10525 Willows Road N.E.,
                         Redmond, Washington, 98073-9746
                                 (425) 881-6444
- --------------------------------------------------------------------------------
        (Address, including zip code, of registrant's principle executive
               offices and telephone number, including area code)


           Securities registered pursuant to Section 12(b) of the Act:
- --------------------------------------------------------------------------------
                                      NONE

           Securities registered pursuant to Section 12(g) of the Act:
- --------------------------------------------------------------------------------
                           Common Stock (No Par Value)
                  Series A Junior Participating Preferred Stock


Indicate by check mark if the  registrant is a well-known  seasoned  issuer,  as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]

Indicate  by  check  mark if the  registrant  is not  required  to file  reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ]   No [X]

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 if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.    Yes [ ] No [X]

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated  filer, or a  non-accelerated  filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ____ Accelerated filer  ___   Non-accelerated filer [X]

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).   Yes [ ] No [X]

      Aggregate market value of voting and non-voting Common Stock held by
              non-affiliates of the registrant as of June 30, 2005

                                   $20,342,406

8,410,961 shares of Common Stock, no par value, outstanding as of March 27, 2006

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the registrant's  Proxy Statement  relating to its May 24, 2006
Annual Meeting of  Shareholders  are  incorporated  into Part III of this Annual
Report on Form 10-K.





                              DATA I/O CORPORATION

                                    FORM 10-K
                   For the Fiscal Year Ended December 31, 2005

                                      INDEX

Part I                                                                    Page
                                                                          ----

     Item 1.    Business ....................................................3

     Item 1A.   Risk Factors ...............................................10

     Item 1B.   Unresolved Staff Comments ..................................15

     Item 2.    Properties .................................................15

     Item 3.    Legal Proceedings ..........................................15

     Item 4.    Submission of Matters to a Vote of Security Holders ........15


Part II

     Item 5.    Market for Registrant's Common Equity, Related
                Stockholder Matters and Issuer Purchases of Equity
                Securities .................................................16

     Item 6.    Selected Financial Data ....................................17

     Item 7.    Management's Discussion and Analysis of Financial
                Condition  and Results of Operations .......................18

     Item 7A.   Quantitative and Qualitative Disclosures About
                Market Risk ................................................25

     Item 8.    Financial Statements and Supplementary Data ................25

     Item 9.    Changes in and Disagreements with Accountants on
                Accounting  and Financial Disclosure .......................45

     Item 9A.   Controls and Procedures ....................................45

     Item 9B.   Other Information ..........................................45

Part III

     Item 10.   Directors and Executive Officers of the Registrant .........45

     Item 11.   Executive Compensation .....................................46

     Item 12.   Security Ownership of Certain Beneficial Owners and
                Management  and Related Stockholder Matters ................46

     Item 13.   Certain Relationships and Related Transactions .............46

     Item 14.   Principal Accounting Fees and Services .....................46

Part IV

     Item 15.   Exhibits, Financial Statement Schedules ....................47


Signatures .................................................................51




                                     PART I


ITEM 1.  BUSINESS
- -----------------

This  Annual  Report  on Form  10-K and the  documents  incorporated  herein  by
reference  contain  forward-looking  statements  based on current  expectations,
estimates and projections about Data I/O(R) Corporation's industry, management's
beliefs and certain assumptions made by management. See "Management's Discussion
and Analysis of Financial  Condition and Results of Operations - Forward Looking
Statements."

GENERAL

Data I/O Corporation ("Data I/O") designs,  manufactures,  and sells programming
systems  used  by  designers  and  manufacturers  of  electronic  products.  Our
programming  system products are used to program  integrated  circuits ("ICs" or
"devices" or  "semiconductors")  so that the ICs will function as desired in the
customer's  electronic  product.  They are an important tool for the electronics
industry  experiencing  growing use of  programmable  ICs.  Data I/O markets and
distributes our programming systems worldwide,  and is the global leader in this
market. Data I/O incorporated in the State of Washington in 1969.

Data I/O  Mission.  Data  I/O's  mission  is to design  and  deliver  innovative
customer-focused  programming solutions,  which enable customers to manage their
firmware supply chain,  getting their products to market faster,  while reducing
costs in their process.  We align our products and services to make  programming
easy, delight our customers and satisfy their whole product needs.

Helping Customers Manage their Firmware Supply Chain. Much of the innovation and
competitive  advantage of today's  electronic  products  comes from the software
buried  inside  the  product,  which  is  commonly  referred  to as  "firmware."
Companies use firmware to differentiate  their products from their  competitors'
products, constantly writing new code to add features. This allows them to build
multiple  models with identical  hardware and many versions of firmware,  all on
one  production  line.  Any  improvement  in  production  efficiency  boosts the
profitability   of  all  products  on  that  line.   Many   original   equipment
manufacturers  ("OEMs") now outsource  production to  specialists  in electronic
manufacturing  services  ("EMS") to  maximize  the  profit  impact  from  highly
efficient  production.  The  challenges  of managing the  firmware  supply chain
remain,  however,  and can even increase  with this  additional  interface.  Our
systems  allow our  customers - both OEM and EMS  companies - to build  products
with the exact firmware  features that consumers  specify,  virtually  real-time
with the latest  software  release.  We help our customers  eliminate  inventory
risks,  delays,  rework,  and lost market  opportunities  while enabling them to
better serve their customers.

Connected Strategy.  There are many providers of device programming tools on the
market today.  However,  experienced design, test and manufacturing  engineering
teams need a comprehensive  approach to process  management that will assure the
integrity of the product data files from design through manufacturing,  assuring
that the  production  line  builds the product in the most  cost-effective  way,
precisely  as  designed.   Data  I/O  solutions   provide  a  consistent  device
programming   methodology   from  design  through   prototype  and  new  product
introduction  and finally in the high volume  manufacturing  phase. We call this
approach the  `Connected  Strategy'.  Data I/O's  Connected  Strategy  leverages
network  capable  products to easily move the customer's  intellectual  property
securely up and down the supply chain.

Business  Restructuring.  During 2005, we took restructuring  related charges of
$96,000  primarily  related to severance  and  completing  actions that had been
started in the second half of 2004. This aligned management  operations with the
changes made in 2004 to control  costs in North  America and Europe and the need
to build staff serving China and Eastern Europe.


INDUSTRY BACKGROUND

Data I/O enables companies to improve productivity and reduce costs by providing
device  programming  solutions  that enable our  customers to take  intellectual
property (design and data files) and program it into memory, microcontroller and
logic devices.  Companies that design and manufacture  electronic  products that
utilize  programmable devices purchase these solutions from us. These companies,
our  primary  customers,  design and  manufacture  a broad  range of  electronic
products for both consumer and industrial  use. Data I/O also provides  services
related  to  hardware  support,  system  installation  and  repair,  and  device
programming.

According to several industry  reports,  there continues to be forecasted growth
of semiconductors used in consumer electronic products,  automotive electronics,
and industrial  controls  which we believe  should  continue to drive demand for
programming  equipment  and  services.   Programmable  devices  continue  to  be
significant  and growing  segments of the  semiconductor  industry  according to
several   published   industry   reports.    Flash   memory   and   programmable
micro-controllers are typical types



                                       3


of these  devices.  Programmable  devices  offer  advantages  to the  electronic
product  designer  allowing  them to bring  products to market more  quickly and
inexpensively than using fixed-function  devices, and can offer the advantage of
simpler  rapid  product  upgrades.  Programmable  devices also offer  attractive
functionality  to the user of the electronic  product,  such as storing personal
information  or  customizing  product   functionality.   As  a  result,  use  of
programmable  devices is growing rapidly in both high-volume consumer electronic
products and more complex electronic systems.

More  than  100  semiconductor   manufacturers   offer  thousands  of  different
programmable  devices.  The technology  trends driving the  programmable  device
market result in a broad range of requirements for programming  information into
these devices.  Programmable memory devices continue to have higher capacity and
occupy smaller circuit board space. Programmable microcontroller devices are now
more  prevalent   because   semiconductor   vendors  are   standardizing   their
manufacturing processes.  These technology advances require advanced programming
equipment like Data I/O manufactures.

Our automated  programming systems integrate  programming and handling functions
into one product solution.  Quality conscious  customers  continue to drive this
portion  of  our  business,   which  includes   high-volume   manufacturing  and
high-volume programming center customers.


PRODUCTS

In order to accommodate  the expanding  variety and  quantities of  programmable
devices being  manufactured  today,  Data I/O offers multiple  solutions for the
numerous types of devices used by our customers in the various  market  segments
and  applications.  We work closely  with major  manufacturers  of  programmable
devices to develop our products to meet the requirements of a particular device.

Data I/O's line of  programming  systems  includes  a broad  range of  products,
systems,  modules, and accessories,  which we group into two general categories:
automated programming systems and non-automated  programming systems. We provide
automated programming systems in two categories: off-line and in-line (including
In-system  Programming).  In addition,  we provide device support and service on
all of our  products.  Device  support is a critical  aspect of our business and
consists of writing  algorithms  for devices and developing  socket  adapters to
hold and connect to the device for programming.

Within the categories of automated and non-automated  systems,  Data I/O targets
specific solutions at specific market segments.  Data I/O optimizes the solution
based on the customer's device,  process and business needs. Data I/O's flagship
programming  platform,  FlashCORE(TM),  has the speed and pricing to provide the
best  value in the  industry,  making  it the  leading  choice  for high  volume
production.   Data  I/O   technical   teams  work  closely  with   semiconductor
manufacturers  to  actively  plan for  programming  support of new  devices  and
physical packages. The FlashCORE platform is used worldwide to program NOR Flash
devices from all providers,  including market leaders, Intel, Renesas,  Spansion
and Toshiba.  Data I/O leads the industry in providing  solutions for NAND flash
programming from Hynix, Micron, Samsung, ST Microelectronics, Toshiba, M Systems
DiskOnChip and others.  The dynamics of the flash market are changing,  blurring
the  distinction  of NAND and NOR  technologies  and the  emergence of converged
offerings,  including Samsung's OneNAND and Spansion's ORNAND, also supported on
FlashCORE  systems.  Data I/O's strong  partnerships with leading  semiconductor
companies greatly enhance our ability to serve our mutual customers.

Target  customers  include  electronic  product  OEM  manufacturers  of consumer
products, like the fast-growing portable/wireless devices, cellular handsets and
smart appliances. These applications are high volume users of programmable flash
memory devices.

In  portable  electronics  products,  shrinking  form  factors  are  driving the
shrinkage  of device  packages.  Manual  programming  and handling of these tiny
packages is increasingly not practical due to quality issues.  This trend toward
small packages should drive demand for Data I/O's automated  programming systems
in 2006.

Applications  targeted  for these  tiny  devices  include  automotive,  consumer
appliances, remote controls, medical devices,  portable/personal electronics, PC
peripherals, hand-held and wearable PCs, telecommunications including phones and
pagers, security alarms and sensors.

TaskLink(R)  for Windows  provides a universal job set-up tool that  intuitively
guides users in preparing product data files for programming. TaskLink is also a
key element of our Connected  Strategy.  Leveraging network  connectivity,  Data
I/O's TaskLink provides monitoring and control over programming systems anywhere
on the network - providing global companies with greater  visibility and control
over remote production lines or contract manufacturing processes.



                                       4



AUTOMATED PROGRAMMING SYSTEMS

Data I/O  provides our  manufacturing  and  programming  center  customers  with
automated programming systems solutions that include robotic handlers, a variety
of programmers,  input and output media handling (such as tray stackers,  tubes,
loaders or  taping),  and marking  solutions.  Our  ProLINE-RoadRunner(TM)  is a
unique in-line  programming  system with  programming  speed  capability,  which
approaches the speed at which Flash devices can currently  accept data.  Many of
our  customers  need to  program  Flash  and  microcontroller  devices  in large
quantities and very quickly.  ProLINE-RoadRunner mounts directly on the assembly
machine  in  the  production  line  (Siemens,  Fuji,  Universal,  Panasonic  and
Assembleon  machines) and delivers  programmed parts from reels of blank devices
to  the  production  line  in a  just-in-time  fashion.  Our  ProLINE-RoadRunner
eliminates  production   bottlenecks  associated  with  high-density  Flash  and
microcontroller  devices,  allowing last minute firmware changes and eliminating
programmed part inventories, ultimately streamlining and reducing the customer's
production and process costs.  ProLINE-RoadRunner enables customers to implement
lean processes and is a key element in Data I/O's Connected  Strategy,  allowing
customers and partners to more  effectively  manage their firmware supply chain.
ProLINE-RoadRunner  currently  retails from  $72,500 to  $118,000,  depending on
programming capability.

Data I/O's PS family of automated  programming  solutions offers highly flexible
solutions for off-line batch  programming.  Data I/O can configure PS systems to
support not only Flash devices,  but also a wide variety of other devices,  such
as microcontrollers.  These systems provide a number of marking,  labeling,  and
input/output options. Most importantly, customers can make changeovers extremely
fast.  This feature  allows the customer to rapidly  respond to diverse  demands
with very little downtime.  Customers can optimize the PS family systems for any
job to maximize  throughput  and, when combined with fast  changeover  times and
high  reliability,  provide the  highest  levels of output  during a  production
shift. Our latest product,  the PS588,  integrates the same FlashCORE programmer
we use in our PS288,  PS300 FlashCORE,  ProLINE-RoadRunner  and FlashPAK(TM) and
builds  on  our   Connected   Strategy  and  common   architecture.   The  PS588
significantly  improves  throughput and lowers the cost per programmed part. The
PS family products range in price from $129,500 to $469,000.

We introduced the  ImageWriter  200, our solution for in-systems  programming of
programmable  microcontrollers  serial  memory  mounted on the  printed  circuit
board, in the fourth quarter of 2004 and introduced the ImageWriter 300 in 2005.
This solution is designed to be  integrated  into the line but does no handling.
The  primary  markets  for  ImageWriter  are  microcontroller   applications  in
automotive electronics,  industrial automation and consumer electronics. Pricing
for the ImageWriter starts at approximately  $2,000 for the first unit with most
installations requiring multiple units.

NON-AUTOMATED PROGRAMMING SYSTEMS

Our  line of  non-automated  programming  systems  provides  solutions  for both
engineering  and low to  medium-volume  manufacturing  customers.  Non-automated
programming  systems  require a user to  physically  handle  the  devices  being
programmed.  These  types of  programmers  are  also  sometimes  referred  to as
"manual" or "desktop"  programmers.  We now have three families of non-automated
programmers: Sprint, UniSystem and FlashPAK.

Engineering  customers typically use single-site  programming systems during the
prototype  phase of a new  design,  and may  purchase  inexpensive  systems  for
limited device needs or more expensive  systems to support more complex  devices
or a large variety of device types.  Single-site programming systems can perform
programming on only one programmable device at a time.

Data  I/O  offers  a range  of high  quality,  universal  single  socket  manual
programming  solutions through our UniSystem family of programming  systems. Our
UniSite and 3980 xpi  programming  systems  offer the  highest  levels of signal
integrity, which ensure the highest programming standards.  Popular in military,
aerospace,  telecommunications  and other  mission  critical  applications,  the
systems range from $15,000 to $35,000.

For more cost  constrained or higher volume  applications,  the Sprint family of
products offers excellent value for the money and  versatility.  The Sprint Quad
and  Octal  programming  systems  offer  4 and 8  socket  universal  programming
configurations  for higher  volume  applications.  The Sprint family of products
range in price from under $1,000 to $20,000 for the multiple socket solutions.

Our newest  programmer,  the  FlashPAK,  leverages  the  high-speed  proprietary
FlashCORE programming  technology in the  ProLINE-RoadRunner  system. We believe
FlashPAK,  starting at approximately  $7,000, is the world's fastest programming
architecture,  limited today only by the speed at which Flash devices can accept
data.  FlashPAK  is  another  key  element  of Data  I/O's  connected  strategy,
providing OEMs and new product  introduction  facilities with a high performance
Flash programming system that can be used to validate designs before moving down
the firmware supply chain. For manufacturing applications,  the FlashPAK, a high
speed,   multi-socket,   small  footprint  desktop  solution,   provides  manual
programming  operations with the highest level of flexibility at the lowest cost
per part. Manufacturers that use manual programming because of lower labor costs
in areas like Asia find FlashPAK an attractive solution.


                                       5



Data I/O  supports  and  completes  our  product  offering  with a full range of
software and device update products and worldwide service and repair capability.

CUSTOMERS

Data  I/O  sells  our  products  to  customers  worldwide  in a broad  range  of
industries, including wireless handset manufacturers and other telecommunication
companies,  consumer  electronics,  computers,  test and  measurement,  medical,
transportation,   military,   aerospace,   electronic  contract   manufacturing,
programming  centers,  and  semiconductors.   Our  principal  customers  include
Motorola,  Nokia, and Siemens.  Our customers  either design and/or  manufacture
electronic  products that  incorporate  programmable  devices or provide  device
programming  services.  During 2005,  we sold  products to over 1,600  customers
throughout  the world.  There were no customers that accounted for more than 10%
of our 2005 net sales and one customer,  Siemens, accounted for 14.5% and 18% of
our 2004 and 2003 net sales, respectively.

Programmable  device  consumption  continues to grow as more and more electronic
product  manufacturers  take advantage of the flexibility and cost effectiveness
of programmable memory,  microcontroller and logic devices.  Electronic products
today   utilize   programmable   technology   in  one  form  or  another,   from
microcontrolled  home appliance  devices to set top boxes and wireless  devices,
which use increasingly vast amounts of memory for Internet  connectivity and new
leading  edge  features.  Therefore,  our  customers  come  from  virtually  all
industries   manufacturing   electronic  products,   and  include  the  consumer
electronic  products,  cell phone,  personal data assistants  ("PDAs") and other
wireless device manufacturers, home entertainment product sectors, aerospace and
military  applications,  the  personal  computer  ("PC")  and the PC  peripheral
industry, automotive electronics and industrial automation and control.

Flash memory growth.  The Flash memory customer segment is experiencing  some of
the most impressive growth of all programmable  devices.  As cell phones,  PDAs,
games  consoles,  set top boxes and other consumer  devices become more capable,
powerful  and  compact,  the demand for Flash units and  megabytes  continues to
grow.

Microcontroller  growth. As the demand for smarter electronic devices increases,
demand for greater numbers of microcontroller devices increases.  Many household
appliances today contain a microcontroller  to control the critical functions of
the  product  and provide new  features.  Examples of these  appliances  include
toasters,  refrigerators,  garage door openers and even thermostats. This growth
creates  new market  opportunities  for us and we have added  support  for these
devices in our FlashCORE  architecture and our ImageWriter product. In addition,
the number of microcontrollers in automotive electronic  applications is growing
rapidly,  with some  cars  having  as many as 80 or more  microcontrollers  that
control functions from airbag and ABS systems to air  conditioning,  information
centers and entertainment and communication  systems.  We are also targeting the
automotive segment as a critical and growing target segment for our solutions.

GEOGRAPHIC MARKETS AND DISTRIBUTION

Data I/O markets and sells our products  through a combination  of direct sales,
internal  telesales,  and indirect sales  representatives  and distributors.  We
continually  evaluate  our sales  channels  against  our  evolving  markets  and
customers.

Sales of Data  I/O's  semiconductor  programming  equipment  products  requiring
installation by us that is other than perfunctory were previously  recorded when
installation  was  complete,   or  at  the  later  of  customer   acceptance  or
installation,  if an acceptance clause is specified in the sales terms. After we
determined  that our  programming  equipment has reached a point of maturity and
stability such that product  acceptance can be assured by testing at the factory
prior to shipment, and each of the multiple deliverables has an established fair
market value pursuant to EITF 00-21, Data I/O began in the third quarter of 2005
recognizing  revenue  for these  products  at the time of shipment if all of the
other criteria for revenue recognition exist in accordance with SAB 104, Revenue
Recognition.  Revenue for the undelivered  installation service remains deferred
at time of shipment and is recognized upon completion of the installation.

Revenue for products where installation is considered  perfunctory  continues to
be  recognized  at  the  time  of  shipment.  Installation  that  is  considered
perfunctory  includes any  installation  that can be performed by other parties,
such as distributors,  other vendors, or in most cases the customers themselves.
We recognize  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.


U.S. SALES

We market our products  throughout the U.S.  using a variety of sales  channels,
including  our  own  field  sales  management   personnel,   independent   sales
representatives, and a direct telesales organization. Our U.S. independent sales
representatives  obtain orders on an agency basis,  with shipments made directly
to the customer by Data I/O. Net sales in the United States for 2005,  2004, and
2003 were $6,386,000, $5,434,000, and $7,263,000, respectively.


                                       6



FOREIGN SALES

Foreign sales represented  approximately  78%, 80%, and 70%, of net sales of our
programming systems in 2005, 2004, and 2003, respectively (see Note 15 of "Notes
to  Consolidated  Financial  Statements").  We make  foreign  sales  through our
wholly-owned  subsidiaries  in  Germany,  China and  Canada,  as well as through
independent   distributors  and  sales  representatives   located  in  35  other
countries.  Our independent foreign  distributors  purchase Data I/O products in
U.S. Dollars for resale and we recognize the sale at the time of shipment to the
distributor.  As with U.S. sales  representatives,  sales made by  international
sales representatives are on an agency basis with shipments made directly to the
customer by us.

Net foreign sales for 2005, 2004, and 2003 were  $21,935,000,  $21,876,000,  and
$17,424,000, respectively. We determine total foreign sales by the international
geographic area into which the products are sold and delivered,  and include not
only sales by foreign  subsidiaries  but also export  sales from the U.S. to our
foreign distributors and to our representatives' customers. Foreign sales do not
include  transfers between Data I/O and our foreign  subsidiaries.  Export sales
are subject to U.S.  Department of Commerce  regulations.  We have not, however,
experienced any difficulties to date as a result of these requirements.

Fluctuating  exchange  rates and  other  factors  beyond  our  control,  such as
international  monetary  stability,  tariff  and trade  policies,  and U.S.  and
foreign tax and economic policies, affect the level and profitability of foreign
sales. We cannot predict the effect of such factors on our business.

