<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>f10k033103c.txt
<DESCRIPTION>FORM 10-K
<TEXT>
                                  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, 2002
                                       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)
                    (I.R.S. Employer Identification Number)

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


          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 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. [X]

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


      Aggregate market value of voting and non-voting common stock held by
         non-affiliates of the registrant as of June 28, 2003
                                   $6,897,967

7,883,188 shares of Common Stock, no par value, outstanding as of March 21, 2003

                      Documents incorporated by reference

Portions of the registrant's Proxy Statement relating to its May 20, 2003 Annual
Meeting of Shareholders are incorporated into Part III of this Annual Report on
Form 10-K.

                                  Page 1 of 52
                            Exhibit Index on Page 41

<PAGE>


                              DATA I/O CORPORATION

                                    FORM 10-K
                  For the Fiscal Year Ended December 31, 2002

                                     INDEX


Part I                                                                  Page

     Item 1.    Business                                                  3

     Item 2.    Properties                                               12

     Item 3.    Legal Proceedings                                        12

     Item 4.    Submission of Matters to a Vote of Security Holders      12


Part II

     Item 5.    Market for Registrant's Common Equity and Related
                Stockholder Matters                                      13

     Item 6.    Selected Financial Data                                  14

     Item 7.    Management's Discussion and Analysis of
                Financial Condition and Results of Operations            15

     Item 7A.   Quantitative and Qualitative Disclosure
                About Market Risk                                        20

     Item 8.    Financial Statements and Supplementary Data              20

     Item 9.    Changes in and Disagreements with Accountants
                on Accounting and Financial Disclosure                   40

Part III

     Item 10.   Directors and Executive Officers of the Registrant       40

     Item 11.   Executive Compensation                                   40

     Item 12.   Security Ownership of Certain Beneficial Owners
                and Management and Related Stockholder Matters           40

     Item 13.   Certain Relationships and Related Transactions           40

     Item 14.   Controls and Procedures                                  40


Part IV

     Item 15.   Exhibits, Financial Statement Schedules,
                and Reports on Form 8-K                                  41


Signatures                                                               45




<PAGE>


                                     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 a 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.  In modern  electronics,
hardware is increasingly becoming a commodity. Wireless telephones are a notable
example.  Most of the innovation and competitive  advantage of a telephone comes
from the software buried inside the telephone,  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  telephones
with  the  exact  firmware  (feature  set)  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.  Data I/O's connected  strategy  leverages  network capable
products to move the customer's intellectual property seamlessly and securely up
and down the supply chain.  Our connected  strategy allows  customers to connect
engineering to manufacturing to end customers.

Business   Restructuring.   The   economic   slowdown   continued  in  2002  and
significantly affected our business. During 2002, we continued the restructuring
process  from 2001 and  recorded  restructuring  charges in the third and fourth
quarter of 2002 of $497,000  and $135,000  respectively  for a total of $632,000
associated with actions taken to reduce our breakeven point and realign Data I/O
with our  market  opportunities.  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.

We reduced our quarterly  breakeven point from  approximately  $7 million of net
sales at the beginning of 2002 to approximately $5.7 million at the end of 2002.
Most of these reductions were achieved by reducing our personnel from 155 at the
beginning of 2002 to 125 at the end of 2002.

During 2001, we took a number of strategic  restructuring  actions to reduce our
breakeven point. Repositioning included the following: a reduction in our global
workforce  from  224 at  the  start  of the  year  to  155 at the  end of  2001;
discontinuance or reallocation of numerous projects and activities not essential
to our  long-term  goals;  streamlining  activities  to  decrease  discretionary
marketing,  distribution  and promotional  expenses,  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 its operations to other locations within Data I/O.

At December 31, 2002 all restructuring  expenses  associated with the activities
detailed above were paid except for approximately $204,000,  which was primarily
associated with severance, facility, consulting and legal fees.

We believe that the progress  made in these areas  positions us for a successful
turnaround and profitable operations if sales remain stable or improve. However,
consistently  profitable operations may not always be possible, nor is there any
assurance that the turnaround efforts will be successful.

Industry Background

Data I/O operates in a niche of the electronics equipment industry that provides
programming  systems  used to load  specific  data and design  information  into
programmable devices.  Companies that design and manufacture electronic products
that  utilize  programmable  devices  purchase  these  systems  from  us.  These
companies,  our  primary  customers,  design and  manufacture  a broad  range of
electronic products for both consumer and industry use.

Programmable  devices represent an over $10 billion segment of the semiconductor
industry, and have grown more rapidly than the semiconductor industry as a whole
in recent years. 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.

Due to this growth, more than 100 vendors provide  programmable devices offering
thousands of different programmable devices on the market, developed by numerous
device vendors.  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.

Automated  programming systems integrate programming and handling functions into
one product for increasing handling and programming capacity.  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 group
automated  programming  systems into two  categories:  off-line and in-line.  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. We think the market
growth opportunity is not a relatively costly universal solution with very broad
device  support,  but optimized  systems  focused on a narrower range of devices
(such as flash devices) which provide customers with the economical  programming
solutions  for high volumes of devices and lean  processes.  Our recent  product
introductions  have focused on these growth  markets and targeted their specific
needs.

TaskLink(R)  is our software  platform  that  provides a common  intuitive  user
interface and enhances the quality of the  customer's  programming  process.  As
part of our  core  technology,  TaskLink  also  supports  Data  I/O's  connected
strategy,  allowing  customers to connect  engineering to  manufacturing  to end
customers.