COMPETITION

The  competition in the programming  systems market is highly  fragmented with a
large number of smaller organizations offering inexpensive  solutions.  While we
are  not  aware  of any  published  industry  market  information  covering  the
programming systems market,  according to our inside analysis,  we estimate that
the total number of programming  systems sold during 2005 has been approximately
$110 million,  with Data I/O  capturing an estimated  25% of the global  market.
Over the last four years,  based on our  analysis,  we believe that Data I/O has
gained market share versus our significant competitors.

Competitive  factors  often  include  prices,   features,   device  support  and
programming  speed,  as the  programming  process  impacts  more  on  the  major
manufacturers'  total  production  process.  However,  competitive  factors  are
changing.  The added value for customers is becoming the whole product  solution
that fits the customer's business processes.  As an example,  ProLINE-RoadRunner
offers a unique solution,  which best addresses the customer's  process needs in
high volume Flash  applications.  To this extent,  the value proposition of this
specific programming solution is very different from traditional solutions.

Therefore,  addressing  customers'  process needs is critical to increasing  the
opportunity for programming  solutions  beyond the current amount in this market
niche.  We estimate  that  customers  are spending  between $2.0 billion to $2.5
billion a year on programming memory, microcontroller and logic devices and much
of this programming is achieved through the use of the customers' test equipment
offered by  companies  like  Agilent and  Teradyne or  homegrown  solutions  for
specific  markets  like  automotive.   The  main  competitive  solution  in  the
programmable  market is, therefore,  the in-house solution,  and the opportunity
exists to substitute  customers'  solutions with more economical and more easily
maintainable solutions to solve the problems,  which traditional  programmers do
not address. Boundary scan tools also fall into this category,  although still a
small  market with a number of small  companies  participating  who  principally
focus on test solutions. We expect that our new ImageWriter product will offer a
competitive solution for the consumer  electronics,  automotive  electronics and
industrial automation customers in this market.

MANUFACTURING, RAW MATERIALS, AND BACKLOG

Data  I/O  performs  primarily  assembly  and  testing  of our  products  at our
principal  facility in Redmond,  Washington  and we outsource  our circuit board
manufacturing  and  fabrication.  We use a combination  of standard  components,
proprietary   custom  ICs  and  fabricated   parts   manufactured  to  Data  I/O
specifications.  An outside supplier located in Germany  manufactures our Sprint
non-automated  programming  systems.  Most  components used are available from a
number of different suppliers and subcontractors but certain items, such as some
handler  and  programmer   subassemblies,   custom  ICs,   hybrid  circuits  and
connectors,  are  purchased  from single  sources.  We believe  that  additional
sources  can  be  developed  for  present   single-source   components   without
significant   difficulties  in  obtaining  supplies.  We  cannot  be  sure  that
single-source  components  will always continue to be readily  available.  If we
cannot develop  alternative  sources for these  components,  or if we experience
deterioration  in  relationships  with these  suppliers,  there may be delays or
reductions in product introductions or shipments, which may materially adversely
affect our operating results.

In  accordance  with  industry  practices,  generally  all orders are subject to
cancellation prior to shipment without penalty, except for contracts calling for
custom configuration. To date, such cancellations have not had a material effect
on our sales volume.


                                       7


To meet customers' delivery requirements,  we manufacture certain products based
upon a combination of backlog and anticipated  orders. Most orders are scheduled
for  delivery  within 1 to 60 days after  receipt of the order.  Our  backlog of
pending orders was approximately $1.2 million, $1.5 million, and $1.5 million as
of December 31, 2005, 2004, and 2003,  respectively.  The size of backlog at any
particular  date is not  necessarily a meaningful  indicator of the trend of our
business.

RESEARCH AND DEVELOPMENT

Data I/O believes  that  continued  investment  in research and  development  is
critical to our future  success.  We continue  to develop new  technologies  and
products  and enhance  existing  products.  Future  growth is to a large  extent
dependent upon the timely development and introduction of new products,  as well
as the development of algorithms to support the latest programmable  devices. We
are currently focusing our research and development  efforts on strategic growth
markets,  namely new programming  technology and automated  handling systems for
the  manufacturing  environment,  including  support  for  NAND  FLASH  and  for
M-Systems  DiskOnChip(R)  technology,  microcontroller  support  for  FlashCORE,
additional platforms and improvements for  ProLINE-RoadRunner,  enhancements for
our  ImageWriter  in-system  programming  solution and eDSS. We continue to also
focus on  increasing  our capacity  and  responsiveness  for new device  support
requests  from  customers  and  programmable  IC  manufacturers  by revising and
enhancing our internal processes and tools.  During this past year, our research
and development resulted in these new products: PS 588 and ImageWriter 300.

During 2005,  2004, and 2003, we made  expenditures for research and development
of $5,286,000,  $5,057,000,  and $4,639,000,  respectively,  representing 18.7%,
18.5%, and 18.8%, of net sales, respectively. Research and development costs are
expensed as incurred.

PATENTS, COPYRIGHTS, TRADEMARKS, AND LICENSES

Intellectual  property  rights  applicable to various Data I/O products  include
patents,  copyrights,  trade  secrets  and  trademarks.  Data I/O also 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 also grew our patent portfolio over the past few
years as we developed  strategic  technologies like the  ProLINE-RoadRunner  and
FlashCORE that are critical to our Connected Strategy.

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.  Our software products are not
normally sold separately from sales of programming  systems.  However,  on those
occasions where software is sold separately,  revenue is recognized when a sales
agreement  exists,  when  delivery  has  occurred,  when  the  fee is  fixed  or
determinable, and when collectibility is probable.

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.

EMPLOYEES

As of December 31, 2005, we had 130 employees,  of which 42 were located outside
the U.S. 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.

ENVIRONMENTAL COMPLIANCE

Our  facilities  are subject to numerous  laws and  regulations  concerning  the
discharge of materials or otherwise relating to the environment. Compliance with
environmental laws has not had, nor is it expected to have, a material effect on
our  capital  expenditures,   financial  position,   results  of  operations  or
competitive position.



                                       8


EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below is certain information concerning the executive officers of Data
I/O as of March 27, 2006:

   Name                       Age          Position
   ----                       ---          --------
   Frederick R. Hume           63          President and Chief Executive Officer

   Joel S. Hatlen              47          Vice President
                                           Chief Financial Officer
                                           Secretary and Treasurer


   Harald A. Weigelt           46          Vice President
                                           Worldwide Sales and Services

Frederick R. Hume joined Data I/O as President  and Chief  Executive  Officer in
February 1999. He was appointed to the Board of Directors of Data I/O in January
1999.  From 1988 until his retirement in 1998, Mr. Hume served as Vice President
and General  Manager of Keithley  Instruments in Cleveland,  Ohio.  From 1972 to
1988, he held various management positions at Fluke Corporation, including Group
Vice President for Manufacturing and Research and Development.

Joel S. Hatlen  joined Data I/O in September  1991 and became  Chief  Accounting
Officer and  Corporate  Controller  in February  1997.  In January  1998, he was
promoted to Vice President of Finance and Chief Financial Officer, Secretary and
Treasurer. He began his career at Data I/O as a Senior Tax Accountant and became
Tax Manager in December  1992.  From  September 1981 until joining Data I/O, Mr.
Hatlen was  employed by Ernst & Young LLP,  where his most recent  position  was
Senior Manager.

Harald A. Weigelt joined Data I/O in 1991, and in October 2005, he was appointed
Vice President,  Worldwide Sales and Services. Prior to this position, he served
as the Vice  President,  European  Operations  and as Managing  Director of Data
I/O's  operations  in Germany.  Prior to joining Data I/O, he was employed  with
Instrumatic, where he served as Product Manager and was employed with Wavetek as
Product Manager.



                                       9



ITEM 1A.  RISK FACTORS
- -----------------------

CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS

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

Any or all of the  forward-looking  statements  in this Annual  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 Annual  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


                                       10



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

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

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

FAILURE  TO  ADAPT  TO  TECHNOLOGY   TRENDS  IN  OUR  INDUSTRY  MAY  HINDER  OUR
COMPETITIVENESS AND FINANCIAL RESULTS.

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

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

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

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

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

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

A DECLINE IN ECONOMIC  AND MARKET  CONDITIONS  MAY RESULT IN  DECREASED  CAPITAL
SPENDING BY OUR CUSTOMERS.

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

WE HAVE A  HISTORY  OF RECENT  OPERATING  LOSSES  AND MAY BE UNABLE TO  GENERATE
ENOUGH REVENUE TO ACHIEVE AND MAINTAIN PROFITABILITY.

We have incurred net losses in three of the last five 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.


                                       11


OUR PRIOR  RESTRUCTURING  ACTIVITIES  MAY HAVE A  NEGATIVE  IMPACT ON OUR FUTURE
OPERATIONS.

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

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

WE MAY NEED TO RAISE  ADDITIONAL  CAPITAL  AND OUR  FUTURE  ACCESS TO CAPITAL IS
UNCERTAIN.

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

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

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

WE MAY FACE INCREASED  COMPETITION  AND MAY NOT BE ABLE TO COMPETE  SUCCESSFULLY
WITH CURRENT AND FUTURE COMPETITORS.

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

IF OUR RELATIONSHIP WITH SEMICONDUCTOR MANUFACTURERS DETERIORATES,  OUR BUSINESS
MAY BE ADVERSELY AFFECTED.

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

OUR  RELIANCE  ON A SMALL  NUMBER OF  SUPPLIERS  MAY RESULT IN A SHORTAGE OF KEY
COMPONENTS, WHICH MAY ADVERSELY AFFECT OUR BUSINESS.

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

Because we rely on a small number of suppliers for certain parts, we are subject
to  possible  price  increases  by these  suppliers.  Also,  we may be unable to
accurately forecast our production schedule.  If we underestimate 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.


                                       12



IF WE ARE UNABLE TO ATTRACT AND RETAIN QUALIFIED THIRD-PARTY  DISTRIBUTORS,  OUR
BUSINESS MAY BE ADVERSELY AFFECTED.

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

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

International sales represented 78% of our net revenue for the fiscal year ended
December 31, 2005 and 80% for the fiscal year ended December 31, 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 establishing, staffing and managing foreign operations

o    longer  average  payment  cycles  and  difficulty  in  collecting  accounts
     receivable

o    fluctuations in foreign currency exchange rates

o    compliance with applicable export 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   ("EU")  has
established certain electronic emission and product safety requirements  ("CE").
Although  our  products  currently  meet these  requirements,  failure to obtain
either a CE  certification  or a waiver  for any  product  may  prevent  us from
marketing  that product in Europe.  The EU also has  directives  concerning  the
Reduction of Hazardous  Substances ("RoHS") from which Data I/O is relying on an
exemption  for  test  and  measurement  companies.  Failure  to meet  applicable
directives  or  qualifying  exemption  may  prevent  us from  marketing  certain
products in Europe or other territories with similar requirements.

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

IF WE ARE UNABLE TO PROTECT  OUR  INTELLECTUAL  PROPERTY,  WE MAY NOT BE ABLE TO
COMPETE EFFECTIVELY OR OPERATE PROFITABLY.

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

Because of the rapidly  changing  technology  in the  semiconductor,  electronic
equipment  and  software  industries,  portions of our products  might  possibly
infringe upon existing patents or copyrights, and we may, therefore, be required
to obtain  licenses or  discontinue  the use of the  infringing  technology.  We
believe that any exposure we may have regarding possible  infringement claims is
a reasonable  business  risk  similar to that assumed by other  companies in the
electronic   equipment   and  software   industries.   However,   any  claim  of
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.


                                       13


WE MAY PURSUE BUSINESS ACQUISITIONS THAT COULD IMPAIR OUR FINANCIAL POSITION AND
PROFITABILITY.

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

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

o    diverting management's attention from other business concerns

o    failing to successfully integrate the acquired products

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

o    entering markets where we have no or limited prior experience

o    potential loss of key employees of the acquired company

o    additional burden of support for an acquired programmer architecture

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

THE LOSS OF KEY EMPLOYEES MAY ADVERSELY AFFECT OUR OPERATIONS.

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

FAILURE TO COMPLY WITH REGULATORY  REQUIREMENTS  MAY ADVERSELY  AFFECT OUR STOCK
PRICE AND BUSINESS.

As a public company, we are subject to numerous  governmental and stock exchange
requirements, with which we believe we are in compliance. The Sarbanes-Oxley Act
of 2002 and the Securities and Exchange  Commission (SEC) have requirements that
we may fail to meet by the 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, with
which we are not yet required to comply as we are not an accelerated  filer. The
compliance date for non-accelerated filers has been extended to the first fiscal
year ending on or after July 15, 2007. Data I/O assumes it will continue to have
the status of a non-accelerated filer based on the aggregate market value of the
voting and non-voting  shares held as of June 30, 2005. During the course of our
testing we may  identify  deficiencies  which we may not be able to remediate in
time to  meet  the  deadline  imposed  by the  Sarbanes-Oxley  Act of  2002  for
compliance with the  requirements  of Section 404. We may also incur  additional
costs in order to comply with Section  404. In  addition,  if we fail to achieve
and  maintain  the  adequacy of our internal  controls,  as such  standards  are
modified,  supplemented  or  amended  from  time to time,  we may not be able to
ensure that we can conclude on an ongoing basis that we have effective  internal
controls  over  financial  reporting  in  accordance  with  Section  404  of the
Sarbanes-Oxley Act of 2002. Moreover, effective internal controls,  particularly
those related to revenue  recognition,  are necessary for us to produce reliable
financial  reports and are  important to help  prevent  financial  fraud.  If we
cannot provide  reliable  financial  reports or prevent fraud,  our business and
operating  results  could be  harmed,  investors  could lose  confidence  in our
reported  financial  information,  and the trading price of our stock could drop
significantly.  Our failure to meet regulatory requirements and exchange listing
standards may result in actions such as the delisting of our stock impacting our
stock's  liquidity;   SEC  enforcement   actions;   and  securities  claims  and
litigation.

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.


                                       14


FAILURE  TO  SUCCESSFULLY  IMPLEMENT  A NEW  WORLDWIDE  INFORMATION  SYSTEM  MAY
ADVERSELY AFFECT OUR OPERATIONS AND SALES.

We  have  recently  acquired  and are  currently  implementing  a new  worldwide
information system. Our corporate office began use of the new system in February
2006. We are now in the process of implementing the new system at our subsidiary
locations.  Our operations and financial results could be adversely  affected if
we are unable to complete the system implement without significant interruptions
in accounting systems,  order entry,  billing,  manufacturing and other customer
support functions. In addition, the costs associated with the implementation and
training could exceed budgeted  amounts and adversely  affect our  profitability
and liquidity.  System  implementation  delays could cause  difficulties  in our
complying  with  the  internal  controls   assessment,   reporting  and  auditor
attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002.

MOVING OUR  HEADQUARTERS  AND  MANUFACTURING  OPERATION MAY ADVERSELY AFFECT OUR
OPERATIONS AND SALES.

We anticipate  moving our Redmond  headquarters and  manufacturing  operation in
mid-year  2006 from our  current  location  to a smaller  location  in  Redmond,
Washington. If we are not able to timely and successfully complete the move, our
short-term  ability to  manufacture  and ship  products  and our sales  could be
adversely affected.

ITEM 1B.  UNRESOLVED STAFF COMMENTS
- -----------------------------------

None.

ITEM 2.  PROPERTIES
- -------------------

In May 1997, Data I/O completed the sale of the land and building comprising our
Redmond,  Washington corporate  headquarters and is currently leasing the 96,000
square foot building on a 10-year  leaseback  agreement  with an option to renew
the lease for an  additional  10 years.  This lease  required base annual rental
payments  in  2005  of  approximately  $1,138,000.  See  Note  7  of  "Notes  to
Consolidated Financial Statements."

On February 28,  2006,  Data I/O entered into a  termination  agreement  for the
Redmond  headquarters  facility  and a five year  lease  agreement  for a 40,000
square foot office space also located in Redmond,  Washington.  We  anticipate a
mid-year move of our corporate headquarters to this new location. We also expect
to enter into a new lease  agreement  during  the first  quarter of 2006 for our
offices in Shanghai, China.

In addition to the Redmond facility,  approximately 13,000 square feet is leased
at five foreign locations,  including our German sales,  service and engineering
operations located in Munich,  Germany,  and three sales and service offices and
an engineering location in China.

ITEM 3.  LEGAL PROCEEDINGS
- --------------------------

As of the date of this  Annual  Report,  Data  I/O is not a party  to any  legal
proceedings, the adverse outcome of which in management's opinion,  individually
or in the  aggregate,  would have a material  adverse  effect on our  results of
operations  or  financial  position.  From time to time,  we may be  involved in
litigation relating to claims arising out of our operations in the normal course
of business.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------

No matters  were  submitted  for a vote of  shareholders  of Data I/O during the
fourth quarter of the fiscal year ended December 31, 2005.


                                       15



                                     PART II


ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
        ISSUER PURCHASES OF EQUITY SECURITIES

The  following  table  shows,  for the periods  indicated,  the high and low bid
information for Data I/O's Common Stock as reported by the NASDAQ Capital Market
tier of The NASDAQ Stock Market (NASDAQ symbol is DAIO).

             Period                                  High          Low
             ------                                  ----          ---
2005         Fourth Quarter                         $5.00        $2.08
             Third Quarter                           2.89         2.20
             Second Quarter                          4.00         2.02
             First Quarter                           3.38         2.81

2004         Fourth Quarter                         $3.85        $2.38
             Third Quarter                           2.97         1.92
             Second Quarter                          3.15         2.17
             First Quarter                           3.70         2.76

The approximate number of shareholders of record as of March 27, 2006 was 689.

Except  for a special  cash  dividend  of $4.15 per share paid on March 8, 1989,
Data I/O has not paid cash dividends on our Common Stock and does not anticipate
paying regular cash dividends in the foreseeable future.

No sales of  unregistered  securities  were made by Data I/O during the  periods
ended December 31, 2005, December 31, 2004 and December 31, 2003.

See Item 12 for the Equity Compensation Plan Information.


                                       16



ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------

The following selected consolidated financial data should be read in conjunction
with  the  consolidated  financial  statements  and the  notes  thereto  and the
information contained herein in Item 7, "Management's Discussion and Analysis of
Financial  Condition  and  Results of  Operations."  Historical  results are not
necessarily indicative of future results.


                                                                                        Year Ended
- -------------------------------------------------------------------------------------------------------------------------------
                                                                Dec. 31,      Dec. 31,      Dec. 31,      Dec. 31,     Dec. 31,
(in thousands, except employee and per share data)              2005(3)        2004          2003          2002        2001(2)
- -------------------------------------------------------------------------------------------------------------------------------
                                                                                                        
For The Year:
     Net sales                                                   $28,321       $27,310       $24,687      $22,838      $26,826
     Cost of goods sold                                           12,230        12,726        11,008       11,556       15,078
                                                             ------------------------------------------------------------------
     Gross margin                                                 16,091        14,584        13,679       11,282       11,748
     Research and development                                      5,286         5,057         4,639        5,331        6,740
     Selling, general and administrative                          10,085         9,036         7,715        8,254        9,707
     Net provision (reversal) for business restructuring(1)           96           562           (39)         632        1,211
                                                             ------------------------------------------------------------------
     Operating income (loss)                                         624           (71)        1,364       (2,935)      (5,910)
     Non-operating income (loss)                                      78           (35)          (25)        (232)         124
                                                             ------------------------------------------------------------------

     Income (loss)                                                   702          (106)        1,339       (3,167)      (5,786)
     Income tax (expense) benefit                                   (120)           14           (33)          61         (224)
                                                             ------------------------------------------------------------------
     Net income (loss)                                              $582          ($92)       $1,306      ($3,106)     ($6,010)

At Year-end:
     Working capital                                              $9,994       $10,250       $11,032       $9,125      $12,010
     Total assets                                                $18,137       $17,847       $18,100      $16,414      $20,387
     Stockholders' equity                                        $12,283       $11,470       $11,200       $9,332      $12,201
     Number of employees                                             130           122           127          125          155
- -------------------------------------------------------------------------------------------------------------------------------
Common Stock Data(3):
     Basic earnings (loss) per share                               $0.07        ($0.01)        $0.17       ($0.40)      ($0.79)
     Diluted earnings (loss) per share                             $0.07        ($0.01)        $0.16       ($0.40)      ($0.79)
     Book value per share at year-end                              $1.47         $1.42         $1.40        $1.20        $1.60
     Shares outstanding at year-end                                8,362         8,065         7,976        7,768        7,614
     Weighted-average basic shares outstanding                     8,226         8,029         7,910        7,704        7,572
     Weighted-average diluted shares outstanding                   8,532         8,029         8,117        7,704        7,572
- -------------------------------------------------------------------------------------------------------------------------------

Key Ratios:
     Current ratio                                                   2.7           2.8           2.9          2.6          2.9
     Gross margin to sales                                          56.8%         53.4%         55.4%        49.4%        43.8%
     Operating income (loss) to sales                                2.2%          (.3%)         5.5%       (12.9%)      (22.0%)
     Income (loss) to sales                                          2.5%          (.3%)         5.3%       (13.6%)      (22.4%)
     Return on average stockholders' equity                          4.9%          (.8%)        12.7%       (28.8%)      (39.7%)
- -------------------------------------------------------------------------------------------------------------------------------

Footnotes:

(1)  For  further  discussion,  see Note 3 of "Notes to  Consolidated  Financial
     Statements."

(2)  In 2001, Data I/O converted to reporting on a calendar  year-end basis. The
     first  quarter of 2001  covered the period  December  29, 2000 to March 31,
     2001.

(3)  The  company  began  recognizing  revenue  for  certain  of  its  equipment
     requiring  installation  at the time of  shipment  beginning  in the  third
     quarter  of  2005.  See  Note  1  of  "Notes  to   Consolidated   Financial
     Statements."



                                       17


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
         AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K 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  Annual  Report  on  Form  10-K  are  forward-looking.  In  particular,
statements  herein regarding  industry  prospects and trends;  future results of
operations  or  financial   position;   integration  of  acquired  products  and
operations;  market  acceptance of our newly  introduced  or upgraded  products;
development,  introduction  and shipment of new products;  establishing  foreign
operations;  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 Annual  Report.  The Reader  should not place
undue reliance on these  forward-looking  statements.  The following discussions
and the section  entitled  "Risk  Factors -  Cautionary  Factors That May Affect
Future  Results"  describes  some,  but not all, of the factors that could cause
these differences.

OVERVIEW

In 2005,  we  continued to focus on our primary goal of 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 began to see a recovery in the
first quarter of 2005 which continued throughout the year. We expect that demand
for  programming  capacity  should improve in 2006, in part based on third party
forecasted  increased  2006 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 in and mix of business we
expect.  We are focusing our research and  development  efforts in our strategic
growth  markets,  namely new  programming  technology and automated  programming
systems  for  the   manufacturing   environment,   particularly   extending  the
capabilities   and   support   for   our   FlashCORE    architecture   and   the
ProLINE-RoadRunner  and PS families.  In 2004, we obtained the rights to certain
in-system  programming  ("ISP")  technology.   We  have  incorporated  this  ISP
technology  into  our  ImageWriter  product,  and will be  required  to pay a 4%
royalty on product  revenues  associated  with such  technology  until March 31,
2007. We began  shipments of the  ImageWriter 200 in the second quarter of 2005,
and in September we introduced the ImageWriter  300. The related  royalties were
not a  material  amount  in 2005.  To  better  support  our  customers  in their
geographic  areas and time zones, we have expanded device support  operations in
Germany, India and China.

Our  customer  focus  has  been  on  strategic  high  volume  manufacturers  and
programming centers and supporting NAND Flash and  microcontrollers on our newer
products  to  gain  new   accounts   and  break  into  new   markets,   such  as
microcontrollers  for the  automotive  market.  We  continue to expand our China
operations  to take  advantage  of the  growth of  manufacturing  in  China.  We
continue to focus on building a services  business  expanding  from our existing
service  operation  model in Brazil.  We also increased our efforts to recapture
the Japanese  market and have entered into a  distribution  agreement  with Toyo
Corporation in Japan. We continue our efforts to partner with the  semiconductor
manufacturers to better serve our mutual customers.

BUSINESS RESTRUCTURING PROGRESS

During 2005, we took restructuring  related charges of $96,000 primarily related
to severance and completing  actions that had been started in the second half of
2004.  This  aligned  management  operations  with the  changes  made in 2004 to
control  costs in North  America and Europe and the need to build staff  serving
China and Eastern Europe.

At  December  31,  2005,  $33,000  remained  as accrued  but unpaid  restructure
charges, which will be paid in 2006.

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


                                       18



During  2003,  we completed  the  restructuring  that began  during 2001,  which
included  actions  taken to reduce  the level of  revenue  required  for our net
income breakeven point and realign Data I/O with our market opportunities.  This
restructuring  included  the  following:  a reduction  in our global  workforce;
discontinuance or reallocation of numerous projects and activities not essential
to our long-term goals; streamlining discretionary activities;  consolidation of
numerous  functions  across the  organization  to create a team,  which was more
productive and able to respond faster to global customer needs; and closure of a
facility in Germany and moving our  operations  to other  locations  within Data
I/O. We required  this  operational  repositioning  because of the impact of the
economic  slowdown and the decline in capital  spending  across a high number of
customer  groups on general demand for  programming  equipment over the past few
years.  Our  level  of  revenue  required  for our net  income  breakeven  point
increased in 2003,  primarily due to cost increases resulting from the impact of
the weaker dollar on foreign  currency based costs and from personnel  costs due
to raises,  incentive  compensation  and selective  hiring of  individuals  with
critical skills to help position us as the continuing  technology  leader in our
market.

At December 31, 2003 all restructuring  expenses  associated with the activities
detailed  for 2002 and 2001 had been  paid and the  excess  expense  accrual  of
$39,000 was reversed during 2003.

CRITICAL ACCOUNTING POLICY JUDGMENTS AND ESTIMATES

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

Data I/O believes the following  critical  accounting  policies  affect the more
significant  judgments and estimates  used in the  preparation  of our financial
statements:

Revenue  Recognition:  Sales of Data I/O's semiconductor  programming  equipment
requiring  installation  by us that is other than  perfunctory  were  previously
recorded when installation was complete,  or at the later of customer acceptance
or  installation,  if an  acceptance  clause is  specified  in the sales  terms.
Beginning in the third quarter of 2005, Data I/O began  recognizing  revenue for
these products at the time of shipment. We began recognizing revenue at the time
of shipment after we determined that our automated products have reached a point
of maturity and stability such that product acceptance can be assured by testing
at the factory prior to shipment and that the installation meets the criteria to
be considered a separate element.  When arrangements  include multiple elements,
we use  objective  evidence  of fair value to allocate  revenue to the  elements
pursuant to EITF 00-21, "Revenue  Arrangements with Multiple  Deliverables," and
recognize  revenue when the criteria for revenue  recognition  have been met for
each element according to SAB 104, "Revenue  Recognition." The amount of revenue
recognized  is  affected  by  our  judgments  as to  the  collectibility  of the
transaction  or whether an  arrangement  includes  multiple  elements and if so,
whether  specific  objective  evidence of fair value exists for those  elements.
Changes to the elements in an arrangement and the ability to establish  specific
objective  evidence  for those  elements  could affect the timing of the revenue
recognition.  These conditions could be subjective and actual results could vary
from the estimated outcome.

Installation that is considered  perfunctory  includes any installation that can
be performed by other parties,  such as distributors,  other vendors, or in most
cases the customers themselves.  This takes into account the complexity,  skill,
and training needed as well as customer expectations regarding installation. The
revenue  related to  products  requiring  installation  that is  perfunctory  is
recognized  at the time of  shipment  provided  that  persuasive  evidence of an
arrangement exists,  shipment has occurred,  the price is fixed or determinable,
and collectibility is reasonably assured.

We 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  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  Provision:  We base inventory  purchases and commitments  upon future
demand forecasts and historic usage.  Such estimates are difficult to make under
most economic  conditions.  If there is a significant decrease in demand for our
products


                                       19


or there is a higher risk of inventory  obsolescence because of rapidly changing
technology and customer  requirements,  Data I/O may be required to increase our
inventory  provision  adjustments  and  our  gross  margin  could  be  adversely
affected.

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

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


                                       20


RESULTS OF OPERATIONS

NET SALES


(in thousands)
Net sales by product line:                       2005             Change            2004           Change           2003
- -------------------------------------------------------------------------------------------------------------------------------

                                                                                                    
Automated programming systems                  $16,040            (6.3%)          $17,116           23.0%          $13,920
Non-automated programming systems               12,281            20.5%            10,194           (5.3%)          10,767
                                           ----------------                   ---------------                  ---------------
Totals                                         $28,321             3.7%           $27,310           10.6%          $24,687
                                           ================                   ===============                  ===============

Net sales by location:
  United States                                 $6,386            17.5%            $5,434          (25.2%)          $7,263
      % of total                                  22.5%                              19.9%                            29.4%
  International                                $21,935             0.3%           $21,876           25.6%          $17,424
      % of total                                  77.5%                              80.1%                            70.6%
- -------------------------------------------------------------------------------------------------------------------------------



2005 vs. 2004
- -------------
Revenues increased  approximately $1.0 million or 3.7% in 2005 compared to 2004.
The increase in revenue  reflects strong sales of our PS systems,  FlashPAKs and
related aftermarket  products.  We benefited from the programming centers adding
capacity  during  2005 which  represented  the major  customer  group for our PS
systems.  While we did  experience  some decline in  RoadRunner  revenues as the
demand for automation  capacity in the wireless segment declined,  the number of
new  RoadRunner  accounts,   especially  within  the  automotive  target  group,
increased in 2005 as compared to 2004.  FlashPAK sales were especially strong in
Asia where manual programming is most common.

International  sales  increased  slightly  in total with  significant  growth in
China.  However,  our overall Asian sales decreased as we experienced  declining
sales in our Japanese and Korean markets. The U.S. dollar strengthened  slightly
during 2005,  which had an unfavorable  effect on our currency  translation  for
sales  denominated  in  foreign  currency,  and in  particular  the Euro,  which
accounted for $290,000  offset to our sales  increase.  Our U.S. sales increased
approximately  $950,000  or  17.5%,  which we  attribute  to  improved  sales to
programming centers and automotive electronics manufacturers.

In 2005, we began to ship the PS588 FlashCORE  automated  programming system and
the ImageWriter 300, our ISP solution.  We expect these products to increase our
revenues;  however, partially offsetting this expected increase is the continued
trend of declining sales of our older non-automated product lines.

2004 vs. 2003
- -------------
Revenues  increased  10.6% in 2004 over 2003.  This  increase  resulted from our
automated  systems  sales  including  growth in the ProLINE  RoadRunner,  the PS
family  (including  the  PS288 new in 2004) and the  related  automated  systems
aftermarket.  Data I/O's non  automated  systems  continued a trend of declining
sales in older products; however FlashPAK, our newer FlashCore based programmer,
continued to show good growth with sales more than doubling in 2004.

International  sales grew,  particularly in Asia, while sales in the U.S. market
continued to decline.  The U.S.  dollar  continued  to weaken in 2004,  which we
believe  assisted our export  sales,  due to  increased  buying power of foreign
currencies  and  the  favorable   effect  of  currency   translation  for  sales
denominated in foreign currency, and in particular the Euro, which accounted for
$784,000  of the  sales  growth.  We see a  continuing  trend  in  migration  of
customers  moving  manufacturing  operations  to low-cost  geographies,  thereby
increasing international sales opportunities.


                                       21





GROSS MARGIN

 (in thousands)                       2005             Change              2004              Change              2003
- -----------------------------------------------------------------------------------------------------------------------------
                                                                                                
Gross margin                        $16,091             10.3%            $14,584              6.6%             $13,679
Percentage of net sales                56.8%                                53.4%                                 55.4%
- -----------------------------------------------------------------------------------------------------------------------------


2005 vs. 2004
- -------------
Gross  margins  increased in both dollars and as a percentage  of sales for 2005
compared to 2004.  The increase in gross margin dollars was due primarily to the
additional  margin  from  increased  sales  volume of  approximately  $1,400,000
especially for the PS family and FlashCore.  The increase in the gross margin as
a percentage of sales results from a favorable average selling price variance of
$807,000,  offset by  unfavorable  currency  exchange  effects of  approximately
$280,000.  Similar to 2004, the manufacturing  overhead application variance was
$272,000  unfavorable due primarily to decreasing  inventory levels and lowering
our rate standards due to productivity.

2004 vs. 2003
- -------------
Gross  margins  increased in dollars but  declined as a percentage  of sales for
2004 compared to 2003. The increase in gross margin dollars was due primarily to
the increase in revenue dollars. The decline in the gross margin as a percentage
of sales reflects  product mix shifts to those with higher  material  costs,  as
well as unfavorable  average  selling price variance of $465,000 and unfavorable
manufacturing   overhead  variance  of  $260,000.   The  manufacturing  overhead
application variance resulted largely from decreasing our inventory level.


RESEARCH AND DEVELOPMENT

 (in thousands)                       2005             Change              2004              Change              2003
- -----------------------------------------------------------------------------------------------------------------------------
                                                                                                 
 Research and development            $5,286             4.5%              $5,057              9.0%              $4,639
 Percentage of net sales               18.7%                                18.5%                                 18.8%
- -----------------------------------------------------------------------------------------------------------------------------



2005 vs. 2004
- -------------
Research and development  ("R&D")  spending during 2005 increased by $229,000 or
4.5% over 2004, but remained  relatively  consistent as a percentage of sales at
approximately  19%.  The increase in spending  relates  primarily to new product
initiatives,  particularly new automation  solutions,  the ImageWriter,  our new
in-system  programming  solution,  and the start of  engineering  operations  in
China.  We shipped the first PS588 in early 2005 and the ImageWriter 300 product
during the third  quarter  of 2005.  Data  I/O's R&D  continues  to focus on the
FlashCORE  architecture,  expanding its capability to address newer technologies
as well as microcontroller device support. We expect R&D spending to increase as
we fill open positions. Our R&D spending also fluctuates based on the number and
the development stage of projects.

2004 vs. 2003
- -------------
Research and development ("R&D") spending for 2004 as compared to 2003 increased
9%, however,  as a percentage of sales,  R&D remained about 19%. The increase in
spending  relates  primarily  to new product  initiatives.  In  particular,  the
ImageWriter,  our new in system programming solution, and eDSS, a tool suite for
device support, were launched in November of 2004. Data I/O's R&D focused on the
FlashCORE  architecture,  expanding its capability to address newer technologies
like  NAND  Flash  support  for  M-Systems  DiskOnChip  technology  as  well  as
microcontroller  device  support.  New  products  in the PS family of  automated
systems included the PS288 FlashCORE,  and, introduced in early 2005, the PS 588
FlashCORE.  Also, we released a  ProLINE-RoadRunner  version for Panasonic CM402
machines.  Finally, we completed our initiative to create "global device support
factories"  with the creation of our engineering  operation in Shanghai,  China,
which joins our other  locations in Redmond,  Washington,  Germany,  Japan,  and
India.

We  believe  it is  essential  to invest  in R&D to  significantly  enhance  our
existing products and to create new products as markets develop and technologies
change. We are focusing our R&D efforts in our strategic growth markets,  namely
new   programming   technology  and  automated   programming   systems  for  the
manufacturing  environment,  particularly extending the capabilities and support
for our FlashCORE and programmer architecture; new automated handling solutions;
and enhancing our ImageWriter products.


                                       22




SELLING, GENERAL AND ADMINISTRATIVE

(in thousands)                                  2005           Change            2004           Change           2003
- ----------------------------------------------------------------------------------------------------------------------------
                                                                                                 
 Selling, general and administrative          $10,085           11.6%           $9,036           17.1%          $7,715
 Percentage of net sales                         35.6%                            33.1%                           31.3%
- ----------------------------------------------------------------------------------------------------------------------------



2005 vs. 2004
- -------------
Selling, General and Administrative ("SG&A") expenses increased by $1,049,000 in
2005 compared to 2004 based  primarily on our  operations in China which include
increased  costs  of  approximately   $488,000.  In  addition,  we  incurred  an
additional $148,000 associated with the new information system which we acquired
in 2005, as well as additional  accounting and the hiring of key personnel costs
of approximately  $158,000,  additional  marketing personnel and launch costs of
$83,000,  unfavorable currency translation impact of $36,000 from European based
operating costs, an unfavorable  administrative  overhead application allocation
amount of $254,000 and finally,  an increase in senior management  incentive pay
of $84,000 related to profitability,  offset by lower sales channel  commissions
of $138,000.

2004 vs. 2003
- -------------
Selling, General and Administrative ("SG&A") expenses increased by $1,321,000 in
2004 versus the prior year due primarily to our strategic  investments  in China
totaling  $343,000 and the hiring of additional  key  personnel of $336,000,  as
well as the unfavorable  currency  translation  impact of $160,000 from European
based operating  costs.  In addition,  we incurred  higher  commission  costs of
$281,000  based on the higher  sales  volume and a higher mix of  representative
sales than  distributor  sales and  higher  travel  and  entertainment  costs of
$184,000.   Partially  offsetting  this  was  a  reduction  in  bonus  incentive
compensation of $244,000 related to the 2004 net loss.


 INTEREST

 (in thousands)                                 2005           Change            2004           Change           2003
- ----------------------------------------------------------------------------------------------------------------------------
                                                                                                  
 Interest income                                $116             50.6%           $77             (31.3%)         $112
 Interest expense                               ($20)            11.1%          ($18)            (21.7%)         ($23)
- ----------------------------------------------------------------------------------------------------------------------------



2005 vs. 2004
- -------------
Interest income for 2005 increased due primarily to higher yields.

2004 vs. 2003
- -------------
Interest  income for 2004  decreased  as compared to 2003  primarily  due to the
decrease in marketable securities.


INCOME TAXES

 (in thousands)                                 2005                             2004                            2003
- ----------------------------------------------------------------------------------------------------------------------------
                                                                                                        
 Income tax (expense) benefit                  ($120)                            $14                             ($33)
- ----------------------------------------------------------------------------------------------------------------------------


2005 vs. 2004 and 2004 vs. 2003
- -------------------------------
Income tax expense or benefit in all years  relates to foreign and state  income
taxes.  Impacting  the  effective  tax  rate  related  to  foreign  income  were
offsetting  losses requiring  valuation  allowances in other  countries.  We had
income in some foreign operations partially offset by losses in other countries.
For financial  reporting  purposes,  Data I/O established tax valuation reserves
against  our  deferred  tax assets  because of the  uncertainty  relating to the
realization of such asset values.  We had valuation  allowances of $9.8 million,
$9.8  million,   and  $9.7  million  at  December  31,  2005,  2004,  and  2003,
respectively.  Given the uncertainty  created by our loss history,  we expect to
continue to limit the  recognition  of net  deferred tax assets and maintain the
tax valuation allowances.

INFLATION AND CHANGES IN FOREIGN CURRENCY EXCHANGE RATES

Sales and  expenses  incurred by foreign  subsidiaries  are  denominated  in the
subsidiary's  local currency and translated  into U.S. Dollar amounts at average
rates of exchange during the year. We recognized  foreign  currency  transaction
losses of $18,000,  $94,000 and $114,000 in 2005,  2004 and 2003,  respectively.
The transaction losses resulted primarily from sales by our German subsidiary to
our main  customers,  which were  invoiced in US  dollars.  We hedge our foreign
currency  exposure  on sales  of  inventory  and  certain  loans to our  foreign
subsidiaries through the use of foreign currency exchange contracts.  See Note 1
of "Notes to Consolidated Financial Statements."


                                       23



FINANCIAL CONDITION


LIQUIDITY AND CAPITAL RESOURCES

 (in thousands)                                  2005           Change           2004           Change           2003
- ----------------------------------------------------------------------------------------------------------------------------
                                                                                                
 Working capital                                $9,994          ($256)          $10,250          ($782)        $11,032
- ----------------------------------------------------------------------------------------------------------------------------



At December 31, 2005,  Data I/O's  principal  sources of liquidity  consisted of
existing cash, cash equivalents and marketable  securities.  Our working capital
decreased by $256,000 and our current ratio decreased from 2.8 in 2004 to 2.7 in
2005.

Our cash and cash  equivalents  decreased by $1.2 million  during 2005 primarily
due to cash used to purchase property, plant and equipment,  including software,
totaling $2 million.  Major capital purchases  included  approximately  $800,000
related  to  the  Brazilian  programming  service  operation  and  approximately
$420,000  related to the  purchase and set up of our new  worldwide  information
system. We expect that we will continue to make capital  expenditures to support
our business and anticipate  that present  working capital will be sufficient to
meet our operating requirements.  Capital expenditures are expected to be funded
by existing and internally generated funds or lease financing.

We also used  approximately  $200,000  of cash for  operations  which  primarily
included a $2.6 million increase in accounts  receivable,  partially offset by a
$417,000 decrease in inventory,  $644,000 of demonstration equipment transferred
to cost of goods sold, as we continually  need to update to the latest  versions
of our  equipment.  Items not requiring the use of cash in operations  were $1.1
million of depreciation and  amortization.  The increase in accounts  receivable
resulted  from  increased  sales  especially  late in the quarter and the longer
collection  times  we  are  experiencing  with  increased  international  sales,
especially in China.

During 2004, our cash and cash equivalents  increased by $1.2 million  primarily
due  to a  $520,000  decrease  in  accounts  receivable,  $500,000  decrease  in
inventory,  $846,000 of  demonstration  equipment  transferred  to cost of goods
sold, offset by a $958,000 decrease in accrued  expenses.  In addition,  we used
$1.2  million of cash in  investing  activities  during  2004  compared  to $1.8
million  during  2003.  The decrease  was driven by the level of  investment  in
marketable securities and the level of cash available from net income.

As  a  result  of  our  significant  product   development,   customer  support,
international   expansion  and  selling  and  marketing   efforts,   we  require
substantial working capital to fund our operations.  Over the last few years, we
restructured  our  operations to lower our costs and operating  expenditures  in
certain  geographic  regions and to lower the level of revenue  required for our
net income  breakeven  point,  to  preserve  our cash  position  and to focus on
profitable operations.  Offsetting these actions are our investments in expanded
operations  in China and Brazil,  in new system and equipment and hiring new key
personnel.  We believe that we have sufficient  working capital  available under
our operating plan to fund our operations  and capital  requirements  through at
least  December  31,  2006.  Any  substantial  inability  to achieve our current
business plan could have a material  adverse  impact on our financial  position,
liquidity,  or results of operations  and may require us to reduce  expenditures
and/or seek additional financing.

AGGREGATE CONTRACTUAL OBLIGATIONS AND COMMITMENTS

Data I/O has purchase  obligations for inventory and production costs as well as
other obligations such as capital  expenditures,  service contracts,  marketing,
and development agreements.  Arrangements are considered purchase obligations if
a  contract  specifies  all  significant  terms,   including  fixed  or  minimum
quantities to be purchased,  a pricing  structure and approximate  timing of the
transaction. Most arrangements are cancelable without a significant penalty, and
with short notice,  typically  less than 90 days.  Any amounts  reflected on the
balance sheet as accounts payable and accrued  liabilities are excluded from the
table below.  Data I/O has no long-term  debt.  Data I/O has  commitments  under
non-cancelable operating leases and other agreements,  primarily for factory and
office space, with initial or remaining terms of one year or more as follows:

For the year ending December 31, 2005 (in thousands):



                                     1 Year           2-3 Years         4-5 Years         After 5 Years           Total
                                  -------------    --------------    --------------    -----------------      -------------
                                                                                               
 Operating leases                    $1,512              $392             $18                   -               $  1,922
 Commitments to suppliers               445               854               -                   -                  1,299
 Other purchase commitments             175                 -               -                   -                    175
                                 --------------    --------------    --------------    -----------------      -------------
 Total                               $2,132            $1,246             $18                   -               $  3,396
                                 ==============    ==============    ==============    =================      ==============



                                       24


OFF-BALANCE SHEET ARRANGEMENTS

Except as noted above in aggregate contractual obligations and commitments, Data
I/O had no off-balance sheet arrangements.

SHARE REPURCHASE PROGRAM

Under a previously announced share repurchase program, Data I/O is authorized to
repurchase  up to  1,123,800  shares of our  outstanding  Common  Stock.  We may
execute  these  purchases  through open market  purchases at  prevailing  market
prices, through block purchases or in privately negotiated transactions,  and we
may commence or discontinue  at any time. As of December 31, 2005,  Data I/O has
repurchased  1,016,200  shares under this repurchase  program at a total cost of
approximately $7.1 million.  Data I/O has not repurchased shares under this plan
since the second quarter of 1997, although it still has the authority to do so.