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 out media handling  (such as tray  stackers,  tubes,
loaders or taping), and marking solutions.  Our  ProLINE-RoadRunner  is a unique
and innovative  in-line  programming  system with  programming  speed capability
which  outstretches  the speed at which Flash devices can currently accept data.
Many of our customers need to program flash devices in large quantities and very
quickly.  ProLINE-RoadRunner  mounts  directly onto the assembly  machine in the
production  line  (Siemens,  Fuji,  Universal and  Assembleon  machines,  with a
version for Panasonic  machines nearly  complete) 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 devices,  allowing last minute  firmware  changes and  eliminating
programmed part inventories, ultimately streamlining and reducing the customer's
production  and process  costs.  The  ProLINE-RoadRunner  enables  customers  to
implement lean processes and is a key element to Data I/O's connected  strategy,
allowing customers and partners to more effectively manage their firmware supply
chain.  The  ProLINE-RoadRunner  currently  retails  from  $85,000 to  $135,000,
depending   on   programming    capacity.    We   continue   to   leverage   our
ProLINE-RoadRunner  in our platform to reach a broader market. For example,  our
Infinity(TM) product uses multiple  ProLINE-RoadRunners in an automated off-line
system that  yields  incremental  improvement  in capacity  and  extremely  high
throughput for high volume manufacturers.

Data  I/O's  PS300  family of  automated  programming  solutions  offers  highly
flexible solutions for off-line batch programming.  Data I/O can configure PS300
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 EMS or programming  center
customers  to rapidly  respond to diverse  demands  with very  little  downtime.
Customers  can  optimize  the  PS300  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 PS300-FC,  integrates the same FlashCORE(TM)  programmer we use in
our  ProLINE-RoadRunner  and FlashPAK and builds on our  connected  strategy and
common architecture.  For smaller memory, microcontroller and logic devices, our
ProMaster systems offer a cost-effective,  high-yield automated solution. Prices
for our  off-line  systems  range  from  $50,000  to  $500,000,  with an average
configuration costing between $200,000-$300,000.

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: the 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. The
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 $7,000 to $25,000.

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 the  higher  volume  applications.  These  two  families  of
products  range in price from under  $1,000 to $16,000 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,  priced at $6,000,  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.

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 and other  telecommunication  companies,
consumer electronics,  computers, test and measurement, medical, transportation,
military,  aerospace,  electronic  contract  manufacturing,  and semiconductors.
These  customers  either  design  and/or  manufacture  electronic  products that
incorporate programmable devices or provide device programming services.  During
2002, we sold products to over 2,500  customers  throughout  the world,  none of
whom accounted for 10% or more of our net sales.

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 PC peripheral industry
and automotive electronics.

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.  In  addition,   the  number  of
microcontrollers in automotive electronic  applications is growing rapidly, with
some cars having as many as 60 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.

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. Sales of our  semiconductor  programming  equipment
products  requiring  installation  by us  that is  other  than  perfunctory  are
recorded when installation is complete,  or at the later of customer  acceptance
or  installation,  if an acceptance  clause is specified in the sales terms.  We
recognize  revenue from other product  sales at the time of shipment.  We record
revenue from the sale of service and update contracts as deferred revenue and we
recognize it on a straight-line  basis over the contractual period. Net Sales in
the United  States for 2002,  2001,  and 2000 were  $8,347,000,  $9,526,000  and
$15,588,000 respectively.

Foreign Sales

Foreign  sales  represented  approximately  64% of net sales of our  programming
systems  in each of 2002,  2001 and 2000 (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. We record
sales made through foreign subsidiaries  requiring installation by Data I/O that
is other than  perfunctory  when  installation  is complete,  or at the later of
customer acceptance or installation, if an acceptance clause is specified in the
sales  terms.  We  recognize  revenue  from other  product  sales at the time of
shipment.  We record  revenue  from the sale of service and update  contracts as
deferred revenue and recognize it on a straight-line  basis over the contractual
period. 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. We recognize sales,  denominated in U.S. Dollars, upon shipment,
if  installation  is perfunctory or does not need to be performed by us, or when
the equipment is installed at the end-user's  site, if installation is more than
perfunctory  and is to be  performed by us, or in the case where  acceptance  is
required, upon acceptance.

Net foreign sales for 2002,  2001, and 2000 were  $14,491,000,  $17,300,000  and
$27,321,000 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.  We
estimate  that prior to the past couple  years the total  number of  programming
systems sold each year has been less than $150 million,  with Data I/O capturing
an estimated 20 to 25% of the global market. Over the last two years, we believe
the amount has  declined by about 50% and 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  required  process.  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 have prepared an estimate that customers are spending between $1 to $2
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
very small market with a number of small companies participating who principally
focus on test solutions. A number of companies are part of a trend towards using
in-system  programming,  which Data I/O does not currently address but continues
to evaluate.

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  relationship  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. 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  $1.3  million,  $1.9
million and $3.0 million as of December 31, 2002, December 31, 2001 and December
28,  2000,  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 significant enhancements of existing products.  Future growth is to
a large extent  dependent upon the timely  development  and  introduction of new
products and algorithm  development for the latest programmable  devices. We are
currently focusing our research and development  efforts in our strategic growth
markets,  namely new programming  technology and automated  handling systems for
the  manufacturing  environment,  including NAND FLASH support,  Microcontroller
support  for  FlashCORE  and   additional   platforms   and   improvements   for
ProLINE-RoadRunner.  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 improvements and
extensions of ProLINE-RoadRunner, PS300, XPI and FlashPAK.

During 2002, 2001 and 2000, we made expenditures for research and development of
$5,331,000, $6,740,000, and $8,716,000, respectively,  representing 23.3%, 25.1%
and  20.3% 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
typically  shipped  in  sealed  packages,  or  on  CDs,  on  which  notices  are
prominently  displayed  informing the end-user that, by breaking the seal of the
packaging,  or installing the software,  the end-user  agrees to be bound by the
license  agreement  contained in the package or product.  The license  agreement
includes limitations on the end-user's authorized use of the product, as well as
restrictions  on  disclosure  and  transferability.   The  legal  and  practical
enforceability and extent of liability for violations of license agreements that
purport to become  effective upon opening of a sealed package or installation of
the  product  are  unclear.  We are not aware of any  situation  where a license
agreement  restricting  an  end-user's  authorized  use  of a  licensed  product
resulted in  enforcement  action.  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, 2002, we had 125 employees,  of which 28 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.

Executive Officers of the Registrant

Set forth below is certain information concerning the executive officers of Data
I/O as of March 21, 2003:

    Name                      Age          Position

    Frederick R. Hume         60           President and Chief Executive Officer

    Joel S. Hatlen            44           Vice President
                                           Chief Financial Officer
                                           Secretary and Treasurer

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 as a Senior Tax Accountant and
became Tax Manager in December 1992. He was promoted to Corporate  Controller in
December  1993.  In  February  1997,  he became  Chief  Accounting  Officer  and
Corporate  Controller.  In January  1998,  he was promoted to Vice  President of
Finance and Chief  Financial  Officer,  Secretary and Treasurer.  From September
1981 until joining Data I/O, Mr. Hatlen was employed by Ernst & Young LLP, where
his most recent position was Senior Manager.

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, future performance or results of current
and anticipated  products,  sales efforts,  expenses,  outsourcing of functions,
outcome of contingencies, and financial results.

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

Development, Introduction and Shipment of New Products

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

For example, we may encounter these problems:

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

o     inability to hire qualified personnel

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

Delays in the development,  completion and shipment of new products,  or failure
of customers to accept new products, may result in a decline in sales in 2003.

Variability in Quarterly Operating Results

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

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

o       increased competition

o       timing of new product announcements

o       product releases and pricing changes by us or our competitors

o       market acceptance or delays in the introduction of new products

o       production constraints

o       labor or material shortages

o       the timing of significant orders

o       war or terrorism

o       customers' budgets

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

o       cyclical nature of demand for our customers' products

o       general economic conditions in the countries where we sell products

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

Rapid Technological Change

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

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

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

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

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

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

Economic and Market Conditions

Our business is highly  impacted by capital  spending  plans and other  economic
cycles that affect the users and  manufacturers  of ICs.  These  industries  are
highly  cyclical and are  characterized  by rapid  technological  change,  short
product  life cycles,  fluctuations  in  manufacturing  capacity and pricing and
gross margin  pressures.  As we  experienced  in 2002, our operations may in the
future reflect substantial  fluctuations from  period-to-period as a consequence
of these industry patterns,  general economic conditions affecting the timing of
orders from major customers, and other factors affecting capital spending. These
factors  could have a material  adverse  effect on our  business  and  financial
condition.

History of Losses

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

Affects of Restructuring Activities

Beginning in the prior fiscal year and  continuing  in the past fiscal year,  we
reduced  our  workforce  from  224 to 125  employees.  There  have  been and may
continue  to be  substantial  costs  associated  with this  workforce  reduction
related to severance and other employee-related costs and our restructuring plan
may  yield  unanticipated   consequences,   such  as  increased  burden  on  our
administrative,  operational,  and  financial  resources  and has  increased the
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  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. Further, the reduction in workforce may reduce employee morale and
may create concern among current and potential  employees  about job security at
Data I/O,  which may lead to difficulty in hiring and retaining  employees,  and
divert management's attention. In addition, the headcount reductions may subject
us to the risk of  litigation,  which  could  result in  substantial  cost.  Any
failure by us to properly manage this rapid change in workforce could impair our
ability to efficiently  manage our business,  to maintain and develop  important
relationships with third-parties,  and to attract and retain customers. It could
also cause us to incur higher  operating cost and delays in the execution of our
business plan or in the reporting or tracking of our financial results.

Need for Additional Funding

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

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

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

Competition

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

Dependence on IC Manufacturers

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

Dependence on Suppliers

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

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

Reliance on Third-Party Distribution Channels

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

International Operations

International sales represented 64% of our net revenue for the fiscal year ended
December  31, 2002.  We expect that  international  sales will  continue to be a
significant portion of our net revenue. International sales may fluctuate due to
various factors, including:

o       migration of manufacturing to low cost geographies

o       unexpected changes in regulatory requirements

o       tariffs and taxes

o       difficulties in staffing and managing foreign operations

o       longer average payment cycles and difficulty in collecting
        accounts receivable

o       fluctuations in foreign currency exchange rates

o       impact of the Euro

o       compliance with applicable export licensing requirements

o       product safety and other certification requirements

o       political and economic instability

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

We operate subsidiaries in Germany, China and Canada. 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 and
Germany may adversely affect our investment in our subsidiaries.

Protection of Intellectual Property

Refer to the section captioned "Patents, Copyrights, Trademarks and Licenses" in
Item 1 above.