NEW ACCOUNTING PRONOUNCEMENTS

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

In May 2005, the FASB issued  Statement No. 154,  "Accounting  Changes and Error
Corrections  - a  replacement  of APB Opinion No. 20 and FASB  Statement No. 3."
This Statement  changes the requirements for the accounting for and reporting of
a change in accounting principle.  Statement No. 154 is effective for accounting
changes and  corrections of errors made in fiscal years beginning after December
15, 2005. We have not yet assessed the effect of this Statement on Data I/O.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- -------------------------------------------------------------------

With respect to our foreign  currency  exchange rate risk, we currently use only
foreign currency hedge derivative instruments, which as of December 31, 2005 and
2004,  the notional  value of our foreign  exchange  contracts  outstanding  was
approximately  $503,000 and  $1,239,000,  respectively,  and the estimated  fair
value of which was a loss of $3,000  and  $33,000,  respectively.  The  weighted
average  contract  rate at  December  31,  2005 and  2004  was  1.18  and  1.32,
respectively.

Data I/O is exposed to interest  rate risks.  We generally  invest in high-grade
commercial  paper  with  original  maturity  dates of twelve  months or less and
conservative  money market funds to minimize our exposure to interest  rate risk
on our marketable  securities,  which are classified as available-for-sale as of
December 31, 2005 and December 31, 2004. We believe that the market risk arising
from holdings of these financial instruments is not material.


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


                                                                   Estimated Fair                           Estimated Fair
                                                 Principal            Value at           Principal             Value at
                                                 Cash Flows         December 31,         Cash Flows          December 31,
                                                  For 2006              2005              For 2005               2004
                                               ---------------    -----------------    ---------------     -----------------
                                                                                                  
     Corporate bonds                             $      -            $       -           $    787              $    787
                                                                                            1.559%
     Taxable Auction Securities                       800                  800                250                   250
                                                    4.264%               4.264%             2.352%
                                               ---------------    -----------------    ---------------     -----------------

     Total portfolio value                       $    800            $     800           $  1,037              $  1,037



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------

See pages 26 through 44.


                                       25


- --------------------------------------------------------------------------------

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

- --------------------------------------------------------------------------------

To the Board of Directors and Stockholders,
 Data I/O Corporation

We have  audited  the  accompanying  consolidated  balance  sheets  of Data  I/O
Corporation  and  subsidiaries  as of December 31, 2005 and 2004 and the related
consolidated statements of operations,  stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2005.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements  are free of material  misstatement.  The Company is not  required to
have,  nor were we  engaged to perform  an audit of its  internal  control  over
financial reporting.  Our audit included  consideration of internal control over
financial  reporting  as  a  basis  for  designing  audit  procedures  that  are
appropriate  in the  circumstances,  but not for the  purpose of  expressing  an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting.  Accordingly,  we express  no such  opinion.  An audit also  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial   statements,   assessing  the  accounting  principles  used  and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the consolidated  financial position of Data
I/O  Corporation  and  subsidiaries  as of December  31, 2005 and 2004,  and the
consolidated  results of their operations and their  consolidated cash flows for
each of the three years in the period ended  December 31,  2005,  in  conformity
with accounting principles generally accepted in the United States of America.

Our audits  were  conducted  for the  purpose of forming an opinion on the basic
financial  statements  taken  as  a  whole.  The  financial  statement  schedule
(Schedule  II) is  presented  for purposes of  additional  analysis and is not a
required  part  of the  basic  financial  statements.  This  schedule  has  been
subjected to the auditing procedures applied in the audit of the basic financial
statements  and, in our opinion,  is fairly  stated in all material  respects in
relation to the basic financial statements taken as a whole.

/S/GRANT THORNTON LLP

Seattle, Washington
March 14, 2006



                                       26



                              DATA I/O CORPORATION

                           CONSOLIDATED BALANCE SHEETS

                                  December 31,



- -------------------------------------------------------------------------------------------------------
                                                                        2005                  2004
- -------------------------------------------------------------------------------------------------------

(in thousands, except share data)
                                                                                        
ASSETS
CURRENT ASSETS:
     Cash and cash equivalents                                          $4,362                $5,534
     Marketable securities                                                 800                 1,037
     Trade accounts receivable, net of allowance for
        doubtful accounts of $165 and $155                               6,828                 4,489
     Inventories                                                         3,529                 4,139
     Other current assets                                                  329                   652
                                                                    -------------         -------------
        TOTAL CURRENT ASSETS                                            15,848                15,851

Property, plant and equipment - net                                      2,274                 1,970
Other assets                                                                15                    26
                                                                    -------------         -------------
        TOTAL ASSETS                                                   $18,137               $17,847
                                                                    =============         =============

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
     Accounts payable                                                   $1,608                $1,688
     Accrued compensation                                                1,249                   991
     Deferred revenue                                                    1,329                 1,706
     Other accrued liabilities                                           1,100                 1,126
     Accrued costs of business restructuring                                33                    86
     Income taxes payable                                                  147                     4
     Deferred gain on sale of property                                     388                     -
                                                                    -------------         -------------
        TOTAL CURRENT LIABILITIES                                        5,854                 5,601

Deferred gain on sale of property                                            -                   776
                                                                    -------------         -------------
                                                                         5,854                 6,377

COMMITMENTS                                                                  -                     -


STOCKHOLDERS' EQUITY
     Preferred stock -
        Authorized, 5,000,000 shares, including
           200,000 shares of Series A Junior Participating
        Issued and outstanding, none                                         -                     -
     Common stock, at stated value -
        Authorized, 30,000,000 shares
        Issued and outstanding, 8,362,369
           and 8,064,696 shares                                         19,408                19,001
     Retained deficit                                                   (7,436)               (8,018)
     Accumulated other comprehensive  income                               311                   487
                                                                    -------------         -------------
        TOTAL STOCKHOLDERS' EQUITY                                      12,283                11,470
                                                                    -------------         -------------
        TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                     $18,137               $17,847
                                                                    =============         =============




See notes to consolidated financial statements.


                                       27



                              DATA I/O CORPORATION

                      CONSOLIDATED STATEMENTS OF OPERATIONS



- --------------------------------------------------------------------------------------------------------------------
For the years ended December 31,                                   2005                2004               2003
- --------------------------------------------------------------------------------------------------------------------

(in thousands, except per share data)

                                                                                                 
Net sales                                                          $28,321             $27,310            $24,687
Cost of goods sold                                                  12,230              12,726             11,008
                                                                -----------         ------------       ------------
       Gross margin                                                 16,091              14,584             13,679
                                                                -----------         ------------       ------------
Operating expenses:
      Research and development                                       5,286               5,057              4,639
      Selling, general and administrative                           10,085               9,036              7,715
      Net provision (reversal) for business restructuring               96                 562                (39)
                                                                -----------         ------------       ------------
         Total operating expenses                                   15,467              14,655             12,315
                                                                -----------         ------------       ------------
         Operating income (loss)                                       624                 (71)             1,364

Non-operating income (expense):
      Interest income                                                  116                  77                112
      Interest expense                                                 (20)                (18)               (23)
      Foreign currency transaction gain (loss)                         (18)                (94)              (114)
                                                                -----------         ------------       ------------
         Total non-operating income (loss)                              78                 (35)               (25)
                                                                -----------         ------------       ------------

Income (loss) before income taxes                                      702                (106)             1,339
Income tax (expense) benefit                                          (120)                 14                (33)
                                                                -----------         ------------       ------------
Net income  (loss)                                                    $582                ($92)            $1,306
                                                                ===========         ============       ============

      Basic earnings (loss) per share                                $0.07              ($0.01)             $0.17
      Diluted earnings (loss) per share                              $0.07              ($0.01)             $0.16

Weighted-average basic shares                                        8,226               8,029              7,910

Weighted-average diluted shares                                      8,532               8,029              8,117




See notes to consolidated financial statements


                                       28



                              DATA I/O CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS




- ------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,                                          2005                2004              2003
- ------------------------------------------------------------------------------------------------------------------------

(in thousands)
                                                                                                       
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income (loss)                                                     $582                ($92)            $1,306
     Adjustments to reconcile income (loss)
      to net cash provided by (used in) operating activities:
       Depreciation and amortization                                      1,118                 953                687
       Net loss on dispositions                                               -                   4                  -
       Write-off of assets                                                   17                   9                  -
       Equipment transferred to cost of goods sold                          644                 846                172
       Amortization of deferred gain on sale                               (388)               (330)              (330)
       Net change in:
          Trade accounts receivable                                      (2,553)                520               (764)
          Inventories                                                       417                 501               (111)
          Other current assets                                              257                (230)                95
          Accrued cost of business restructuring                            (53)                 86               (204)
          Accounts payable and accrued liabilities                          210                (517)               609
          Deferred revenue                                                 (422)                279               (179)
                                                                     ----------------    ---------------    --------------
          Net cash provided by (used in) operating activities              (171)              2,029              1,281

CASH FLOWS FROM INVESTING ACTIVITIES:
     Additions to property, plant and equipment                          (1,846)             (2,528)              (486)
     Purchase of software                                                  (203)                (30)                 -
     Purchases of available-for-sale securities                          (1,250)             (1,182)            (4,815)
     Proceeds from maturities of available-for-sale securities            1,492               2,495              3,536
                                                                     ----------------    ---------------    --------------
       Cash provided by (used in) investing activities                   (1,807)             (1,245)            (1,765)

CASH FLOWS FROM FINANCING ACTIVITIES
     Sale of common stock                                                   132                 154                119
     Proceeds from exercise of stock options                                275                  50                 40
                                                                     ----------------    ---------------    --------------
       Cash provided by financing activities                                407                 204                159
                                                                     ----------------    ---------------    --------------
Increase (decrease) in cash and cash equivalents                         (1,571)                988               (325)

Effects of exchange rate changes on cash                                    399                 166                322
Cash and cash equivalents at beginning of year                            5,534               4,380              4,383
                                                                     ----------------    ---------------    --------------
Cash and cash equivalents at end of year                                 $4,362              $5,534             $4,380
                                                                     ================    ===============    ==============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
     Interest                                                               $20                 $18                $23
     Income taxes                                                           $39                ($14)               $33




See notes to consolidated financial statements.


                                       29



                              DATA I/O CORPORATION

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY





                                                                                          Accumulated
                                                Common Stock             Retained            Other                        Total
                                           ------------------------      Earnings        Comprehensive            Stockholders'
                                             Shares        Amount        (Deficit)       Income (Loss)                   Equity
                                           -----------    ---------      ----------     -----------------       -----------------
(in thousands, except share data)

                                                                                                        
Balance at December 31, 2002                7,767,630       18,638         (9,232)              (74)                    9,332

Stock options exercised                        14,189           40              -                 -                        40
Issuance of stock through
      Employee Stock Purchase Plan            194,477          119              -                 -                       119
Comprehensive income:
      Net Income                                    -            -          1,306                 -                     1,306
      Translation adjustment                        -            -              -               405                       405
      Unrealized gain on
            Marketable securities                   -            -              -                (2)                       (2)
                                                                                                                -----------------
Total comprehensive income                                                                                              1,709
                                           -----------    ---------      ----------     -----------------       -----------------
Balance at December 31, 2003                7,976,296       18,797         (7,926)              329                    11,200

Stock options exercised                        27,179           50              -                 -                        50
Issuance of stock through
      Employee Stock Purchase Plan             61,221          154              -                 -                       154
Comprehensive income:
      Net loss                                      -            -            (92)                -                       (92)
      Translation adjustment                        -            -              -               162                       162
      Unrealized gain on
            Marketable securities                   -            -              -                (4)                       (4)
                                                                                                                -----------------
Total comprehensive income                                                                                                 66
                                           -----------    ---------      ----------     -----------------       -----------------
Balance at December 31, 2004                8,064,696       19,001         (8,018)              487                    11,470

Stock options exercised                       240,597          275              -                 -                       275
Issuance of stock through
      Employee Stock Purchase Plan             57,076          132              -                 -                       132
Comprehensive income:
      Net income                                    -            -            582                 -                       582
      Translation adjustment                        -            -              -              (181)                     (181)
      Unrealized gain on
           Marketable securities                    -            -              -                 5                         5
                                                                                                                -----------------
Total comprehensive income                                                                                                406
                                           -----------    ---------      ----------     -----------------       -----------------
Balance at December 31, 2005                8,362,369      $19,408        ($7,436)                  $311              $12,283
                                           ===========    =========      ==========     =================       =================




See notes to consolidated financial statements.


                                       30



                              DATA I/O CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations
- --------------------

Data I/O Corporation ("Data I/O") designs,  manufactures,  and sells programming
systems  used  by  designers  and  manufacturers  of  electronic  products.  Our
programming  system products are used to program  integrated  circuits ("ICs" or
"devices" or  "semiconductors")  with the specific unique data necessary for the
ICs contained in various products, and are an important tool for the electronics
industry  experiencing  growing  use of  programmable  ICs.  Customers  for  our
programming  system  products  are located  around the world,  primarily  in the
United  States,  Europe  and the Far  East.  Our  manufacturing  operations  are
currently  located in the United States.  An outside supplier located in Germany
currently manufactures our Sprint non-automated programming systems.

Principles of Consolidation
- ---------------------------

The  consolidated   financial  statements  include  the  accounts  of  Data  I/O
Corporation  and  our  wholly-owned  subsidiaries.   Intercompany  accounts  and
transactions have been eliminated in consolidation.

Use of Estimates
- ----------------

The preparation of financial statements in conformity with accounting principles
generally  accepted in the United States of America requires  management to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements,  and the  reported  amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Stock-Based Compensation
- ------------------------

Data I/O has  stock-based  employee  compensation  plans that are described more
fully  in  Note  12.  In  accordance  with  Statement  of  Financial  Accounting
Standards, or SFAS 123, Accounting for Stock-Based Compensation ("SFAS 123"), as
amended by SFAS 148,  Accounting  for  Stock-Based  Compensation-Transition  and
Disclosure, we elected to continue to account for stock-based compensation using
the intrinsic value method  prescribed in Accounting  Principles  Board, or APB,
Opinion 25, Accounting for Stock Issued Employees,  and related interpretations.
Compensation  cost for employee stock options is measured as the excess, if any,
of the  market  price of our  common  stock at the date of grant  over the stock
option  exercise  price.  Any deferred  compensation  is  recognized on a graded
vesting  method.  Under our plan,  stock options are  generally  granted at fair
market value.  The following  table  illustrates the effect on net income (loss)
and earnings (loss) per share if Data I/O had applied the fair value recognition
provisions  of SFAS 123,  using  the  assumptions  described  in Note 12, to our
stock-based employee plans.


                                       31



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


                                                                           Year Ended December 31,
                                                               -------------------------------------------------
                                                                    2005            2004             2003
                                                               ---------------  --------------  ----------------
                                                                                            
    Net income (loss) - as reported                                   $582           ($92)           $1,306

    Deduct:  Total stock-based employee compensation expense
    determined under fair value based method for awards
    granted, modified, or settled, net of related tax effects         (400)          (372)             (338)
                                                               ---------------  --------------  ----------------
    Net income (loss) - pro forma                                     $182          ($464)             $968
                                                               ===============  ==============  ================

    Basic earnings (loss) per share - as reported                    $0.07         ($0.01)            $0.17
    Diluted earnings (loss) per share - as reported                  $0.07         ($0.01)            $0.16
    Basic earnings (loss) per share - pro forma                      $0.02         ($0.06)            $0.12
    Diluted earnings (loss) per share - pro forma                    $0.02         ($0.06)            $0.12



Foreign Currency Translation
- ----------------------------

Assets and  liabilities of foreign  subsidiaries  are translated at the exchange
rate on the  balance  sheet  date.  Revenues,  costs  and  expenses  of  foreign
subsidiaries are translated at average rates of exchange  prevailing  during the
year.  Translation  adjustments  resulting  from this  process  are  charged  or
credited  to  stockholders'  equity,  net  of  taxes  recognized.  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.

In an effort to minimize the effect of exchange rate fluctuations on the results
of our  operations,  Data I/O hedges portions of our foreign  currency  exposure
through the use of forward exchange contracts, none of which are speculative. At
December 31, 2005, we had a notional  value of  approximately  $503,000 in three
foreign  exchange  contracts  outstanding,  the estimated loss in fair value was
recorded as a liability of $3,000. The contract terms are 30-90 days. The hedges
are highly effective, as currency,  settlement date and amount of the underlying
receivables  and of the forward  contracts  coincide,  and as spot rates are the
same for both the hedge and the hedged item.

Cash and Cash Equivalents
- -------------------------

Cash and cash equivalents are highly liquid investments with maturities of three
months or less at date of purchase.

Marketable Securities
- ---------------------

Data I/O generally invests in debt securities with original maturities of twelve
months  or  less  and  money  market  funds,  all of  which  are  classified  as
available-for-sale  securities and recorded at fair value,  as defined below. We
record  unrealized  holding  gains  and  losses,  net of any  tax  effect,  as a
component of accumulated other comprehensive  income (loss) within stockholders'
equity.  We report interest earned in  non-operating  income as interest income.
Marketable  securities  are  classified  in the  balance  sheet as  current  and
noncurrent  based on maturity dates and our expectation of sales and redemptions
in the following year.


                                       32



Fair Value of Financial Instruments
- -----------------------------------

The carrying value of cash, cash equivalents,  marketable securities and forward
exchange  contracts  approximates  fair  value.  The fair  value  of Data  I/O's
marketable securities is based upon the quoted market price on the last business
day of the fiscal year plus accrued interest, if any.

Accounts Receivable
- -------------------

The majority of Data I/O's  accounts  receivable  are due from  companies in the
electronics manufacturing industries.  Credit is extended based on an evaluation
of a customer's financial condition and, generally,  collateral is not required.
Accounts  receivable  are  typically  due within 30 to 60 days and are stated at
amounts due from customers net of an allowance for doubtful  accounts.  Accounts
outstanding  longer than the contractual  payment terms are considered past due.
Data I/O determines our allowance by considering a number of factors,  including
the length of time trade  accounts  receivable are past due, Data I/O's previous
loss history,  the customer's  current  ability to pay their  obligation to Data
I/O, and the condition of the general economy and the industry as a whole.  Data
I/O writes off accounts receivable when they become uncollectible,  and payments
subsequently  received on such  receivables  are credited to the  allowance  for
doubtful  accounts.  Interest is allowed to accrue,  according  to our  standard
sales terms, beginning on the day after the due date of the receivable. However,
interest  income is  subsequently  recognized  on these  accounts  either to the
extent cash is  received,  or when the future  collection  of  interest  and the
receivable balance is considered probable by management.

Inventories
- -----------

Inventories  are  stated  at the lower of cost or  market  with  cost  being the
currently  adjusted  standard  cost,  which  approximates  cost  on a  first-in,
first-out  basis.  We evaluate the need for inventory  reserves  associated with
obsolete,  slow-moving,  excess and non-salable  inventory by reviewing  current
transactions  and forecasted  product demand.  We evaluate our inventories on an
item by item basis and establish reserves accordingly. See Note 6.

Property, Plant and Equipment
- -----------------------------

Property, plant and equipment,  including leasehold improvements,  are stated at
cost and  depreciation  is  calculated  over the  estimated  useful lives of the
related  assets  or  lease  terms  on the  straight-line  basis.  We  depreciate
substantially  all  manufacturing  and office equipment over periods of three to
seven years. We depreciate leasehold  improvements over the remaining portion of
the lease,  or over the  expected  life of the asset if less than the  remaining
term of the lease.

Long-lived assets are evaluated on an annual basis for impairment. Based on this
evaluation, no impairment was noted for the years ended December 31, 2005, 2004,
and 2003.

Revenue Recognition
- -------------------

Sales of Data  I/O's  semiconductor  programming  equipment  products  requiring
installation by us that is other than perfunctory were previously  recorded when
installation  was  complete,   or  at  the  later  of  customer   acceptance  or
installation, if an acceptance clause is specified in the sales terms. Beginning
in the third  quarter  of 2005,  Data I/O began  recognizing  revenue  for these
products at the time of shipment.  We began  recognizing  revenue at the time of
shipment after we determined that our programming equipment have reached a point
of maturity and stability such that product acceptance can be assured by testing
at the factory prior to shipment and that the installation meets the criteria to
be considered a separate element.  When arrangements  include multiple elements,
we use  objective  evidence  of fair value to allocate  revenue to the  elements
pursuant to EITF 00-21, "Revenue  Arrangements with Multiple  Deliverables," and
recognize  revenue when the criteria for revenue  recognition  have been met for
each element according to SAB 104, "Revenue  Recognition." The amount of revenue
recognized  is  affected  by  our  judgments  as to  the  collectibility  of the
transaction  or whether an  arrangement  includes  multiple  elements and if so,
whether specific objective evidence of fair value exists for those elements.

Installation that is considered  perfunctory  includes any installation that can
be performed by other parties,  such as distributors,  other vendors, or in most
cases the customers themselves.  This takes into account the complexity,  skill,
and training needed as well as customer expectations regarding installation. The
revenue  related to  products  requiring  installation  that is  perfunctory  is
recognized  at the time of  shipment  provided  that  persuasive  evidence of an
arrangement exists,  shipment has occurred,  the price is fixed or determinable,
and collectibility is reasonably assured.

We 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. Sales
were  recorded net of associated  sales return  reserves,  which were  $150,000,
$250,000, and $300,000 at December 31, 2005, 2004, and 2003, respectively.


                                       33



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


Research and Development
- ------------------------

Research and development costs are expensed as incurred.

Advertising Expense
- -------------------

Data I/O expenses advertising costs as incurred. Total advertising expenses were
approximately  $238,000,  $273,000,  and  $248,000  in  2005,  2004,  and  2003,
respectively.