Acquisitions

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

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

o       diverting management's attention from other business concerns

o       failing to successfully integrate the acquired products

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

o       entering markets where we have no or limited prior experience

o       potential loss of key employees of the acquired company

o       additional burden of support for an acquired programmer architecture

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

Dependence on Key Personnel

Refer to the section captioned "Employees" above.

Potential Volatility of Stock Price

The stock prices of technology  companies tend to fluctuate  significantly,  and
many experienced significant reductions in value during 2002. 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.

Item 2.  Properties

In May 1997, Data I/O completed the sale of the land and building comprising our
Redmond,  Washington  corporate  headquarters  and it 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 2002 of  approximately  $1,084,000.  See Note 6 of "Notes to
Consolidated  Financial  Statements."  As part of our  1999  restructuring  plan
implementation,   we  vacated   one  floor  of  the  leased   Redmond   facility
(approximately  25,000  square feet) and sublet the majority of this space for a
period  of 28 months  beginning  January  1,  2000,  at a rate of  approximately
$33,000 per month through April 2002.  The sublease  terminated in June 2002. We
have not been  successful  in  subleasing  this space and believe the market for
this space is currently quite limited.

In addition to the Redmond facility,  approximately  9,000 square feet is leased
at five  foreign  locations,  including  our Canadian  sales and service  office
located  in  Mississauga,   Ontario,   German  sales,  service  and  engineering
operations  located in Munich,  Germany,  and three sales and service offices 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 Shareholders

No matters  were  submitted  for a vote of  shareholders  of Data I/O during the
fourth quarter of the fiscal year ended December 31, 2002.


<PAGE>

                                     PART II


Item 5.  Market  for the  Registrant's  Common  Equity and  Related  Stockholder
Matters

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  National
Market  tier of The  NASDAQ  Stock  Market  (NASDAQ  symbol is DAIO).  Effective
December 31, 2002 Data I/O transferred to the NASDAQ SmallCap Market.

             Period                                     High          Low

2002         Fourth Quarter                             $1.45        $0.60
             Third Quarter                               1.55         0.41
             Second Quarter                              1.75         0.86
             First Quarter                               2.00         1.20

2001         Fourth Quarter                             $2.11        $1.30
             Third Quarter                               2.81         1.50
             Second Quarter                              2.84         1.50
             First Quarter                               3.81         1.50

The approximate number of shareholders of record as of March 21, 2003 was 761.

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 shares of  unregistered  securities  were made by Data I/O  during the period
ended December 31, 2002.

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,  2002.  See Notes 11 and 12 of "Notes to
Consolidated Financial Statements."

<TABLE>
<CAPTION>

                                     (a) Number of securities       (b) Weighted-average      (c) Number of securities remaining
                                      to be issued upon the          exercise price of         available for future issuance under
                                      exercise of outstanding        outstanding options,      equity compensation plans (excluding
                                      options, warrants and          warrants and rights       securities reflected in column (a)
                                      rights
<S>                                   <C>                            <C>                       <C>

Equity compensation plans
approved by the security
holders (1) (3)                              1,247,000                      $2.35                             678,070

Equity   compensation   plans  not
approved by the  security
holders (2)                                     10,000                      $5.19                                0

</TABLE>

(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.

<PAGE>

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."  Data I/O  adopted SEC Staff
Accounting  Bulletin No. 101, Revenue  Recognition in Financial  Statements (SAB
101) in the fourth quarter of fiscal year 2000, effective beginning of the first
quarter  of fiscal  year  2000.  The pro forma  information  in the table  below
reflects  the  adoption  of SAB  101.  Historical  results  are not  necessarily
indicative of future results.

<TABLE>
<CAPTION>
                                                                                        Year Ended
-------------------------------------------------------------------------------------------------------------------------------
                                                               Dec. 31,      Dec. 31,      Dec. 28,      Dec. 30,    Dec. 31,
(in thousands, except employee and per share data)               2002          2001          2000         1999        1998
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>           <C>           <C>           <C>         <C>

For The Year:
     Net sales                                                   $22,838       $26,826       $42,909      $34,113      $35,338
     Cost of goods sold                                           11,556        15,078        22,760       17,948       24,933
                                                             ------------------------------------------------------------------
     Gross margin                                                 11,282        11,748        20,149       16,165       10,405
     Research and development                                      5,331         6,740         8,716        8,403        9,109
     Selling, general and administrative                           8,254         9,707        10,616       11,022       14,386
     Write-off acquired in-process R&D (1)                             -             -             -            -        1,959
     Net provision for business restructuring (2)                    632         1,211          (255)        (215)       4,370
                                                             ------------------------------------------------------------------
     Operating income (loss)                                      (2,935)       (5,910)        1,072       (3,045)     (19,419)
     Non-operating income (loss)                                    (232)          124           876        1,920          952
                                                             ------------------------------------------------------------------

     Income (loss) from continuing operations before income
        taxes and cumulative effect of accounting change          (3,167)       (5,786)        1,948       (1,125)     (18,467)
     Income tax (expense) benefit                                     61          (224)          (36)         (55)         (58)
                                                             ------------------------------------------------------------------
     Income (loss) from continuing operations, before
           cumulative effect of accounting                        (3,106)       (6,010)        1,912       (1,180)     (18,525)
     change
     Income from discontinued operations (4)                           -             -            90          831          894
     Cumulative effect of accounting change (3)                        -             -        (2,531)           -            -
                                                             ------------------------------------------------------------------
     Net income (loss)                                           ($3,106)      ($6,010)        ($529)       ($349)    ($17,631)
     Pro forma net income (loss)                                       -             -             -      ($2,880)    ($17,631)
     --------------------------------------------------------------------------------------------------------------------------

At Year-end:
     Working capital                                              $9,125       $12,010       $16,792      $16,179      $15,084
     Total assets                                                $16,367       $20,340       $28,746      $30,050      $40,089
     Total debt                                                        -             -             -            -         $564
     Stockholders' equity                                         $9,284       $12,154       $18,039      $18,058      $18,909
     Number of employees from continuing operations                  125           155           224          199          270
-------------------------------------------------------------------------------------------------------------------------------

Common Stock Data (3):
     Basic earnings per share:
        From continuing operations, after taxes, before
           cumulative effect of accounting change                 ($0.40)       ($0.79)        $0.26       ($0.16)      ($2.59)
        Net income (loss)                                         ($0.40)       ($0.79)       ($0.07)      ($0.05)      ($2.46)
        Pro forma net income (loss)                                    -             -             -       ($0.40)      ($2.46)
     Diluted earnings per share:
          From continuing operations, after taxes, before
              cumulative effect of accounting change              ($0.40)       ($0.79)        $0.26       ($0.16)      ($2.59)
         Net income (loss)                                        ($0.40)       ($0.79)       ($0.07)      ($0.05)      ($2.46)
         Pro forma net income (loss)                                   -             -             -       ($0.40)      ($2.46)
     Book value per share at year-end                              $1.20         $1.59         $2.41        $2.48        $2.63
     Shares outstanding at year-end                                7,768         7,614         7,495        7,290        7,187
     Weighted-average basic shares outstanding                     7,704         7,572         7,405        7,254        7,154
     Weighted-average diluted shares outstanding                   7,704         7,572         7,405        7,254        7,154
-------------------------------------------------------------------------------------------------------------------------------

Key Ratios:
     Current ratio                                                  2.6           2.9           2.9          2.7          1.8
     Gross margin to sales                                         49.4%         43.8%         47.0%        47.4%        29.4%
     Operating income (loss) to sales                             (12.9%)       (22.0%)         2.5%        (8.9%)      (54.9%)
     Income (loss) from continuing operations to sales            (13.6%)       (22.4%)         4.5%        (3.5%)      (52.4%)
     Return on average stockholders' equity                       (22.7%)       (39.8%)        10.6%        (6.3%)      (63.5%)
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Footnotes:
(1) For  further  discussion, see Note 8 of "Notes to Consolidated Financial
Statements."
(2) For  further  discussion, see Note 2 of "Notes to Consolidated  Financial
Statements."
(3) For further discussion,  see Note 1 of "Notes to Consolidated  Financial
Statements."
(4) Discontinued  operations are amounts that relate to the divestitures of the
Synario and Reel Tech Divisions that took place in 1997.

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;  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  "Business -
Cautionary  Factors That May Affect Future Results" describes some, but not all,
of the factors that could cause these differences.

BUSINESS RESTRUCTURING PROGRESS

During  2002,  we  continued  the  restructuring  process from 2001 and recorded
restructuring  charges in the third and fourth  quarter of 2002 of $497,000  and
$135,000 respectively  for a total of $632,000  associated with actions taken to
reduce our breakeven point and realign Data I/O with our growth  activities.  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.

We reduced our quarterly  breakeven point from  approximately  $7 million of net
sales at the beginning of 2002 to approximately $5.7 million at the end of 2002.
Most of these reductions were achieved by reducing our personnel from 155 at the
beginning of 2002 to 125 at the end of 2002.

During 2001, we took a number of strategic  restructuring  actions to reduce our
breakeven point. Repositioning included the following: a reduction in our global
workforce  from  224 at  the  start  of the  year  to  155 at the  end of  2001;
discontinuance or reallocation of numerous projects and activities not essential
to our  long-term  goals;  streamlining  activities  to  decrease  discretionary
marketing,  distribution  and promotional  expenses,  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.

At December 31, 2002 all restructuring  expenses  associated with the activities
detailed above were paid except for approximately $204,000,  which was primarily
associated with severance, facility and consulting and legal fees.

We believe that the progress  made in these areas  positions us for a successful
turnaround  and  profitable   operations.   However,   consistently   profitable
operations  may not  always be  possible,  nor is there any  assurance  that the
turnaround efforts will be successful.

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

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

Inventory  Provisions:  We base inventory  purchases and commitments upon future
demand  forecasts  and historic  usage.  If there is a  significant  decrease in
demand for our  products  or there is a higher  risk of  inventory  obsolescence
because of rapidly changing technology and customer  requirements,  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.

Results of Continuing Operations

Net Sales
<TABLE>
<CAPTION>

(in thousands)
Net sales by product line:                       2002             Change            2001           Change          2000
-----------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>               <C>              <C>             <C>           <C>

Non-automated programming systems              $11,532            (2.4%)          $11,821         (33.1%)       $17,672
Automated programming systems                   11,306           (24.7%)           15,005         (40.5%)        25,237
                                           ------------------                 -----------------               ---------------
Totals                                         $22,838           (14.9%)          $26,826         (37.5%)       $42,909
                                           ==================                 =================               ===============

Net sales by location:
  United States                                 $8,347           (12.4%)           $9,526         (38.9%)       $15,588
      % of total                                 36.5%                              35.5%                         36.3%
  International                                $14,491           (16.2%)          $17,300         (36.7%)       $27,321
      % of total                                 63.5%                              64.5%                         63.7%
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

2002 vs. 2001
Data I/O sales  declined for the year 2002  compared to 2001.  However,  for the
third and fourth  quarters of 2002,  sales  increased  over the same quarters in
2001.  The overall  decline is attributed to the  continued  economic  downturn,
especially in capital spending.  Sales declined in all product  categories,  but
the declines were offset in part by increased sales from our  ProLine-RoadRunner
and  new  FlashPAK  product  lines.  Sales  declined  in  both  in  the  US  and
international  markets with the Americas and Europe declining the most. We see a
continuing  trend in migration of customers moving  manufacturing  operations to
low-cost geographies,  thereby increasing international sales opportunities. The
weakened US dollar,  especially  compared to the Euro,  is expected to assist in
export sales as foreign currencies have more buying power.