Warranty Expense
- ----------------

Data I/O records a  liability  for an estimate of costs that it expects to incur
under our basic limited  warranty when product  revenue is  recognized.  Factors
affecting our warranty liability include the number of units sold and historical
and anticipated rates of claims and costs per claim. We periodically  assess the
adequacy of our warranty  liability based on changes in these factors.  Data I/O
normally  warrants our products  against defects for periods ranging from ninety
days to one year.  The  FlashPAK,  which at  introduction,  carried a three-year
warranty on some components,  now have a one year warranty. We provide currently
for the estimated cost that may be incurred under our product  warranties.  Data
I/O records  revenues on extended  warranties on a straight-line  basis over the
term of the related warranty contracts. Service costs are expensed as incurred.

Earnings (Loss) Per Share
- -------------------------

Basic earnings  (loss) per share exclude any dilutive  effects of stock options.
Basic earnings (loss) per share are computed using the  weighted-average  number
of common shares outstanding  during the period.  Diluted earnings per share are
computed  using the  weighted-average  number of common  shares and common stock
equivalent  shares  outstanding  during the period.  Options to purchase 396,181
shares of common  stock were  outstanding  as of  December  31,  2005,  but were
excluded from the  computation  of diluted EPS for the period then ended because
the options were  anti-dilutive.  Options to purchase 1,439,488 shares of common
stock as of  December  31,  2004  were  excluded  from EPS as their  effect  was
anti-dilutive.

Diversification of Credit Risk
- ------------------------------

Financial  instruments,  which potentially subject Data I/O to concentrations of
credit risk, consist primarily of trade receivables.  Our cash, cash equivalents
and marketable  securities consist of high quality financial  instruments.  Data
I/O maintains cash balances in financial institutions, which at times may exceed
federally  insured  limits.  We have not experienced any losses in such accounts
and believe we are not exposed to any  significant  credit risk on cash and cash
equivalents.  Our trade  receivables  are  geographically  dispersed and include
customers  in many  different  industries.  We believe  that any risk of loss is
significantly  reduced due to the diversity of our  end-customers and geographic
sales areas. We perform on-going credit evaluations of our customers'  financial
condition and require collateral, such as letters of credit and bank guarantees,
whenever deemed necessary.

Derivatives
- -----------

Data I/O  accounts  for our  derivatives  using 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.


                                       34


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 of our hedging  instruments  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 estimated fair
value gain  (loss) of the open hedge  contracts  as of  December  31,  2005 is a
liability of $3,000 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. We are exposed to credit-related
losses in the event of  nonperformance  by  counterparties  to forward  exchange
contracts.  However,  we have entered into these  instruments with  creditworthy
financial institutions and consider the risk of nonperformance remote.

New Accounting Pronouncements
- -----------------------------

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

In May 2005, the FASB issued  Statement No. 154,  "Accounting  Changes and Error
Corrections  - a  replacement  of APB Opinion No. 20 and FASB  Statement No. 3."
This Statement  changes the requirements for the accounting for and reporting of
a change in accounting principle.  Statement No. 154 is effective for accounting
changes and  corrections of errors made in fiscal years beginning after December
15, 2005.  We have not yet assessed the effect of this Statement on Data I/O.


NOTE 2 - CLASSIFICATIONS

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


NOTE 3 - PROVISION FOR BUSINESS RESTRUCTURING

During 2005, we took restructuring  related charges of $96,000 primarily related
to severance and completing  actions that had been started in the second half of
2004.  This  aligned  management  operations  with the  changes  made in 2004 to
control costs in North  America and Europe;  and the need to build staff serving
China and Eastern Europe.

At  December  31,  2005,  $33,000  remained  as accrued  but unpaid  restructure
charges, which will be paid in 2006.

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

During  2003,  we completed  the  restructuring  that began  during 2001,  which
included  actions  taken to reduce  the level of  revenue  required  for our net
income breakeven point and realign Data I/O with our market opportunities.  This
restructuring  included  the  following:  a reduction  in our global  workforce;
discontinuance or reallocation of numerous projects and activities not essential
to our long-term goals; streamlining discretionary activities;  consolidation of
numerous functions across the


                                       35


organization  to create a team,  which was more  productive  and able to respond
faster to global customer needs; and closure of a facility in Germany and moving
our operations to other locations  within Data I/O. We required this operational
repositioning  because of the impact of the economic slowdown and the decline in
capital  spending  across a high number of customer groups on general demand for
programming equipment over the past few years. Our level of revenue required for
our  net  income  breakeven  point  increased  in  2003,  primarily  due to cost
increases  resulting  from the impact of the weaker  dollar on foreign  currency
based costs and from personnel costs due to raises,  incentive  compensation and
selective  hiring of individuals with critical skills to help position us as the
continuing technology leader in our market.

At December 31, 2003 all restructuring  expenses  associated with the activities
detailed  for 2002 and 2001 had been  paid and the  excess  expense  accrual  of
$39,000 was reversed during 2003.

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


                               2004            2004          Reserve           2005             2005           Reserve
                             Expenses       Payments/      Balance at        Expenses        Payments/        Balance at
 Description                                Write-offs    Dec. 31, 2004                      Write-offs     Dec. 31, 2005
 ------------------------------------------------------------------------------------------------------------------------
                                                                                                
 Downsizing U.S.
 Operations:
    Employee severance         $310            $256            $54              $81             $117              $18

    Redmond facility             10               8              2                -                2                -
    consolidation

    Consulting and legal         15              15              -               15               15                -
    expenses

    Downsizing foreign
    operations                  227             196             30                -               15               15

                           ------------   ------------    ------------    ------------       ------------     ------------
 Total                         $562            $475            $86              $96             $149              $33
                           ============   ============    ============    ============       ============     ============



NOTE 4 - MARKETABLE SECURITIES

The estimated fair value of marketable securities consisted of the following (in
thousands):

                                                  Dec. 31,           Dec. 31,
                                                   2005                2004
                                              -------------      -------------

         Corporate bonds                         $     -            $   787
         Taxable auction securities                  800                250
                                              -------------      -------------
                                                 $   800            $ 1,037
                                              =============      =============

At December 31, 2005, cost approximated market value for Data I/O's portfolio of
marketable securities and there were no significant  unrealized gains or losses.
The  marketable  securities  are all  classified as current  assets due to their
maturity  date or because of the available  for sale holding  intent,  as in the
case of corporate bonds which had a maturity date in the second quarter of 2005.
The cost of securities sold is determined by the specific identification method.



                                       36



NOTE 5 - ACCOUNTS RECEIVABLE, NET

Receivables consist of the following (in thousands):


                                                                  Dec. 31,           Dec. 31,
                                                                   2005                2004
                                                              -------------      -------------
                                                                            
     Trade accounts receivable                                     $6,993              $4,644
     Less allowance for doubtful receivables                          165                 155
                                                              -------------      -------------
                 Trade accounts receivable, net                    $6,828              $4,489
                                                              =============      =============



Trade  receivables  relate to sales to Data I/O  customers,  for which credit is
extended based on the customer's credit history. Changes in Data I/O's allowance
for doubtful accounts are as follows (in thousands):


                                                                  Dec. 31,           Dec. 31,
                                                                   2005                2004
                                                              -------------      -------------
                                                                                
    Beginning balance                                              $155               $202
                Bad debt expense (reversal)                          64                (37)
                Accounts written-off                                (64)               (10)
                Recoveries                                           10                  -
                                                              -------------      -------------
    Ending balance                                                 $165               $155
                                                              =============      ==============



NOTE 6 - INVENTORIES

Net inventories consisted of the following components (in thousands):


                                                           Dec. 31,           Dec. 31,
                                                            2005                2004
                                                       -------------      -------------
                                                                           
    Raw material                                           $2,076                $2,381
    Work-in-process                                           767                   899
    Finished goods                                            686                   859
                                                       -------------      -------------
    Inventories                                            $3,529                $4,139
                                                       =============      ==============



Reserves for excess and obsolete  inventory  were  $1,539,000  and $1,915,000 at
December 31, 2005 and December 31, 2004,  respectively.  The $376,000 decline in
the reserve related primarily to scrapping and disposal of the related inventory
with a reversal  of $158,000  in cost of goods sold  related to items sold.  Our
inventory reserve addresses excess and obsolete inventories.  The reserve is not
part of a current lower of cost or market  ("LOCOM")  evaluation or provision as
the company uses a standard  costing system and any associated  LOCOM write down
would be  permanently  made to the item cost. Our reserve  generally  results in
items being  scrapped or disposed of for a small salvage  value;  however,  some
inventory does get eventually  used and sold, in which case the reserve would be
credited back to cost of goods sold.

NOTE 7 - SALE - LEASEBACK

In May 1997, Data I/O completed the sale of the land and building comprising our
Redmond,  Washington,  corporate  headquarters.  The  sale  included  a  10-year
leaseback of the building to Data I/O. The sale  represented an overall  pre-tax
gain to Data I/O of $5.6 million.  Of this amount, we recognized $2.3 million in
1997,  with the remainder  being  amortized over the life of the lease ending in
2006.


                                       37



NOTE 8 - PROPERTY, PLANT AND EQUIPMENT, NET

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


                                                    Dec. 31,          Dec. 31,
                                                     2005               2004
                                                -------------      -------------
   Leasehold  improvements                            $343               $291
   Equipment                                         9,935             10,065
                                                -------------      -------------
                                                    10,278             10,356
   Less accumulated depreciation                     8,004              8,386
                                                -------------      -------------
   Property, plant and equipment, net               $2,274             $1,970
                                                =============      =============


Total depreciation  recorded for 2005, 2004, and 2003 was $1,107,000,  $922,000,
and $602,000, respectively.


NOTE 9 - OTHER ACCRUED LIABILITIES

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

                                                   Dec. 31,          Dec. 31,
                                                    2005               2004
                                               -------------      -------------
    Product warranty liability                       $459               $494
    Sales return reserve                              150                250
    Other                                             491                382
                                               -------------      -------------
    Other accrued liabilities                      $1,100             $1,126
                                               =============      =============

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

                                                   Dec. 31,          Dec. 31,
                                                    2005               2004
                                               -------------      -------------
    Liability, beginning of year                     $494              $563
    Net expenses                                      810               896
    Warranty claims                                  (810)             (896)
    Accrual revisions                                 (35)              (69)
                                               -------------      -------------
    Liability, end of year                           $459              $494
                                               =============      =============


                                       38



NOTE 10 - AGGREGATE CONTRACTUAL OBLIGATIONS AND COMMITTMENTS

Data I/O has purchase  obligations for inventory and production costs as well as
other obligations such as capital  expenditures,  service contracts,  marketing,
and development agreements.  Arrangements are considered purchase obligations if
a  contract  specifies  all  significant  terms,   including  fixed  or  minimum
quantities to be purchased,  a pricing  structure and approximate  timing of the
transaction. Most arrangements are cancelable without a significant penalty, and
with short notice,  typically  less than 90 days.  Any amounts  reflected on the
balance sheet as accounts payable and accrued  liabilities are excluded from the
below table.  Data I/O has no long-term  debt.  Data I/O has  commitments  under
non-cancelable operating leases and other agreements,  primarily for factory and
office space, with initial or remaining terms of one year or more as follows:

For the years ending December 31, (in thousands):

                                         Purchase                  Operating
                                      obligations                     leases
                                    ----------------           ----------------

       2006                                  $620                     $1,512
       2007                                   854                        249
       2008                                     -                        143
       2009                                     -                         18
       2010 and thereafter                      -                          -
                                    ----------------           ----------------
       Total                               $1,474                     $1,922
                                    ================           ================

Lease and  rental  expense  before the  deduction  for the  amortization  of the
deferred gain was  $1,227,000,  $1,610,000,  and  $1,476,000 in 2005,  2004, and
2003,  respectively.  Data I/O has renewal options on  substantially  all of our
major leases.  The initial lease on the Redmond facility expires on December 31,
2006.  On February  28,  2006,  Data I/O and our current  landlord  concurrently
entered into a termination agreement for the Redmond headquarters facility lease
and a five year lease agreement for an  approximately  40,000 square foot office
space also located in Redmond,  Washington. We anticipate a mid-year move of our
corporate  headquarters to this new location. We also expect to enter into a new
lease  agreement  during the first  quarter of 2006 for our offices in Shanghai,
China.

NOTE 11 - STOCK AND RETIREMENT PLANS

Stock Option Plans
- ------------------

At December 31, 2005,  there were 1,436,091  shares of Common Stock reserved for
issuance of which 280,646 shares are available for future grant under Data I/O's
employee stock option plans. Pursuant to these plans, options are granted to our
officers and key employees  with exercise  prices equal to the fair market value
of the Common  Stock at the date of grant and  generally  vest over four  years.
Certain  options  granted  during  1998 and 1999  vest over two  years.  Options
granted under the plans generally have a maximum term of six years from the date
of grant,  except for  certain  options  granted in January  1999,  which have a
maximum term of ten years.

Employee Stock Purchase Plan
- ----------------------------

Under the Employee Stock Purchase Plan,  eligible  employees may purchase shares
of Data I/O's  Common  Stock at  six-month  intervals at 85% of the lower of the
fair  market  value  on the  first or the  last  day of each  six-month  period.
Employees  may purchase  shares  having a value not exceeding 10% of their gross
compensation  during an offering period.  During 2005, 2004 and 2003, a total of
57,076, 61,221, and 194,477 shares, respectively,  were purchased under the plan
at  average  prices of $2.31,  $2.52,  and $0.61  per  share,  respectively.  At
December 31, 2005, a total of 157,687 shares were reserved for future issuance.


                                       39



Stock Appreciation Rights Plan
- ------------------------------

Data I/O has a Stock Appreciation Rights Plan ("SAR") under which each director,
executive  officer or holder of 10% or more of Data I/O's Common Stock has a SAR
with respect to each exercisable  stock option.  The SAR entitles the SAR holder
to receive cash from Data I/O for the difference between the market value of the
stock and the  exercise  price of the option in lieu of  exercising  the related
option. SARs are only exercisable following a tender offer or exchange offer for
Data I/O's  stock,  or  following  approval by  shareholders  of Data I/O of any
merger,  consolidation,  reorganization or other  transaction  providing for the
conversion or exchange of more than 50% of the common shares outstanding.  As no
event has occurred, which would make the SARs exercisable,  and no such event is
deemed probable, no compensation expense has been recorded under this plan.

Director Fee Plan
- -----------------

Data I/O has a Director Fee Plan,  not currently in use,  which had provided for
payment to directors who are not employees of Data I/O  Corporation  by delivery
of shares of Data I/O's  Common  Stock.  No shares were issued from the plan for
2005,  2004,  or 2003 board service and 151,332  shares remain  available in the
plan.

Retirement Savings Plan
- -----------------------

Data  I/O  has a  savings  plan  that  qualifies  as a cash or  deferred  salary
arrangement  under Section 401(k) of the Internal  Revenue Code. Under the plan,
participating  U.S.  employees  may defer their pre-tax  salary,  subject to IRS
limitations.  In fiscal  years 2005,  2004 and 2003,  Data I/O  contributed  one
dollar for each dollar contributed by a participant, with a maximum contribution
of 4% of a participant's  earnings. Data I/O's matching contribution expense for
the savings plan was  approximately  $182,000,  $178,000,  and $161,000 in 2005,
2004, and 2003, respectively.

Share Repurchase Program
- ------------------------

Under a previously announced share repurchase program, Data I/O is authorized to
repurchase  up to  1,123,800  shares  of our  outstanding  Common  Stock.  These
purchases may be executed  through open market  purchases at  prevailing  market
prices, through block purchases or in privately negotiated transactions, and may
commence  or be  discontinued  at any  time.  In years  prior  to 2005,  we have
repurchased  1,016,200  shares under this repurchase  program at a total cost of
approximately $7.1 million. We have not repurchased shares under this plan since
the second quarter of 1997, although we still have the authority to do so.

NOTE 12- STOCK-BASED COMPENSATION

Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been  determined as if Data I/O had accounted for our employee
stock  options,  employee  stock purchase plan options and directors' fee shares
under the fair value method of that  Statement  (see Note 1). The fair value for
these  options  was  estimated  at the  date  of  grant  using  a  Black-Scholes
option-pricing model with the following weighted-average assumptions:


                                      Employee Stock                   Employee Stock                       Director
                                         Options                        Purchase Plan                       Fee Plan
                              -------------------------------  --------------------------------  -------------------------------
                                2005       2004       2003       2005       2004       2003        2005       2004       2003
                              ---------  ---------  ---------  ---------  ---------  ----------  ---------  ---------  ---------
                                                                      
Risk-free interest rates        3.72%      3.44%      2.21%      2.00%      1.15%       1.14%       N/A        N/A        N/A
Volatility factors               .79       1.03       1.03        .91       1.04         .97        N/A        N/A        N/A
Expected life of the option     4.61       4.35       4.31        .50        .50         .50        N/A        N/A        N/A
     in years
Expected dividend yield         None       None       None       None       None       None        None       None       None



For purposes of pro forma  disclosures,  the estimated fair value of the options
granted,  which is estimated to be $1.61,  $2.15,  and $1.01 per share for 2005,
2004 and 2003,  respectively,  is amortized to expense over the options' vesting
period.


                                       40



A summary of Data I/O's stock option activity, and related information follows:


                                          December 31, 2005              December 31, 2004              December 31, 2003
                                     ----------------------------    --------------------------    -----------------------------
                                                      Weighted-                     Weighted-                       Weighted-
                                                       Average                       Average                         Average
                                                      Exercise                      Exercise                         Exercise
                                       Options          Price         Options         Price          Options          Price
                                    --------------- --------------  -------------  ------------   --------------- ---------------
                                                                                                     
Outstanding at beginning of year      1,439,488          $2.27       1,326,805        $2.25         1,141,412          $2.56
   Granted                              295,500           2.52         313,000         2.91           299,500           1.39
   Exercised                           (421,945)          1.99         (27,179)        1.64           (14,408)          2.40
   Expired or forfeited                (157,598)          2.47        (173,138)        3.28           (99,699)          3.10
                                    ---------------                 -------------                 ---------------
Outstanding - end of year             1,155,445                      1,439,488         2.27         1,326,805           2.25
                                    ===============                 =============                 ===============
Exercisable at end of year              652,573          $2.44         907,533        $2.34           829,572          $2.52



The following table summarizes  information  about stock options  outstanding at
December 31, 2005:


                                        Options Outstanding                              Options Exercisable
                       ------------------------------------------------------      ---------------------------------
                                            Weighted-
                                             Average           Weighted-                              Weighted-
                                            Remaining           Average                                Average
      Range of              Number         Contractual         Exercise               Number          Exercise
   Exercise Prices       Outstanding      Life in Years          Price             Exercisable          Price
                        -------------    ---------------     --------------       -------------     -------------
                                                                                       
    $1.00 - $1.25           187,224            3.14               $1.04              124,043             $1.06
    $1.33 - $1.89           189,245            2.49                1.42              161,755              1.42
    $1.94 - $2.49           282,132            4.72                2.43               89,118              2.33
    $2.24 - $3.04           302,294            4.66                2.82              101,419              2.84
    $3.13 - $5.16           194,550            1.24                4.66              176,238              4.17
                        -------------                                             -------------
    $1.00 - $5.16         1,155,445            3.49               $2.42              652,573             $2.44
                        =============                                             =============



NOTE 13 - ACCUMULATED OTHER COMPREHENSIVE INCOME

Ending  accumulated  balances for each item in accumulated  other  comprehensive
income are as follows:


(in thousands)                                             Dec 31,                 Dec 31,
                                                            2005                    2004
                                                        -------------           -------------
                                                                          
Unrealized currency gain                                    $312                    $493
Unrealized loss on marketable securities                      (1)                     (6)
                                                        -------------           -------------
Total accumulated other comprehensive income                $311                    $487
                                                        =============           =============



NOTE 14- INCOME TAXES

Data I/O accounts for income taxes using the  liability  method as prescribed by
Statement of Financial  Accounting  Standards  No. 109,  "Accounting  for Income
Taxes."


                                       41



Components of income (loss) before taxes:

                                                                        Year Ended December 31,
                                                           ---------------------------------------------------
(in thousands)                                                 2005               2004              2003
                                                           --------------    ---------------   ----------------
                                                                                           
     U.S. operations                                           $541               $329              $698
     Foreign operations                                         161               (435)              641
                                                           --------------    ---------------   ----------------
                                                               $702              ($106)           $1,339
                                                           ==============    ===============   ================


Income tax expense (benefit) consists of:
     Current tax expense (benefit):
         U.S. federal                                         $   -             $    -              $  -
         State                                                    5                  -                 -
         Foreign                                                115                (14)               33
                                                           --------------    ---------------   ----------------
                                                                120                (14)               33
     Deferred tax expense (benefit) - U.S. federal                -                  -                 -
                                                           --------------    ---------------   ----------------
            Total income tax expense (benefit)                $ 120               ($14)             $ 33
                                                           ==============    ===============   ================



A  reconciliation  of Data I/O's effective  income tax rate and the U.S. federal
tax rate is as follows:


                                                                        Year Ended December 31,
                                                          ------------------------------------------------
                                                             2005               2004               2003
                                                          -----------       ------------        ----------
                                                                                          
     Statutory rate                                          34.0%              34.0%              34.0%
     State and foreign income tax, net of
        federal income tax benefit                           (0.1)              27.9              (13.7)
     Valuation allowance for deferred tax assets            (16.8)             (48.8)             (17.9)
                                                          -----------       ------------        ----------
                                                             17.1%              13.1%               2.4%
                                                          ===========       ============        ============



The tax effects of temporary  differences that gave rise to significant portions
of the deferred tax assets are presented below (in thousands):


                                                                           Dec. 31,             Dec. 31,
                                                                             2005                2004
                                                                        ---------------     ---------------
                                                                                              
Deferred income tax assets:
     Allowance for doubtful accounts                                        $   15              $    24
     Inventory and product return reserves                                     853                1,143
     Compensation accruals                                                     189                  155
     Accrued liabilities                                                       532                  573
     Book-over-tax depreciation and amortization                               799                  743
     Foreign net operating loss carryforwards                                  259                  194
     U.S. net operating loss and credit carryforwards                        7,149                6,969
     Other, net                                                                  7                    6
                                                                        ---------------     ---------------
                                                                             9,803                9,807
     Valuation allowance                                                    (9,803)              (9,807)
                                                                        ---------------     ---------------
         Total deferred income tax assets                                   $    -              $     -
                                                                        ===============    ================


The valuation allowance for deferred tax assets decreased $4,000 during the year
ended  December 31, 2005, due primarily to the 2005 book net income that allowed
the utilization of tax deferred assets reducing the related valuation allowance.
The valuation  allowance for deferred tax assets  increased  $107,000 during the
year ended  December 31, 2004,  due primarily to the 2004 net  operating  losses
generated that have been reserved for by increasing the valuation allowance. The
net  deferred  tax  assets  have  a full  valuation  allowance  provided  due to
uncertainty regarding Data I/O's ability to utilize such assets in future years.
Credit  carryforwards   consist  primarily  of  research  and  experimental  and
alternative minimum tax credits. Net operating loss carryforwards expire in 2019
to 2025.  Utilization of net operating loss and credit  carryforwards is subject
to certain  limitations  under Section 382 of the Internal Revenue Code of 1986,
as amended.