We are continuing our connected  strategy and transition to a common programming
architecture,  which resulted in the new FlashPAK and PS 300 FlashCORE. In 2002,
we  also  introduced  ProLINE  Infinity,  ProLINE-RoadRunner  Variable  Capacity
Options, TF-20 Tray Feeder System, and High Insertion Socket Adapters. We expect
these products to increase revenues,  however,  partially offsetting this is the
trend of declining sales of our older product lines. Subsequent to year-end, ICE
Technology,  who licensed our distribution of a low cost programmer line, ceased
business. In 2002, sales related to these products were approximately  $250,000.
We are attempting to sell off our remaining inventory and are offering our other
programmers as substitute products.

2001 vs. 2000
Data I/O experienced a decline in revenues in each of the last three quarters of
2001 versus 2000. The decline was a significant reduction in orders for both our
automated and non-automated  programming equipment. We believe this to be due to
the general  economic  slowing in the wireless  communications  industry,  among
contract  manufacturers  and in other sectors of the  electronics  industry.  We
experienced a decline in revenues in both the US and international markets.

Gross Margin
<TABLE>
<CAPTION>

 (in thousands)                       2002             Change              2001              Change              2000
-----------------------------------------------------------------------------------------------------------------------------
<S>                                 <C>                <C>               <C>                <C>                <C>

Gross margin                        $11,282            (4.0%)            $11,748            (41.7%)            $20,149
 Percentage of net sales              49.4%                                43.8%                                 47.0%
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

2002 vs. 2001
Gross margin  decreased in dollars due primarily to the decline in sales volume.
Gross margin  increased as a percentage  of sales  primarily  due to the savings
from the restructuring and  implementation of cost reductions,  as well as lower
inventory reserve and warranty charges. The product mix shift towards additional
ProLINE-RoadRunner  and related  aftermarket  products  also  improved the gross
margin as a percentage of sales.

The  restructuring  efforts  lowered our  breakeven  point by bringing  cost and
operation expenditures, primarily personnel reductions, in line with the revenue
levels  we are  experiencing.  We  expect  these  efforts  and cost  reductions,
combined  with the  expected  stability  or  growth  in  revenues,  to result in
improved gross margin  percentages  over what have been  experienced  during the
past three years.

2001 vs. 2000
Gross  margins  decreased  sharply  from 2000 to 2001.  Data I/O  experienced  a
decrease in both gross margin dollars and gross margin  percentage.  The drop in
gross  margin  dollars  was  roughly  in  proportion  to the  decline in revenue
dollars.  By  implementing  cost reductions and three  restructuring  activities
during 2001, Data I/O limited the reduction in gross margin percentage to 3.2%.

Research and Development
<TABLE>
<CAPTION>

 (in thousands)                       2002             Change              2001              Change              2000
-----------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>              <C>                 <C>               <C>                <C>
 Research and development            $5,331            (20.9%)            $6,740            (22.7%)             $8,716
 Percentage of net sales              23.3%                                25.1%                                 20.3%
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

2002 vs. 2001
Research and development  ("R&D") spending for 2002 as compared to 2001 declined
both in dollars and as a  percentage  of sales.  This was due  primarily  to the
lower headcount  related to our  restructuring  actions over the past two years.
During 2002, Data I/O's R&D focused on the new FlashPAK gang programming  system
and  PS300  FlashCORE   automated   programming   system  which  integrated  the
programming  architecture  first introduced in the  ProLINE-RoadRunner.  We also
released the following  new products:  ProLine  Infinity,  a  ProLine-RoadRunner
utilizing an automated  handler;  ProLINE-RoadRunner  Variable Capacity Options;
TF-20 Tray Feeder System; and High Insertion Socket Adapters.

2001 vs. 2000
While  reducing the R&D  expenditures  by nearly $2 million from the prior year,
R&D  spending  increased  as a  percentage  of net  sales by  4.8%.  Significant
spending  reductions  occurred  in  salaries  and  benefits  as a result  of the
restructuring and cost control efforts.

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 architecture and versions of the ProLine-RoadRunner.

Selling, General and Administrative
<TABLE>
<CAPTION>

(in thousands)                                  2002           Change            2001           Change           2000
----------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>             <C>              <C>             <C>             <C>

 Selling, general and administrative           $8,254          (15.0%)          $9,707          (8.6%)          $10,616
 Percentage of net sales                        36.1%                            36.2%                            24.7%
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

2002 vs. 2001
Selling,  General and Administrative ("SG&A") spending decreased by $1.5 million
in 2002 versus the prior year due  primarily to the  restructuring  actions.  We
reduced our  expense by lowering  our bad debts  reserve  due to  collection  of
accounts receivable, incurring less retirement plan costs and lower commissions,
partially offsetting these reductions were higher rent and insurance costs.