                                       42



NOTE 15 - SEGMENT AND GEOGRAPHIC INFORMATION

In 2005, no customer accounted for 10% of Data I/O's  consolidated  revenues and
in 2004 and 2003, one customer,  Siemens,  accounted for 14.5% and 18.0% of Data
I/O's consolidated revenues,  respectively,  and no other customer accounted for
more than 10%.  Major  operations  outside  the U.S.  include  sales and service
support subsidiaries in Germany, Brazil, Canada and China.

We present  geographic  information  of our operations for the three years ended
December 31, 2005 in the table that  follows.  Net sales,  as shown in the table
below,  are based upon the geographic area into which the products were sold and
delivered.  Export sales are subject to U.S. Department of Commerce regulations,
and to the market  conditions  in the  countries in which the products are sold.
For purposes of the table below, the profit on the transfers between  geographic
areas has been shown in operating  income in the geographic area where the final
sale to non-affiliated  customers took place. Certain general corporate expenses
are charged to the U.S. segment.  Identifiable  assets are those assets that can
be directly associated with a particular  geographic area. All Company financial
instruments,  consisting of cash and marketable securities, are included in U.S.
operations.


                                                           Year Ended December
                                    ------------------------------------------------------------------
    (in thousands)                       2005                    2004                       2003
                                    ---------------          --------------           ----------------
                                                                              
    Net sales:
         U.S.                           $6,386                   $5,434                   $7,263
         Europe                         11,340                   11,156                   10,678
         Rest of World                  10,595                   10,720                    6,746
                                    ---------------          --------------           ----------------
                                       $28,321                  $27,310                  $24,687
                                    ===============          ==============           ================




    Included in Europe and Rest of World are
    the following significant balances:
                                                                              
         Germany                        $8,510                   $8,989                   $8,765
         China                          $4,458                   $2,986                   $3,149

    Operating income (loss):
         U.S.                            ($394)                 ($1,526)                   ($709)
         Europe                          1,715                    2,824                    2,848
         Rest of World                    (696)                  (1,369)                    (775)
                                    ---------------          --------------           ----------------
                                          $625                     ($71)                  $1,364
                                    ===============          ==============           ================

    Identifiable assets:
         U.S.                           $8,351                   $9,202                  $11,128
         Europe                          4,882                    4,577                    3,949
         Rest of World                   4,904                    4,068                    3,023
                                    ---------------          --------------           ----------------
                                       $18,137                  $17,847                  $18,100
                                    ===============          ==============           ================




NOTE 16 - QUARTERLY FINANCIAL INFORMATION (unaudited)

The following table sets forth unaudited selected  quarterly  financial data for
Data I/O for 2005 and 2004. Although our business is not seasonal,  growth rates
of sales and earnings have varied from quarter to quarter as a result of factors
such as  stocking  orders  from  international  distributors,  the timing of new
product  introductions,  business  restructuring,  and  short-term  industry and
general U.S. and international economic conditions. Information as to any one or
more  quarters  is,  therefore,  not  necessarily  indicative  of  trends in our
business or profitability.


                                       43




(in thousands except per share data)                                           Year Ended December 2005
                                                           -----------------------------------------------------------------
For the quarters ended                                        Mar 31          June 30          Sept 30            Dec 31
                                                           -------------    -------------    -------------     -------------
                                                                                                     
     Net sales(4)                                              $6,737           $6,642           $6,587            $8,355
     Gross margin                                               4,014            3,933            3,756             4,388
     Net income (loss) (2)                                         39               53              127               363
     Basic and diluted earnings per share (1)                  $ 0.00           $ 0.01           $ 0.02            $ 0.07





                                                                               Year Ended December 2004
(in thousands except per share data)
                                                           -----------------------------------------------------------------
For the quarters ended:                                       Mar 31          June 30          Sept 30            Dec 31
                                                           -------------    -------------    -------------     -------------
                                                                                                    
     Net sales(3)                                              $6,834           $6,896           $7,765            $5,815
     Gross margin                                               3,713            3,510            4,232             3,129
     Net income (loss) (2)                                        296              103               93              (584)
     Basic and diluted earnings (loss) per share (1)           $ 0.04           $ 0.01           $ 0.01            ($0.07)


(1)  The sum of  quarterly  per share  amounts  may not equal per share  amounts
     reported for year-to-date  periods. This is due to changes in the number of
     weighted-average  shares  outstanding  and the effects of rounding for each
     period.

(2)  The Company recorded  restructure charges of $55,000,  $17,000, and $24,000
     in the  second,  third  and  fourth  quarters  of 2005,  respectively,  and
     $70,000,  $432,000 and $60,400 in the second,  third and fourth quarters of
     2004, respectively, for charges associated primarily with severance related
     charges and a small office closure.

(3)  The  loss in the  fourth  quarter  of 2004  was  primarily  related  to the
     quarter's  decline in sales to  customers  in the  wireless  market.

(4)  Beginning in the third  quarter of 2005, we began  recognizing  revenue for
     certain equipment requiring  installation at the time of shipment. See Note
     1.




NOTE 17 - LONG-TERM DEBT

As of December 31, 2005 and December  31, 2004,  Data I/O had no long-term  debt
outstanding.  Data I/O  established a foreign line of credit for 50,000 Euros in
February 2002 that was renewed in January 2003 but not renewed in January 2004.


                                       44



ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
         AND FINANCIAL DISCLOSURE

None.

ITEM 9A. 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 our consolidated  subsidiaries) required to be included
in our periodic SEC filings and Form 8-K reports.

(b)  Changes in internal controls.

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

We  have  recently  acquired  and are  currently  implementing  a new  worldwide
information  system that will result in changes to our  internal  controls.  Our
corporate office began use of the new system in February 2006. We are now in the
process of implementing the new system at our subsidiary locations. We intend to
include process and internal control  improvements as part of the implementation
process.


ITEM 9B. OTHER INFORMATION

None.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------

Information regarding the Registrant's directors is set forth under "Election of
Directors" in Data I/O's Proxy  Statement  relating to Data I/O's annual meeting
of  shareholders  to be held on May  24,  2006  and is  incorporated  herein  by
reference.  Such  Proxy  Statement  will be filed  within 120 days of Data I/O's
year-end. Information regarding the Registrant's executive officers is set forth
in  Item 1 of  Part I  herein  under  the  caption  "Executive  Officers  of the
Registrant."

Code of Ethics

We have  adopted  an  updated  Code of Ethics  that  applies  to all  directors,
officers and employees of Data I/O,  including the Chief  Executive  Officer and
Chief  Financial  Officer.  The key  principles of the Code of Ethics are to act
legally  and with  integrity  in all work for Data  I/O.  The Code of  Ethics is
posted   on   the    corporate    governance    page   of   our    website    at
http://www.dataio.com/corporate/governance.asp.  We will post any  amendments to
our Code of Ethics  on our  website.  In the  unlikely  event  that the Board of
Directors  approves  any sort of waiver to the Code of Ethics for our  executive
officers or directors, information concerning such waiver will also be posted on
our website. In addition to posting information regarding amendments and waivers
on our website,  the same  information  will be included in a Current  Report on
Form 8-K within  four  business  days  following  the date of the  amendment  or
waiver, unless website posting of such amendments or waivers is permitted by the
rules of The Nasdaq Stock Market, Inc.


                                       45


ITEM 11.  EXECUTIVE COMPENSATION
- --------------------------------

Information  called for by Part III,  Item 11, is  included  in Data I/O's Proxy
Statement  relating to Data I/O's annual meeting of  shareholders  to be held on
May 24, 2006 and is incorporated herein by reference. The information appears in
the Proxy  Statement  under the  caption  "Executive  Compensation."  Such Proxy
Statement will be filed within 120 days of Data I/O's year-end.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
          AND RELATED STOCKHOLDER MATTERS

Information  called for by Part III,  Item 12, is  included  in Data I/O's Proxy
Statement  relating to Data I/O's annual meeting of  shareholders  to be held on
May 24, 2006 and is incorporated herein by reference. The information appears in
the Proxy Statement under the caption "Voting Securities and Principal Holders."
Such Proxy Statement will be filed within 120 days of Data I/O's year-end.

Equity Compensation Plan Information
- ------------------------------------

The following table gives  information about our Common Stock that may be issued
upon the  exercise  of  options  and  rights  under all of our  existing  equity
compensation  plans as of December  31,  2005.  See Notes 11 and 12 of "Notes to
Consolidated Financial Statements."



                                (a) Number of securities                                   (c) Number of securities remaining
                                 to be issued upon the         (b) Weighted-average        available for future issuance under
                                 exercise of outstanding       exercise price of           equity compensation plans
                                 options, warrants and         outstanding options,        (excluding securities reflected in
                                 rights                        warrants and rights         column (a))
                                 ------------------------      ---------------------       -----------------------------------
                                                                                     
Equity compensation plans
approved by the security
holders(1)(3)                           1,182,641                      $2.41                          562,469

Equity compensation plans
not approved by the security
holders(2)                                     0                      $0.00                                 0

(1)  Represents  shares of Data I/O's Common Stock issuable pursuant to our 2000
     Stock  Incentive  Compensation  Plan, 1986 Stock Option Plan, 1992 Employee
     Stock Purchase Plan, and Director Fee Plan.

(2)  Director  option grant  represents a one-time  option grant to Directors in
     May  1998  prior  to  shareholder  approval  of  an  option  plan  covering
     Directors.

(3)  Stock Appreciation  Rights Plan ("SAR") provides that directors,  executive
     officers  or  holders  of 10% or more of Data  I/O's  Common  Stock have an
     accompanying  SAR with respect to each exercisable  option.  While the plan
     has been  approved by the  security  holders,  no amounts  are  included in
     columns (a), (b), or (c) relating to the SAR.



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

ITEM 14. PRINCIPLE ACCOUNTING FEES AND SERVICES

The information  required by this Item with respect to principal accountant fees
and services is  incorporated by reference to the section  captioned  "Principal
Accountant's  Fees and Services" in the Proxy  Statement  relating to Data I/O's
annual meeting of  shareholders to be held on May 24, 2006. Such Proxy Statement
will be filed within 120 days of Data I/O's year-end.


                                       46


                                     PART IV

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Executive Compensation Plans and Arrangements

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 10.17.

(2)  Amended and Restated Retirement Plan and Trust Agreement. See Exhibit 10.2,
     10.3, 10.4, 10.8, 10.11, 10.12, and 10.13.

(3)  Summary of Amended and Restated Management Incentive Compensation Plan. See
     Exhibit 10.9.

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

(5)  Amended and Restated 1986 Stock Option Plan. See Exhibit 10.15.

(6)  Form of Change in Control Agreements. See Exhibit 10.21 and 10.22.

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

(8)  Letter Agreement with Frederick R. Hume. See Exhibit 10.16.

(9)  Amended and Restated 2000 Stock  Compensation  Incentive  Plan. See Exhibit
     10.18.

(10) Form of Option Agreement. See Exhibit 10.20.

(11) Data I/O  Corporation Tax Deferral  Retirement  Plan. See Exhibit 10.19 and
     10.24.

(12) Harald Weigelt Employment Agreement. See Exhibit 10.23.


(a)  List of Documents Filed as a Part of This Report: Page

     (1)  Index to Financial Statements:

          Report of Independent Registered Public Accounting Firm            26

          Consolidated Balance Sheets as of December 31, 2005
          and 2004                                                           27

          Consolidated Statements of Operations for each of the
          three years ended December 31, 2005                                28

          Consolidated Statements of Cash Flowsfor each of the
          three years ended December 31, 2005                                29

          Consolidated Statement of Stockholders' Equity for
          each of the three years ended December 31, 2005                    30

          Notes to Consolidated Financial Statements                         31



                                       47



     (2)  Index to Financial Statement Schedules:

          Schedule II - Consolidated Valuation and Qualifying Accounts       52

          All other  schedules  not listed above have been  omitted  because the
          required  information  is  included  in  the  consolidated   financial
          statements or the notes thereto, or is not applicable or required.

     (3)  Index to Exhibits:

          3    ARTICLES OF INCORPORATION:

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

               3.2    Data I/O's Bylaws as amended and restated as of
                      February 2006.

               3.3    Certification 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)).


                                       48



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

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

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

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

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

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

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

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

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

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

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


                                       49



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

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

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

               10.18  Amended and Restated 2000 Stock Compensation Incentive
                      Plan dated May 20, 2004 (Incorporated by reference to
                      Data I/O's 2004 Proxy Statement dated April 12, 2004).

               10.19  Data I/O Corporation Tax Deferral Retirement Plan, as
                      amended (Incorporated by reference to Data I/O's 2004
                      Annual Report on Form 10-K (File No. 0-10394)).

               10.20  Form of Option Agreement (Incorporated by reference to
                      Data I/O's 2004 Annual Report on Form 10-K
                      (File No. 0-10394)).

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

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

               10.23  Harald Weigelt Employment Agreement.

               10.24  Data I/O Corporation Tax Deferral Retirement Plan, as
                      amended.

               10.25  Lease Termination Agreement dated February 28, 2006
                      (Redmond Headquarters).

               10.26  Lease, Redmond East Business Campus between Data I/O
                      Corporation and Carr Redmond PLCC dated February 28, 2006.

               21.1   Subsidiaries of the Registrant

               23.1   Consent of Independent Registered Public Accounting Firm

          31   CERTIFICATION - SECTION 302:

               31.1   Chief Executive Officer Certification
               31.2   Chief Financial Officer Certification

          32   CERTIFICATION - SECTION 906:

               32.1   Chief Executive Officer Certification
               32.2   Chief Financial Officer Certification



                                       50



                                   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:   March 29, 2006                        By: //S//Frederick R. Hume
                                                  ------------------------
                                                    Frederick R. Hume
                                          President and Chief Executive Officer



Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  Registrant and
in the capacities and on the dates indicated.

NAME & DATE                                TITLE
- -----------                                -----

By: /s/ Frederick R. Hume                  President and Chief Executive Officer
    --------------------------             (Principal Executive Officer)
    Frederick R. Hume

By: /s/ Joel S. Hatlen                     Chief Financial Officer
    --------------------------             Vice President of Finance
    Joel S. Hatlen                         Secretary, Treasurer
                                           (Principal Financial and Accounting
                                           Officer)

By: /s/ Paul A. Gary                       Director
    --------------------------
    Paul A. Gary

By: /s/ Edward D. Lazowska                 Director
    --------------------------
    Edward D. Lazowska

By: /s/ Daniel A. DiLeo                    Director
    --------------------------
    Daniel A. DiLeo

By: /s/ Steven M. Quist                    Director
    --------------------------
    Steven M. Quist

By: /s/ William R. Walker                  Director
    --------------------------
    William R. Walker




                                       51



                              DATA I/O CORPORATION

          SCHEDULE II - CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS



                                                                 Charged/
                                                                (Credited)
                                              Balance at         to Costs                            Balance at
                                               Beginning            and          Deductions-           End of
                                               of Period         Expenses          Describe            Period
                                            ----------------  ----------------  ---------------  --------------------
(in thousands)
                                                                                        
Year Ended December 31, 2003:
     Reserves and allowances
        deducted from asset accounts:
           Allowance for bad debts                $187                $71             ($56) (1)          $202
           Inventory reserves                   $3,267               ($96)           ($875) (2)        $2,296

Year Ended December 31, 2004 :
     Reserves and allowances
        deducted from asset accounts:
           Allowance for bad debts                $202               ($37)            ($10) (1)          $155
           Inventory reserves                   $2,296               ($80)           ($301) (2)        $1,915

Year Ended December 31, 2005:
     Reserves and allowances
        deducted from asset accounts:
           Allowance for bad debts                $155                 64              (54)              $165
           Inventory reserves                   $1,915              ($158)           ($218)            $1,539


(1)  Uncollectable accounts written off, net of recoveries.
(2)  Obsolete inventories disposed of.





                                       52

EX-3.2

EXHIBIT 3.2

AMENDED AND RESTATED
BYLAWS OF
DATA I/O CORPORATION

As of February 16, 2006

ARTICLE I

Offices

        (1)   Registered Office and Registered Agent: The registered office of the corporation shall be located in the State of Washington at such place as may be fixed from time to time by the Board of Directors upon filing of such notices as may be required by law, and the registered agent shall have a business office identical with such registered office.

        (2)   Other Offices: The corporation may have other offices within or outside the State of Washington at such place or places as the Board of Directors may from time to time determine.

ARTICLE II

Shareholders’ Meetings

        (1)   Meeting Place: All meetings of the shareholders shall be held at the registered office of the corporation, or at such other place as shall be determined from time to time by the Board of Directors, and the place at which any such meeting shall be held shall be stated in the notice of the meeting.

        (2)   Annual Meeting Time: The annual meeting of the shareholders for the election of directors and for the transaction of such other business as may properly come before the meeting, shall be held each year during the month of May on such date and at such time as may be determined each year by the Board of Directors.

        (3)   Special Meetings: Special meetings of the shareholders for any purpose may be called at any time by the President, Board of Directors, or the holders of not less than one-tenth of all shares entitled to vote at the meeting in accordance with RCW 23B.07.020.

        (4)   Notice:

            (a)    Notice of the time and place of the annual meeting of shareholders shall be given by delivering personally or by mailing a written or printed notice of the same, at least ten

1

days, and not more than sixty days, prior to the meeting to each shareholder of record entitled to vote at such meeting.

            (b)    At least ten days and not more than sixty days prior to the meeting, written or printed notice of each special meeting of shareholders, stating the place, day and hour of such meeting, and the purpose or purposes for which the meeting is called, shall be delivered personally, or mailed to each shareholder of record entitled to vote at such meeting.

            (c)    Notice of a shareholders’ meeting at which the shareholders will be called to act on an amendment to the articles of incorporation, a plan of merger or share exchange, a proposed sale of assets other than in the regular course of business or the dissolution of the Corporation shall be given not fewer than twenty days and not more than sixty days before the meeting date.

        (5)   Voting Record: At least ten days and not more than seventy days before each meeting of shareholders, a complete record of the shareholders entitled to vote at such meeting, or any adjournment thereof, shall be made, arranged in alphabetical order, with the address of and number of shares held by each, which record shall be kept on file at the registered office of the corporation for a period of ten days prior to such meeting. The record shall be kept on file at the registered office of the Corporation for a period beginning ten days prior to such meeting and shall be kept open at the time and place of such meeting for the inspection of any shareholder, or any shareholder’s agent or attorney.

        (6)   Quorum: Except as otherwise required by law:

            (a)    A quorum at any annual or special meeting of shareholders shall consist of shareholders representing, either in person or by proxy, a majority of the votes entitled to be cast on the matter by each voting group.

            (b)    The votes of a majority in interest of those present at any properly called meeting or adjourned meeting of shareholders at which a quorum as in this paragraph defined is present shall be sufficient to transact business.

        (7)   Voting of Shares:

            (a)    Except as otherwise provided in these Bylaws or to the extent that voting rights of the shares of any class or classes are limited or denied by the Articles of Incorporation, each shareholder, on each matter submitted to a vote at a meeting of shareholders, shall have one vote for each share of stock registered in his name in the books of the corporation.

            (b)    If a quorum exists, action on a matter, other than the election of directors, is approved by a voting group if the

2

votes cast within the voting group favoring the action exceed the votes cast within the voting group opposing the action, unless the question is one which by express provision of law, of the Articles of Incorporation or of these Bylaws a greater number of affirmative votes is required.

            (c)    Unless otherwise provided in the Articles of Incorporation, in any election of directors the candidates elected are those receiving the largest numbers of votes cast by the shares entitled to vote in the election, up to the number of directors to be elected by such shares.

        (8)   Closing of Transfer Books and Fixing Record Date: For the purpose of determining shareholders notice of or to vote at any meeting of shareholders, or any adjournment thereof, or entitled to receive payment of any dividend, the Board of Directors may provide that the stock transfer books shall be closed for a stated period not to exceed seventy days nor be less than ten days preceding such meeting. In lieu of closing the stock transfer books, the Board of Directors may fix in advance a record date for any such determination of shareholders, such date to be not more than seventy days and, in case of a meeting of shareholders, not less than ten days prior to the date on which the particular action requiring such determination of shareholders is to be taken.

        (9)   Proxies: A shareholder may vote either in person or by proxy executed in writing by the shareholder or his duly authorized attorney-in-fact or agent. An appointment of a proxy is effective when received by the person authorized to tabulate votes for the Corporation. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy.

        (10)   Action by Shareholders without a Meeting: Any action required or which may be taken at a meeting of shareholders of the corporation may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the shareholders entitled to vote with respect to the subject matter thereof, and delivered to the Corporation for inclusion in the minutes or filing with the Corporation’s records. Such consent shall have the same force and effect as a unanimous vote of shareholders. Action taken in accordance with this section shall be effective when all written consents are in the possession of the Corporation unless the consent specifies a later effective date.

        (11)   Waiver of Notice: A waiver of any notice required to be given any shareholder, signed by the person or persons entitled to such notice, whether before or after the time stated therein for the meeting shall be equivalent to the giving of such notice provided that such waiver has been delivered to the Corporation for inclusion in the minutes or filing with the Corporation’s records. A shareholder’s attendance at a meeting waives

3

any notice required, unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting.

        (12)   Action of Shareholders by Communications Equipment: Shareholders may participate in a meeting of shareholders by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time, and participation by such means shall constitute presence in person at a meeting.