2001 vs. 2000
SG&A spending  decreased by $909,000 in 2001 versus the prior year due primarily
to the restructuring  actions and reduced marketing  expenses.  We increased our
direct sales force and  decreased  our  dependence on outside sales rep firms to
sell our products.

Interest
<TABLE>
<CAPTION>

 (in thousands)                                 2002           Change            2001           Change           2000
----------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>            <C>               <C>            <C>             <C>

 Interest income                                $87             (63.6%)          $239            (49.3%)         $471
 Interest expense                              ($18)             12.54%          ($16)           (36.0%)         ($25)
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

2002 vs. 2001
Interest  income for 2002  decreased  as compared to 2001  primarily  due to the
reduction in interest rates that occurred during 2002 and 2001.

2001 vs. 2000
Interest  income for 2001  decreased  as compared to 2000  primarily  due to the
reduction in cash,  cash  equivalents  and marketable  securities as well as the
reduction in interest rates, which occurred during 2001.

Income Taxes
<TABLE>
<CAPTION>

 (in thousands)                                 2002                             2001                            2000
----------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>                               <C>                             <C>
 Income tax expense(benefit)                   ($61)                             $224                             $36
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

2002 vs. 2001 and 2001 vs. 2000
Income tax expense in all years relates  entirely to foreign  income taxes.  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 $10.1 million
at December  31, 2002  compared  to $9.0  million at December  31, 2001 and $7.0
million at December 28, 2000.

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 $150,000 and $222,000 in 2002 and 2001  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  exchange  contracts.  See  Note 1 of  "Notes  to
Consolidated Financial Statements."

Financial Condition

Liquidity and Capital Resources
<TABLE>
<CAPTION>

 (in thousands)                                  2002            Change          2001            Change           2000
----------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>             <C>             <C>             <C>             <C>

 Working capital                                $9,125          $(2,885)        $12,010          ($4,782)        $16,792
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

In 2002,  cash and  marketable  securities  declined  by $433,000  comprising  a
portion  of the  working  capital  used to fund our  loss in  2002.  Inventories
decreased  by $1.9  million  primarily  due to lower sales  volumes,  aggressive
measures  undertaken  during the year to reduce  inventory  levels,  and reduced
incoming  purchased  components  and the  implementation  of lean  manufacturing
techniques.  Accounts  Receivable  decreased  by $1.4  million due to  increased
collection  efforts  and  settlement  of a former  distributor  receivable.  The
decreases in accounts payable and accrued expenses reflect the reduced volume of
business and lower monthly operating costs from the restructure.

We estimate that capital  expenditures for property,  plant and equipment during
2003 will be between  $500,000  and $1.0  million.  Although we expect that such
expenditures  will  be  made,  we  had  no  significant   outstanding   purchase
commitments at December 31, 2002.  Such  expenditures  are expected to be funded
from existing and internally  generated funds or may be leased. We established a
foreign line of credit for 50,000 Euros in February 2002.

As a result  of our  significant  product  development,  customer  support,  and
selling and marketing efforts, Data I/O has required substantial working capital
to fund our operations.  We  restructured  our operations to lower our costs and
operating  expenditures to lower our breakeven point, preserve our cash position
and return to profitable operations.  We believe that we have sufficient working
capital  available  under our operating  plan to fund our operations and capital
requirements  through at least December 31, 2003. Any  substantial  inability to
achieve the 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 to enable us to continue
operations through December 31, 2003.

Commitments

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 are as  follows  for the year  ending  December  31(in
thousands):

                     2003                    $1,345
                     2004                     1,321
                     2005                     1,274
                     2006                     1,182
                     2007                       493
                                         --------------
                     Total                   $5,615
                                         ==============

Share Repurchase Program

Under a previously announced share repurchase program, Data I/O is authorized to
repurchase  up to  1,123,800  shares  (approximately  14.8%) 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,
2002, 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 June 2001,  the FASB issued  Statement 143,  Accounting for Asset  Retirement
Obligations  (SFAS 143). This statement  requires entities to record a liability
for the estimated retirement and removal costs of assets used in their business.
The liability should be recorded at its fair value,  with a corresponding  asset
that should be  depreciated  over the  remaining  useful life of the  long-lived
asset to which the liability  relates.  Period  expenses will also be recognized
for changes in the original value of the liability as a result of the passage of
time and  revisions  in the  undiscounted  cash flows  required  to satisfy  the
obligation.  The provisions of SFAS 143 are effective for fiscal years beginning
after June 15, 2002.  Data I/O is currently  assessing and quantifying the asset
retirement  obligations associated with our long-lived assets and estimates that
the  impact on future  annual net income  will not be  material  due to the long
period over which the costs will be depreciated.

The FASB issued SFAS No. 145,  "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB  Statement  No. 13, and Technical  Corrections,"  on April 30,
2002.  Statement No. 145 rescinds  Statement No.4,  which required all gains and
losses  from  extinguishments  of  debt  to  be  aggregated  and,  if  material,
classified as an  extraordinary  item,  net of related  income tax effect.  Upon
adoption of Statement No. 145,  companies will be required to apply the criteria
in APB  Opinion No. 30,  "Reporting  the Results of  Operations,  Reporting  the
Effects of Disposal of a Segment of a Business,  and Extraordinary,  Unusual and
Infrequently   Occurring   Events   and   Transactions"   in   determining   the
classification of gains and losses resulting from the  extinguishments  of debt.
Statement  No. 145 is effective for fiscal years  beginning  after May 15, 2002.
While we have no current debt  outstanding,  we are evaluating the  requirements
and impact of this statement on our operations and financial position.