        (13)   Notice of Shareholder Nominees: Nominations of persons for election to the Board of Directors shall be made only at a meeting of shareholders and only (i) by the Board of Directors or a committee appointed by the Board of Directors or (ii) by any shareholder entitled to vote in the election of directors at the meeting who complies with the notice procedures set forth in this Section 13. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the corporation. To be timely, a shareholder’s notice shall be delivered to or mailed and received at the principal executive offices of the corporation (i) with respect to an election to be held at an annual meeting of shareholders, ninety days prior to the date one year from the date of the immediately preceding annual meeting of shareholders, and (ii) with respect to an election to be held at a special meeting of shareholders for the election of directors, the close of business on the tenth day following the date on which notice of such meeting is first given to shareholders. For purposes of this Section 14, any adjournment(s) or postponement(s) of the original meeting whereby the meeting will reconvene within thirty days from the original date shall be deemed for purposes of notice to be a continuation of the original meeting, and no nominations by a shareholder of persons to be elected directors of the corporation may be made at any such reconvened meeting unless pursuant to a notice which was timely for the meeting on the date originally scheduled. Each such notice shall set forth: (a) the name and address of the shareholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the shareholder is a holder of record of stock of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (d) such other information regarding each nominee proposed by such shareholder as would be required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to the Securities Exchange Act of 1934, as amended; and (e) the consent of each nominee to serve as a director of the corporation if so elected.

4

        Notwithstanding the foregoing, nothing in this Section 13 shall be interpreted or construed to require the inclusion of information about any such nominee in any proxy statement distributed by, at the direction of, or on behalf of the Board of Directors. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedures, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded.

        (14)   Shareholder Proposals at Annual Meeting: Business may be properly brought before an annual meeting by a shareholder only upon the shareholder’s timely notice thereof in writing to the Secretary of the corporation. To be timely, a shareholder’s notice must be delivered to or mailed and received at the principal executive offices of the corporation not later than ninety days prior to the date one year from the date of the immediately preceding annual meeting of shareholders. For purposes of this Section 14, any adjournment(s) or postponement(s) of the original meeting whereby the meeting will reconvene within thirty days from the original date shall be deemed for purposes of notice to be a continuation of the original meeting, and no business may be brought before any reconvened meeting unless pursuant to a notice which was timely for the meeting on the date as originally scheduled. Each such notice shall set forth: (a) the name and address of the shareholder who intends to make the proposal; (b) a representation that the shareholder is a holder of record of stock of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to vote for the proposal; (c) any material interest of such shareholder in such proposal; and (d) such other information regarding such proposal as would be required to be disclosed in solicitations of proxies pursuant to the Securities Exchange Act of 1934, as amended.

        Notwithstanding the foregoing, nothing in this Section 14 shall be interpreted or construed to require the inclusion of information about any such proposal in any proxy statement distributed by, at the discretion of, or on behalf of the Board of Directors. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a proposal was not made in accordance with the foregoing procedures, and if he should so determine, he shall so declare to the meeting, and any such business not properly brought before the meeting shall be disregarded.

5

ARTICLE III

Stock

        (1)   Issuance of Shares: No shares of the Corporation shall be issued unless authorized by the Board of Directors. Such authorization shall include the number of shares to be issued, the consideration to be received and a statement regarding the adequacy of the consideration.

        (2)   Certificates: Certificates of stock shall be issued in numerical order, and each shareholder shall be entitled to a certificate signed by the President, or a Vice President, and the Secretary or an Assistant Secretary, and may be sealed with the seal of the corporation or a facsimile thereof. The signatures of such officers may be facsimiles if the certificate is manually signed on behalf of a transfer agent, or registered by a registrar, other than the corporation itself or an employee of the corporation. If an officer who has signed or whose facsimile signature has been placed upon such certificate ceases to be an officer before the certificate is issued, it may be issued by the corporation with the same effect as if the person were an officer on the date of issue.

        At a minimum each certificate of stock shall state:

            (a)    the name of the Corporation;

            (b)    that the Corporation is organized under the laws of the State of Washington;

            (c)    the name of the person to whom the certificate is issued;

            (d)    the number and class of shares and the designation of the series, if any, the certificate represents; and

            (e)    if the Corporation is authorized to issue different classes of shares or different series within a class, the designations, relative rights, preferences and limitations applicable to each class and the variations in rights, preferences and limitations determined for each series, and the authority of the Board of Directors to determine variations for future series, must be summarized either on the front or back of the certificate. Alternatively, the certificate may state conspicuously on its front or back that the Corporation will furnish the shareholder this information without charge on request in writing.

6

        (3)   Transfers:

            (a)    Transfers of stock shall be made only upon the stock transfer books of the corporation, kept at the registered office of the corporation or at its principal place of business, or at the office of its transfer agent or registrar, and before a new certificate is issued the old certificate shall be surrendered for cancellation. The Board of Directors may, by resolution, open a share register in any state of the United States, and may employ an agent or agents to keep such register, and to record transfers of shares therein.

            (b)    Shares of certificated stock shall be transferred by delivery of the certificates therefor, accompanied either by an assignment in writing on the back of the certificate or an assignment separate from certificate, or by a written power of attorney to sell, assign and transfer the same, signed by the holder of said certificate. No shares of certificated stock shall be transferred on the records of the Corporation until the outstanding certificates therefor have been surrendered to the Corporation or to its transfer agent or registrar.

        (4)   Registered Owner: Registered shareholders shall be treated by the corporation as the holders in fact of the stock standing in their respective names and the corporation shall not be bound to recognize any equitable or other claim to or interest in any share on the part of any other person, whether or not it shall have express or other notice thereof, except as expressly provided below or by the laws of the State of Washington. The Board of Directors may adopt by resolution a procedure whereby a shareholder of the corporation may certify in writing to the corporation that all or a portion of the shares registered in the name of such shareholder are held for the account of a specified person or persons. The resolution shall set forth:

            (a)    The classification of shareholder who may certify;

            (b)    The purpose or purposes for which the certification may be made;

            (c)    The form of certification and information to be contained therein;

            (d)    If the certification is with respect to a record date or closing of the stock transfer books, the date within which the certification must be received by the corporation; and

            (e)    Such other provisions with respect to the procedure as are deemed necessary or desirable.

        Upon receipt by the corporation of a certification complying with the procedure, the persons specified in the certification

7

shall be deemed, for the purpose or purposes set forth in the certification, to be the holders of record of the number of shares specified in place of the shareholder making the certification.

        (5)   Mutilated, Lost or Destroyed Certificates: In case of any mutilation, loss or destruction of any certificate of stock, another may be issued in its place on proof of such mutilation, loss or destruction. The Board of Directors may impose conditions on such issuance and may require the giving of a satisfactory bond or indemnity to the corporation in such sum as they might determine or establish such other procedures as they deem necessary.

        (6)   Fractional Shares or Scrip: The corporation, by resolution of the Board of Directors, may either: (a) issue fractions of a share which shall entitle the holder to exercise voting rights, to receive dividends thereon, and to participate in any of the assets of the corporation in the event of liquidation; (b) arrange for the disposition of fractional interests by those entitled thereto; (c) pay in cash the fair value of fractions of a share as of the time when those entitled to receive such shares are determined; or (d) issue scrip in registered or bearer form which shall entitle the holder to receive a certificate for a full share upon the surrender of such scrip aggregating a full share.

        (7)   Shares of Another Corporation: Shares owned by the corporation in another corporation, domestic or foreign, may be voted by such officer, agent or proxy as the Board of Directors may determine or, in the absence of such determination, by the President of the corporation.

ARTICLE IV

Board of Directors

        (1)   Number and Powers: The management of all the affairs, property and interest of the corporation shall be vested in a Board of Directors consisting of seven (6) persons, who shall be elected for a term of one year, and shall hold office until their successors are elected and qualified. Directors need not be shareholders or residents of the State of Washington. In addition to the powers and authorities by these Bylaws and the Articles of Incorporation expressly conferred upon it, the Board of Directors may exercise all such powers of the corporation and do all such lawful acts and things as are not prohibited by statute or by the Articles of Incorporation or by these Bylaws or as directed or required to be exercised or done by the shareholders.

        (2)   Change of Number: The number of directors may at any time be increased or decreased by amendment of these Bylaws, but no decrease shall have the effect of shortening the term of any

8

incumbent directors, except as provided in Sections 5 and 6 of this Article IV.

        (3)   Vacancies: All vacancies in the Board of Directors, whether caused by resignation, death or otherwise, may be filled by the affirmative vote of a majority of the remaining directors though less than a quorum of the Board of Directors. A director elected to fill any vacancy shall hold office for the unexpired term of his or her predecessor and until his or her successor is elected and qualified. Any directorship to be filled by reason of an increase in the number of directors may be filled by the Board of Directors for a term of office continuing only until the next election of directors by the shareholders and until his or her successor is elected and qualified.

        (4)   Resignation: A director may resign at any time by delivering written notice to the Board of Directors, the President or the Secretary. A resignation is effective when the notice is delivered unless the notice specifies a later effective date.

        (5)   Removal of Directors: At a special meeting of shareholders called expressly for that purpose, the entire Board of Directors, or any member thereof, may be removed by a vote of the holders of a majority of shares then entitled to vote at an election of such directors. A director or directors may be removed only if the number of votes cast to remove the director exceeds the number of votes cast not to remove the director. The notice of such special meeting must state that the purpose, or one of the purposes, of the meeting is removal of the director or directors, as the case may be.

        (6)   Regular Meetings: Regular meetings of the Board of Directors or any committee may be held without notice at the registered office of the corporation or at such other place or places, either within or without the State of Washington, as the Board of Directors or such committee, as the case may be, may from time to time designate. The annual meeting of the Board of Directors shall be held without notice immediately after the adjournment of the annual meeting of shareholders.

        (7)   Special Meetings:

            (a)    Special meetings of the Board of Directors may be called at any time by the President or by any two directors, to be held at the registered office of the corporation or at such other place or places as the Board of Directors or the person or persons calling such meeting may from time to time designate. Notice of all special meetings of the Board of Directors shall be given to each director by three day’s service of the same by telegram, by letter, or personally. Such notice need not specify the business to be transacted at, nor the purpose of, the meeting.

9

            (b)    Special meetings of any committee may be called at any time by such person or persons and with such notice as shall be specified for such committee by the Board of Directors, or in the absence of such specification, in the manner and with the notice required for special meetings of the Board of Directors.

        (8)   Quorum: A majority of the whole Board of Directors shall be necessary at all meetings to constitute a quorum for the transaction of business. If a quorum is present when a vote is taken, the affirmative vote of a majority of directors present is the act of the Board of Directors.

        (9)   Waiver of Notice: Attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened and does not thereafter vote for or assent to action taken at the meeting. A waiver of notice signed by the director or directors and delivered to the Corporation for inclusion in the minutes or filing with the corporate records, whether before or after the time stated for the meeting, shall be equivalent to the giving of notice.

        (10)   Registering Dissent: A director who is present at a meeting of the Board of Directors at which action on a corporate matter is taken shall be presumed to have assented to such action unless his dissent shall be entered in the minutes of the meeting, or unless he shall file his written dissent to such action with the person acting as the secretary of the meeting, before the adjournment thereof, or shall forward such dissent by registered mail to the Secretary of the corporation within a reasonable time after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action.

        (11)   Executive and Other Committees: The Board of Directors, by resolution adopted by a majority of the full Board of Directors, may designate from among its members an Executive Committee and one or more other standing or special committees. The Executive Committee shall have and may exercise all the authority of the Board of Directors, and other standing or special committees may be invested with such powers, subject to such conditions, as the Board of Directors shall see fit; providedthat, notwithstanding the above, no committee of the Board of Directors shall have the authority to: (1) Declare dividends or distributions, except at a rate or in periodic amount determined by the Board of Directors; (2) approve or recommend to shareholders actions or proposals required by law to be approved by shareholders; (3) fill vacancies on the Board of Directors or any committee thereof; (4) adopt, amend, or repeal the Bylaws; (5) authorize or approve the reacquisition of shares unless pursuant to general formula or method specified by the Board of Directors; (6) fix compensation of any director for serving on the Board of Directors or on any committee thereof;

10

(7) approve a plan of merger, consolidation, or exchange of shares not requiring shareholder approval; (8) reduce earned or capital surplus; or (9) appoint other committees of the Board of Directors or the members thereof. All committees so appointed shall keep regular minutes of their meetings and shall cause them to be recorded in books kept for that purpose in the office of the corporation. The designation of any such committee and the delegation of authority thereto shall not relieve the Board of Directors, or any member thereof, of any responsibility imposed by law.

        (12)   Remuneration: No stated salary shall be paid directors, as such, for their service, but by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, may be allowed for attendance at each regular or special meeting of such Board; provided, that nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity and receiving compensation therefore. Members of standing or special committees may be allowed like compensation for attending committee meetings.

        (13)   Loans: No loans shall be made by the corporation to the directors, unless first approved by the holders of two-thirds of the voting shares. No loans shall be made by the corporation secured by its own shares.

        (14)   Action by Directors Without a Meeting: Any action required or which may be taken at a meeting of the directors, or of a committee thereof, may be taken without a meeting if a consent in writing, setting forth the action so taken or to be taken, shall be signed by all of the directors, or all of the members of the committee, as the case may be, either before or after the action taken, and delivered to the Corporation for inclusion in the minutes or filing with the Corporation’s records. Such consent shall have the same effect as a unanimous vote.

        (15)   Action of Directors by Communications Equipment: Any action required or which may be taken at a meeting of directors, or of a committee thereof, may be taken by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time.

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ARTICLE V

Officers

        (1)   Designations: The officers of the corporation shall be a Chairman of the Board of Directors, a President, one or more Vice-Presidents (one or more of whom may be Executive Vice-Presidents), a Secretary and a Treasurer, and such Assistant Secretaries and Assistant Treasurers as the Board may designate, who shall be elected for one year by the directors at their first meeting after the annual meeting of shareholders, and who shall hold office until their successors are elected and qualified. Any two or more offices may be held by the same person, except the offices of President and Secretary.

        (2)   The Chairman of the Board of Directors: The Chairman of the Board of Directors shall preside at all meetings of shareholders and directors, and shall perform all such other duties as are incident to his office or are properly required of him by the Board of Directors. If no person holds the office of Chairman of the Board of Directors, the President shall preside at all meetings of shareholders and directors.

        (3)   The President: The President shall have general supervision of the affairs of the corporation, and shall perform all such other duties as are incident to his office or are properly required of him by the Board of Directors.

        (4)   Vice-Presidents: During the absence or disability of the President, the Executive Vice-Presidents, if any, and the Vice-Presidents in the order designated by the Board of Directors, shall exercise all the functions of the President. Each Vice-President shall have such powers and discharge such duties as may be assigned to him from time to time by the Board of Directors.

        (5)   Secretary and Assistant Secretaries: The Secretary shall issue notices for all meetings, except for notices for special meetings of the shareholders and special meetings of the directors which are called by the requisite number of shareholders or directors, shall keep minutes of all meetings, shall have charge of the seal and the corporate books, and shall make such reports and perform such other duties as are incident to his office, or are properly required of him by the Board of Directors. The Assistant Secretary, or Assistant Secretaries in the order designated by the Board of Directors, shall perform all of the duties of the Secretary during the absence or disability of the Secretary, and at other times may perform such duties as are directed by the President or the Board of Directors.

        (6)   The Treasurer: The Treasurer shall have the custody of all moneys and securities of the corporation and shall keep regular books of account. He shall disburse the funds of the

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corporation in payment of the just demands against the corporation or as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the Board of Directors from time to time as may be required of him an account of all his transactions as Treasurer and of the financial condition of the corporation. He shall perform such other duties incident to his office or that are properly required of him by the Board of Directors. The Assistant Treasurer, or Assistant Treasurers in the order designated by the Board of Directors, shall perform all of the duties of the Treasurer in the absence or disability of the Treasurer, and at other times may perform such other duties as are directed by the President or the Board of Directors.

        (7)   Delegation: In the case of absence or inability to act of any officer of the corporation and of any person herein authorized to act in his place, the Board of Directors may from time to time delegate the powers or duties of such officer to any other officer or any director or other person whom it may in its sole discretion select.

        (8)   Vacancies: Vacancies in any office arising from any cause may be filled by the Board of Directors at any regular or special meeting of the Board.

        (9)   Other Officers: Directors may appoint such other officers and agents as it shall deem necessary or expedient, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors.

        (10)   Resignation: An officer may resign at any time by delivering notice to the Corporation. Such notice shall be effective when delivered unless the notice specifies a later effective date. Any such resignation shall not affect the Corporation’s contract rights, if any, with the officer.

        (11)   Loans: No loans shall be made by the corporation to any officer, unless first approved by the holders of two-thirds of the voting shares.

        (12)   Term — Removal: The officers of the corporation shall hold office until their successors are chosen and qualify. Any officer or agent elected or appointed by the Board of Directors may be removed at any time, with or without cause, by the affirmative vote of a majority of the whole Board of Directors, but such removal shall be without prejudice to the contract rights, if any, of the person so removed.

        (13)   Salaries and Contract Rights: The salaries, if any, of the officers shall be fixed from time to time by the Board of Directors. The appointment of an officer shall not of itself create contract rights.

        (14)   Bonds: The Board of Directors may, by resolution, require any and all of the officers to give bonds to the corporation, with sufficient surety or sureties, conditioned for the faithful performance of the duties of their respective offices, and to comply with such other conditions as may from time to time be required by the Board of Directors.

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ARTICLE VI

        (1)   Distributions: The Board of Directors may authorize and the corporation may make distributions to its shareholders; provided that no distribution may be made if, after giving it effect, either:

            (a)    The Corporation would not be able to pay its debts as they become due in the usual course of business; or

            (b)    The Corporation’s total assets would be less than the sum of its total liabilities plus the amount which would be needed, if the Corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution.

        The Board of Directors may authorize distributions to holders of record at the close of business on any business day prior to the date on which the distribution is made. If the Board of Directors does not fix a record date for determining shareholders entitled to a distribution, the record date shall be the date on which the Board of Directors authorizes the distribution.

        (2)   Measure of Effect of a Distribution: For purposes of determining whether a distribution may be authorized by the Board of Directors and paid by the Corporation under Article VI, Section 1 of these Bylaws, the effect of the distribution is measured:

            (a)    In the case of a distribution of indebtedness, the terms of which provide that payment of principal and interest are made only if and to the extent that payment of a distribution to shareholders could then be made under this section, each payment of principal or interest is treated as a distribution, the effect of which is measured on the date the payment is actually made; or

            (b)    In the case of any other distribution:

                (i)     if the distribution is by purchase, redemption, or other acquisition of the Corporation’s shares, the effect of the distribution is measured as of the earlier of the date any money or other property is transferred or debt incurred by the Corporation, or the date the shareholder ceases to be a shareholder with respect to the acquired shares;

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                (ii)     if the distribution is of an indebtedness other than described in subsection 2(a) and (b)(i) of this section, the effect of the distribution is measured as of the date the indebtedness is distributed; and

                (iii)     in all other cases, the effect of the distribution is measured as of the date the distribution is authorized if payment occurs within 120 days after the date of authorization, or the date the payment is made if it occurs more than 120 days after the date of authorization.

        (3)   Depositories: The moneys of the corporation shall be deposited in the name of the corporation in such bank or banks or trust company or trust companies as the Board of Directors shall designate, and shall be drawn out only by check or other order for payment of money signed by such persons and in such manner as may be determined by resolution of the Board of Directors.

ARTICLE VII

Notices

        Except as may otherwise be required by law, any notice to any shareholder or director must be in writing and may be transmitted by: mail, private carrier or personal delivery; telegraph or teletype; or telephone, wire or wireless equipment which transmits a facsimile of the notice. Written notice by the Corporation to its shareholders shall be deemed effective when mailed, if mailed with first-class postage prepaid and correctly addressed to the shareholder’s address shown in the Corporation’s current record of shareholders. Except as set forth in the previous sentence, written notice shall be deemed effective at the earliest of the following: (i) when received; (ii) five days after its deposit in the United States mail, as evidenced by the postmark, if mailed with first-class postage, prepaid and correctly addressed; or (iii) on the date shown on the return receipt, if sent by registered or certified mail, return receipt requested, and receipt is signed by or on behalf of the addressee.

ARTICLE VIII

Seal

        The corporate seal of the corporation shall be in such form and bear such inscription as may be adopted by resolution of the Board of Directors, or by usage of the officers on behalf of the corporation.

ARTICLE IX

Indemnification

        (1)   Right to Indemnification: Each person who was or is

15

made a party or is threatened to be made a party to or is involved (including, without limitation, as a witness) in any actual or threatened action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was a director or officer of the corporation or, being or having been such a director or officer, he or she is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the corporation to the full extent permitted by applicable law as then in effect, against all expense, liability and loss (including attorneys’ fees, judgments, fines, ERISA excise taxes or penalties and amounts to be paid in settlement) actually and reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that except as provided in Section 2 of this Article with respect to proceedings seeking to enforce rights to indemnification, the corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the corporation. The right to indemnification conferred in this Section shall be a contract right and shall include the right to be paid by the corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that the payment of such expenses in advance of the final disposition of a proceeding shall be made only upon delivery to the corporation of an undertaking, by or on behalf of such director of officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Section or otherwise.

        (2)   Right of Claimant to Bring Suit: If a claim under Section 1 of this Article is not paid in full by the corporation within sixty days after a written claim has been received by the corporation, except in the case of a claim for expenses incurred in defending a proceeding in advance of its final disposition, in which case the applicable period shall be twenty days, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, to the extent successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. The claimant shall be presumed to be entitled to indemnification under this Article upon submission of a written claim (and, in an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition,

16

where the required undertaking has been tendered to the corporation) and thereafter the corporation shall have the burden of proof to overcome the presumption that the claimant is not so entitled. Neither the failure of the corporation (including its Board of Directors, independent legal counsel or its shareholders) to have made a determination prior to the commencement of such action that indemnification of or reimbursement or advancement of expenses to the claimant is proper in the circumstances nor an actual determination by the corporation (including its Board of Directors, independent legal counsel or its shareholders) that the claimant is not entitled to indemnification or to the reimbursement or advancement of expenses shall be a defense to the action or create a presumption that the claimant is not so entitled.

        (3)   Nonexclusivity of Rights: The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Articles of Incorporation, Bylaws, agreement, vote of shareholders or disinterested directors or otherwise.

        (4)   Insurance, Contracts and Funding: The corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the Washington Business Corporation Act. The corporation may, without further shareholder action, enter into contracts with any director or officer of the corporation in furtherance of the provisions of this Article and may create a trust fund, grant a security interest or use other means (including, without limitation, a letter of credit) to ensure the payment of such amounts as may be necessary to effect indemnification as provided in this Article.

        (5)   Indemnification of Employees and Agents of theCorporation: The corporation may, by action of its Board of Directors from time to time, provide indemnification and pay expenses in advance of the final disposition of a proceeding to employees and agents of the corporation with the same scope and effect as the provisions of this Article with respect to the indemnification and advancement of expenses of directors and officers of the corporation or pursuant to rights granted pursuant to, or provided by, the Washington Business Corporation Act or otherwise.

ARTICLE X

Books and Records

        The corporation shall keep correct and complete books and

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records of account and shall keep minutes of the proceedings of its shareholders and Board of Directors; and shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of its shareholders, giving the names and addresses of all shareholders in alphabetical order by class of shares showing the number and class of the shares held by each. Any books, records, and minutes may be in written form or any other form capable of being converted into written form within a reasonable time.

ARTICLE XI

Amendments

        (1)   By Shareholders: These Bylaws may be altered, amended or repealed by the affirmative vote of a majority of the voting stock issued and outstanding at any regular or special meeting of the shareholders.

        (2)   By Directors: The Board of Directors shall have power to make, alter, amend and repeal the Bylaws of this corporation. However any such Bylaws, or any alteration, amendment or repeal of the Bylaws, may be changed or repealed by the holders of a majority of the stock entitled to vote at any shareholders’ meeting.

        (3)   Emergency Bylaws: The Board of Directors may adopt emergency Bylaws, subject to repeal or change by action of the shareholders, which shall be operative during any emergency in the conduct of the business of the corporation resulting from an attack on the United States or any nuclear or atomic disaster.

        Most recently amended by resolution of the corporation’s Board of Directors on February 16, 2006.

___________________________________
Joel S. Hatlen, Secretary

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EX-10.23

Exhibit 10.23

Contract of Employment

This Agreement made and entered into by and between

Data I/O GmbH
Lochhamer Schlag 5
82166 Grafelfing, Germany
(hereinafter: Company)

and

Mr. Harald Weigelt
Untermaxkron 19b
82377 Penzberg, Germany
(hereinafter: Managing Director)

Mr.   Weigelt became appointed Geschäftsführer of the Company on December 23, 1999 . Therefore, this Agreement shall set forth all terms and conditions of his employment as of December 23, 1999 with Data I/O GmbH; it replaces all former agreements made between the parties or their predecessors, successors or assigns:

Article 1
Managing Director’s Duties

(1)   The Managing Director shall be entitled and obligated to represent the Company in compliance with the laws, the Articles of Association, and — if available — the Management’s Rules of Procedure. The Managing Director shall not be exempted from

2

the restrictions of Section 181 of the German Civil Code (§ 181 Bürgerliches Gesetzbuch). The Company has the right to appoint a further Managing Director.

(2) Within the framework of his management and representation, the Managing Director shall observe the resolutions of the shareholders´ meeting.

(3) The Managing Director shall be obligated to manage the Company’s affairs in accordance with the principles of a prudent businessman.

(4) The Managing Director shall be obligated to arrange for preparation of the Company’s balance sheet within the Data I/O Corporation (“DATA I/O”) reporting schedule after the end of the respective business year and to perform all acts and make all declarations which are necessary therefor.

The Managing Director shall be obligated, promptly after submission of the balance sheet, to send the same together with the notice of a shareholders’ meeting to the Company by registered letter with return receipt.

(5) The Managing Director shall report to the Vice President, Worldwide Sales and Service of DATA  I/O or other appropriate official as designated by the Company or the shareholders meeting. The Managing Director shall at all times keep the shareholders promptly and fully informed of the business affairs of the Company in compliance with the group’s general policy and shall provide additional information if required by the shareholders.

(6) The Managing Director shall be obligated to perform the employer’s duties for the Company, in particular to ensure that the wage and salary tax and social security contributions are paid in due time.

(7) The Company shall indemnify and hold the Managing Director harmless from any applicable German taxes due from the Company which have not been paid by the Company or its predecessors, successors or assigns, and from any actions occurring prior to the appointment of the Managing Director as the Managing Director of the Company.

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Article 2
Limitation of Management

For all transactions going beyond the ordinary course of business, the Managing Director shall obtain prior approval of the shareholder according to the then-current DATA I/O rules of authorization. This shall apply, in particular, to the

2.1. determination and variation of the long-term business policy of the company,

2.2. granting of guaranties and other securities to third persons,

2.3. acquisition and sale of business operations and parts of business operations, establishment and closure of places of plants,

2.4. acquisition, sale and encumbrance of shares in other companies,

2.5. conclusion, alteration or termination of contracts for the acquisition or sale of industrial property rights (patents, patent applications, trade-marks), secret processes, business secrets, know-how and equivalent rights as well as the conclusion, the alteration and the termination of license contracts,

2.6. conclusion, alteration or termination of inter-company-agreements,

2.7. complete or partial dislocation of development and production of products and software, which are made by the Company or its affiliates in Germany,

2.8. execution of the power of control vis-a-vis affiliates and execution of voting-rights in affiliates, in particular appointment and revocation of managing directors, conclusion, alteration and termination of their service agreements, adoption of the annual statement of account and any decision concerning the appropriation of profits,

2.9. the taking and granting of loans, except for loans which are necessary for the current business operations,

2.10. the acquisition, sale and encumbrance of real property and equivalent rights,

2.11. hiring of permanent employees exceeding the annual budget plan for the Company,

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2.12. contracts with shareholders and their relatives,

2.13. salary-increases exceeding the annual budget plan for the Company,

2.14. bonus payments exceeding the annual budget plan for the Company,

2.15. disposition of goods of the Company with a book value of more than DM 100,000. — ,

2.16 the granting and revocation of "Prokura" or commercial signing rights.

Article 3
Second Occupation, Prohibition of Competition

(1) The Managing Director shall devote his full working capacity to the Company. The Managing Director shall not be entitled to engage in a second occupation which interferes with the Company’s interests without the shareholders’ express approval given through shareholder resolution.

(2) The Managing Director agrees that he will not, directly or indirectly, during his employment and for a period five (5) months from the date on which his employment with the Company terminates or this Agreement expires for any reason (the “Term”), directly or indirectly be employed by, own, manage, operate, join, control or participate in the ownership, management, operation or control of or be connected with, in any manner, any person or entity engaged in competition with Company, Data I/O or its subsidiaries with respect to any product or service sold or activity engaged in by Company, Data I/O or its subsidiaries (including without limitation, products or services used in the “IC Programmer Products Market” as defined below) up to the time of expiration or termination of this Agreement in any geographical area in which at the time of expiration or termination of this Agreement such product or service is sold or activity is engaged in. “IC Programmer Products Market” means the design, development, manufacture, sale or distribution of any device or system used to program programmable integrated circuits. The Managing Director shall be deemed to be connected with such business if such business is carried on by a partnership, corporation or association of which he is an employee, officer, director, shareholder, partner, member, consultant or agent; provided, however, that nothing herein shall prevent the purchase or ownership by the Managing Director of shares which constitute less than five percent (5%) of the

5

outstanding equity securities of a publicly-held corporation, or shall prevent the Managing Director from being connected with any such business if less than five percent (5%) of such business’ revenues relate to the “IC Programmer Products Market” and if the Managing Director is not in any manner associated with the portion of such business generating such revenues.

If the Managing Director breaches this non-competition commitment, the Managing Director hereby covenants with the Company to pay in each instance of breach a contractual penalty of DM 30,000. — . In case the breach is continued, the contractual penalty will have to be paid whenever a calendar month begins. The Company reserves its right to claim for higher damages accrued.

Article 4
Remuneration

(1) The Managing Director shall receive a gross salary of DM 185,500.00 per year as of January 1, 2000, in 12.5 equal installments reduced by statutory deductions payable on/or before the end of each calendar month.

(2) Moreover, the Managing Director shall be eligible to receive an annual bonus of a certain percentage of his annual salary pursuant to the sales and bonus plan agreed between the parties at the beginning of each calendar year.

(3) The Managing Director shall be furnished with a company car (at present DM 1,425.00 monthly lease installments exclusive of VAT). Costs for insurance, for regular maintenance, repairs and gasoline, will be borne by the Company, except for the gasoline cost during the Managing Director’s vacation time. The Managing Director may use this car for private purposes.

The Managing Director shall be obligated to pay tax on the pecuniary advantage resulting from such private use and shall bear the tax burden resulting therefrom as determined by German law.

(4) The Managing Director shall be reimbursed all reasonable expenses and charges incurred by him within the framework of his activities for the Company and according to

6

DATA I/O’s  policies or shall be reimbursed the lump-sums – per diem – which are tax-free according to German-law. The Managing Director shall be obligated to submit to the Company the vouchers and documents in support of expenses.

Article 5
Illness, Death

(1) In case of serious illness or disability not due to his fault which substantially impairs the performance of the Managing Director’s duties, the Managing Director shall be entitled to receive continued payment of the proportional salary according to Article 4, paragraph 1 for three (3) months following the beginning of such illness or disability. This Agreement shall remain in effect during such three (3) month period.

During the next three (3) month period of serious illness or disability, this Agreement shall remain in effect, but the Company shall not be required to pay the Managing Director any salary. Thereafter this Agreement shall terminate if the serious illness or disability continues.

(2) If the Managing Director dies during the term of this Agreement, this Agreement shall terminate and his wife or, if he has no wife, his heirs shall receive continued payment of his remuneration for a period of one (1) month after the date of death of the Managing Director.

Article 6
Holidays

(1) The Managing Director shall have a right to holidays of thirty (30) working days.

(2) If not all of the holiday claim is granted due to business reasons until March 31 of the following year, the claim will be discharged by a payment of the Company. This payment will be based on the fixed salary according to Art. 4, paragraph 1.

7

Article 7
Duty of Confidentiality

The Managing Director undertakes to treat all matters of the Company, DATA I/O and its subsidiaries, such as trade and business secrets, know-how, production methods, design and software developments and non-public financial, marketing and operating information strictly confidentially and shall not disclose the same to third parties. This duty of confidentiality shall survive the termination of this Agreement.

Article 8
Developments and Inventions

(1) The Managing Director hereby grants the Company the exclusive right to use any and all technical, artistic and organizational developments. No special remuneration shall be owed for the grant of this right.

(2) The above provisions shall apply mutatis mutandis to inventions of the Managing Director made by him in connection with the fulfillment of his contractual obligations or on the basis of developments of the Company.

Article 9
Commencement and Term

This Agreement takes effect on December 23,1999 and shall be valid for an indefinite period of time.

Article 10
Termination

(1) Either party hereto may give notice of termination of this Agreement subject to three (3) months’ notice with the notice of termination being effective at the end of a calendar month. The notice shall be in writing.

8

A  recall of the Managing Director shall be deemed a notice of termination by the Company as well, with the notice being effective at the next possible date, and shall also be in writing.

(2) Either party shall have the right to terminate this Agreement for good cause with immediate effect; good cause shall include, but shall not be limited to

a) violation of the duty of confidentiality pursuant to Article 7 or the prohibition of competition pursuant to Article 3 hereof,

b) the Managing Director contravenes against directives of the advisory board and/or shareholders’ meeting of Company, the board of Directors of DATA I/O or the President of DATA I/O where such contravention has an adverse effect on the Company or DATA I/O.

(3) In case that the notice of termination has been given, the Company shall be entitled to release the Managing Director from his work duties, with unused holidays to be taken into consideration and payment of remuneration to be continued for the periods as stated in Article 5 if the termination is pursuant to Article 5, and for the three (3) months’ notice period if the termination is pursuant to Article 10, paragraph 1. No remuneration is to be continued if termination is pursuant to Article 10, paragraph 2. Provided the Managing Director has executed an agreement and general release acceptable to the Company, as additional compensation for termination of the Managing Director’s employment by the Company under Article 10, paragraph 1, the Managing Director will be paid an additional lump sum equal to five (5) months of his then-current salary and 5/12 of the sales incentive and performance bonus he received in the preceding complete year.

(4) The Managing Director shall be obligated to return, on the day of termination hereof, or on the date when he is released from his duties pursuant to Article 10, paragraph 3, whichever is earlier, all documents, models and keys concerning the Company together with all copies or duplicates thereof and shall be obligated to return, on the date of termination hereof, the company car made available to him.

Insofar, the Managing Director shall have no right of retention.

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Article 11
Final Provisions

(1) This Agreement has been approved through resolution of the shareholder. It shall replace all former agreements between the parties, which agreements are cancelled hereby.

(2) Modifications of, supplements to and termination of this Agreement shall be legally valid only if in writing. This shall also apply to waiver of this clause requiring written form.

(3) The parties hereto agree that German law shall be applicable.

(4) If any provision of this Agreement is invalid or void, this shall not affect the validity of the remaining provisions hereof. In this case, the parties hereto shall be obligated to agree on a regulation which most nearly achieves the purpose of the invalid or void provision.

(5) Neither of the parties shall assign or delegate or in any way transfer any rights, interests or obligations hereunder without the prior written consent of the other parties, except that the parties agree that this Agreement: (A) shall be transferred or assigned by Company to (i) an entity resulting from any merger, consolidation or other reorganization to which Company is a party or (ii) a buyer of all or substantially all of Company’s assets relevant to Company’s performance under this Agreement, whereupon such assignee or transferee shall succeed to the rights and obligations of Company hereunder, and (B) may be transferred or assigned by Company to any entity in which Company has a controlling interest or which is under common control with Company, whereupon such assignee or transferee shall succeed to the rights and obligations of Company hereunder. Subject to the foregoing restrictions, this Agreement will be fully binding upon, inure to the benefit of, and be enforceable by the parties hereto and their respective successors and permitted assigns.

IN WITNESS WHEREOF, the parties hereto have hereunto set their hands the day and year hereinafter written.

Date: __________________, ________
Data I/O GmbH

By:       ________________________________

Title:    ________________________________
Harald Weigelt

________________________________

EX-10.24

EXHIBIT 10.24

MANDATORY DISTRIBUTION AMENDMENT
(Code Section 401(a)(31)(B))
to the
Metropolitan Life Insurance Co.
Defined Contribution Prototype Plan & Trust
Basic Plan Document No.03

ARTICLE I
APPLICATION OF AMENDMENT

1.1 Effective Date. Unless a later effective date is specified in Article III of this Amendment, the provisions of this Amendment will apply with respect to distributions made on or after March 28, 2005.

1.2 Precedence. This Amendment supersedes any inconsistent provision of the Plan.

1.3 Adoption by prototype sponsor. Except as otherwise provided herein, pursuant to authority granted by Section 5.01 of Revenue 2005-16, Metropolitan Life Insurance Co. adopts this amendment on behalf of all adopting employers.

ARTICLE II
DEFAULT PROVISION:   AUTOMATIC ROLLOVER
OF AMOUNTS OVER $1,000

Unless the Employer otherwise elects in Article III of this Amendment, the provisions of the Plan concerning mandatory distributions of amounts not exceeding $5,000 are amended as follows:

In the event of a mandatory distribution greater than $1,000 that is made in accordance with the provisions of the Plan providing for an automatic distribution to a Participant without the Participant’s consent, if the Participant does not elect to have such distribution paid directly to an “eligible retirement plan” specified by the Participant in a direct rollover (in accordance with the direct rollover provisions of the Plan) or to receive the distribution directly, then the Administrator shall pay the distribution in a direct rollover to an individual retirement plan designated by the Administrator.

ARTICLE III
EMPLOYER’S ALTERNATIVE ELECTIONS

Note: Elections in this Article III are only required if the mandatory distribution threshold is being reduced to $1,000.

3.1 Election to reduce mandatory distribution threshold to $1,000

The provisions of the Plan that provide for the involuntary distribution of vested accrued benefits of $5,000 or less, are modified to provide that the $5,000 threshold in such provisions is reduced to $1,000 and the value of the Participant’s interest in the Plan for such purpose shall include any rollover contributions (and earnings thereon) within the meaning of Code Sections 402(c), 403(a)(4), 403(b)(8), 408(d)(3)(A)(ii), and 457(e)(16).

Employer Adoption

NOTE:   The employer (and any Participating employer) only need to execute this Amendment if the employer has made an election in this Article III above.

This amendment is executed as follows:

Name of Plan:  ____________________________________

Name of Employer:  ________________________________

By:   ___________________________________________
                      EMPLOYER Date:__________________________________

Name of Participating Employer:   ____________________________

By:

________________________________________
PARTICIPATING EMPLOYER

________________________________________
DATE

Name of Participating Employer:   ____________________________

By:

________________________________________
PARTICIPATING EMPLOYER

________________________________________
DATE

Except with respect to any election made by the Employer in Article III, this Amendment is hereby adopted by Metropolitan Life Insurance, Co., the prototype sponsoring organization, on behalf of all adopting employers on March 11, 2005.

By:   ___________________________________________

EX-10.25

EXHIBIT 10.25

EX-21.1

                                                                    EXHIBIT 21.1


                              DATA I/O CORPORATION
                         SUBSIDIARIES OF THE REGISTRANT


The following table indicates the name, jurisdiction of incorporation and basis
of ownership of each of Data I/O's subsidiaries:



                                                          State or                 Percentage
                                                        Jurisdiction                of Voting
                                                             of                    Securities
Name of Subsidiary                                      Organization                  Owned
- ------------------                                      ------------                  -----

                                                                                
Data I/O International, Inc.                             Washington                   100%

Data I/O FSC International, Inc.                      Territory of Guam               100%

Data I/O Canada Corporation                                Canada                     100%

Data I/O China, Ltd                                   Hong Kong, China                100%

Data I/O GmbH                                              Germany                    100%

RTD, Inc. (formerly Reel-Tech, Inc.)                     Washington                   100%

Data I/O Electronics (Shanghai) Co. Ltd                     China                     100%

Data I/O Programacao de Sistemas Ltda                       Brazil                    100%

EX-23.1

                                                                    EXHIBIT 23.1



            CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



We have issued our report dated March 14, 2006,  accompanying  the  consolidated
financial  statements  and  schedule  included in the Annual  Report of Data I/O
Corporation on Form 10-K for the year ended December 31, 2005. We hereby consent
to the incorporation by reference of said report in the Registration  Statements
of Data I/O Corporation on Form S-8 (File Nos.  33-95608,  33-54422,  333-55911,
33-02254,  33-03958,  333-48595  and  333-121861)  and on  Form  S-3  (File  No.
333-121566).



/s/ GRANT THORNTON LLP

Seattle, Washington
March 14, 2006

EX-31.1

                                                                    EXHIBIT 31.1


                    Certification by Chief Executive Officer
                       Pursuant to 18 U.S.C. Section 1350
                             As Adopted Pursuant to
                Section 302(a) of the Sarbanes-Oxley Act of 2002

I, Frederick R. Hume, certify that:

1)   I have reviewed this annual report on Form 10-K of Data I/O Corporation;

2)   Based upon my  knowledge,  this  annual  report does not contain any untrue
     statement of 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 annual report;

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

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

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

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

     c)   disclosed  in  this  annual  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.

5)   The registrant's other certifying  officers 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 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  controls  over  financial  reporting  which are
          reasonably  likely to  adversely  affect the  registrant's  ability to
          record, process, summarize and report financial information; and

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



Date: March 29, 2006

/s/ Frederick R. Hume
- ------------------------------------
Frederick R. Hume
Chief Executive Officer
(Principal Executive Officer)

EX-31.2

                                                                    EXHIBIT 31.2


                    Certification by Chief Financial Officer
                       Pursuant to 18 U.S.C. Section 1350
                             As Adopted Pursuant to
                Section 302(a) of the Sarbanes-Oxley Act of 2002

I, Joel S. Hatlen, certify that:

1)   I have reviewed this annual report on Form 10-K of Data I/O Corporation;

2)   Based upon my  knowledge,  this  annual  report does not contain any untrue
     statement of 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 annual report;

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

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

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

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

     c)   disclosed  in  this  annual  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.

5)   The registrant's other certifying  officers 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 registrant's board of
     directors (or persons performing the equivalent functions):

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

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

Date: March 29, 2006

/s/ Joel S. Hatlen
- ----------------------------------
Joel S. Hatlen
Chief Financial Officer
(Principal Financial Officer)

EX-32.1

                                                                    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 annual report of Data I/O Corporation  (the "Company") on
Form 10-K for the period ended  December  31, 2005 as filed with the  Securities
and Exchange Commission on the date hereof (the "Report"), I, Frederick R. Hume,
Chief  Executive  Officer of the Company,  certify,  that  pursuant to 18 U.S.C.
Section 1350, as adopted  pursuant to Section 906 of the  Sarbanes-Oxley  Act of
2002, that:

     (1)  The Report fully  complies with the  requirements  of Section 13(a) or
          15(d) of the Securities Exchange Act of 1934; and

     (2)  The  information  contained  in the  Report  fairly  presents,  in all
          material respects,  the financial  condition and results of operations
          of the Company.


/s/ Frederick R. Hume
- ---------------------------------
Frederick R. Hume
Chief Executive Officer
(Principal Executive Officer)
March 29, 2006

EX-32.2

                                                                    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 annual report of Data I/O Corporation  (the "Company") on
Form 10-K for the period ended  December  31, 2005 as filed with the  Securities
and Exchange  Commission on the date hereof (the  "Report"),  I, Joel S. Hatlen,
Chief  Financial  Officer of the Company,  certify,  that  pursuant to 18 U.S.C.
Section 1350, as adopted  pursuant to Section 906 of the  Sarbanes-Oxley  Act of
2002, that:

     (1)  The Report fully  complies with the  requirements  of Section 13(a) or
          15(d) of the Securities Exchange Act of 1934; and

     (2)  The  information  contained  in the  Report  fairly  presents,  in all
          material respects,  the financial  condition and results of operations
          of the Company.


/s/ Joel S. Hatlen
- ------------------------------------
Joel S. Hatlen
Chief Financial Officer
(Principal Financial Officer)
March 29, 2006