In June 2002,  the FASB issued  Statement 146,  Accounting for Costs  Associated
with Exit or Disposal Activities.  This statement requires entities to recognize
costs associated with exit or disposal  activities when liabilities are incurred
rather than when the entity  commits to an exit or disposal  plan,  as currently
required.  Examples of costs covered by this guidance include one-time  employee
termination  benefits,  costs to terminate  contracts other than capital leases,
costs to consolidate facilities or relocate employees, and certain other exit or
disposal  activities.  This  statement is effective  for fiscal years  beginning
after  December 31,  2002,  and will impact any exit or disposal  activities  we
initiate after that date.

In December  2002,  the FASB issued  Statement  148 (SFAS 148),  Accounting  for
Stock-Based  Compensation  -- Transition  and  Disclosure:  an amendment of FASB
Statement  123 (SFAS  123),  to provide  alternative  transition  methods  for a
voluntary  change to the fair value based method of accounting  for  stock-based
employee compensation.  In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require  prominent  disclosures  in annual  financial  statements
about the method of accounting for stock-based employee compensation and the pro
forma  effect on reported  results of applying  the fair value based  method for
entities that use the intrinsic value method of accounting. The pro forma effect
disclosures  are also  required to be  prominently  disclosed in interim  period
financial  statements.  This statement is effective for financial statements for
fiscal  years ending after  December  15, 2002 and is  effective  for  financial
reports containing  condensed financial statements for interim periods beginning
after December 15, 2002, with earlier  application  permitted.  We do not plan a
change to the fair value based method of  accounting  for  stock-based  employee
compensation  and have included the disclosure  requirements  of SFAS 148 in the
accompanying financial statements.

In November 2002, FASB Interpretation 45, Guarantor's  Accounting and Disclosure
Requirements for Guarantees,  Including  Indirect  Guarantees of Indebtedness of
Others  (FIN 45),  was  issued.  FIN 45  requires  a  guarantor  entity,  at the
inception  of  a  guarantee  covered  by  the  measurement   provisions  of  the
interpretation,  to  record a  liability  for the fair  value of the  obligation
undertaken  in  issuing  the  guarantee.  Data I/O  previously  did not record a
liability when guaranteeing  obligations unless it became probable that we would
have to perform under the guarantee.  FIN 45 applies prospectively to guarantees
we issue or modify  subsequent to December 31, 2002, but has certain  disclosure
requirements  effective for interim and annual periods ending after December 15,
2002. Data I/O has  historically  issued  guarantees only on a limited basis and
does not  anticipate  FIN 45 will have a material  effect on our 2003  financial
statements.  Disclosures  required by FIN 45 are  included  in the  accompanying
financial statements.

In November 2002, the Emerging Issues Task Force reached a consensus  opinion on
EITF 00-21,  "Revenue  Arrangements with Multiple  Deliverables."  The consensus
provides that revenue arrangements with multiple  deliverables should be divided
into separate units of accounting if certain criteria are met. The consideration
for the  arrangement  should be allocated to the  separate  units of  accounting
based on their relative fair values, with different provisions if the fair value
of all deliverables are not known or if the fair value is contingent on delivery
of specified items or performance  conditions.  Applicable  revenue  recognition
criteria  should be considered  separately for each separate unit of accounting.
EITF 00-21 is effective for revenue  arrangements entered into in fiscal periods
beginning  after  June 15,  2003.  Entities  may elect to report the change as a
cumulative  effect  adjustment  in  accordance  with APB Opinion 20,  Accounting
Changes. Data I/O has not determined the effect of adoption of EITF 00-21 on our
financial statements or the method of adoption it will use.

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, at a given date, are not
material.  However,  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, 2002 and  December  31, 2001.  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):
<TABLE>
<CAPTION>
                                                                 Estimated Fair                             Estimated Fair
                                              Principal             Value at            Principal              Value at
                                              Cash Flows          December 31,          Cash Flows           December 31,
                                               For 2003               2002               For 2002                2001
                                            --------------     -------------------   ---------------      -----------------
<S>                                           <C>               <C>                     <C>                 <C>

     Corporate bonds                            $  734                  $ 734            $ 1,534                  $ 1,534
                                                2.936%                                    3.319%


     Euro-dollar bonds                             342                    342                399                      399
                                                2.100%                                    3.520%

     Taxable Auction Securities                      -                      -                800                      800
                                                                                          2.231%

     Asset Backed Securities                         -                      -                503                      503
                                                                                          2.521%
                                           ---------------     -------------------   ---------------     ------------------

     Total portfolio value                      $1,076                 $1,076             $3,236                   $3,236
</TABLE>

Item 8. Financial Statements and Supplementary Data

See pages 23 through 39.

<PAGE>

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

REPORT OF GRANT THORNTON LLP INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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

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

We have  audited  the  accompanying  consolidated  balance  sheets  of Data  I/O
Corporation  as of December  31, 2002 and  December  31,  2001,  and the related
statements of operations, stockholders' equity and cash flows for the years then
ended.  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 auditing standards generally accepted
in the United States of America.  Those standards require that the Company plans
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes 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 financial  statements  referred to above present fairly, in
all material  respects,  the financial  position of Data I/O  Corporation  as of
December 31, 2002 and 2001, and the results of its operations and its cash flows
for the years then ended in  conformity  with  accounting  principles  generally
accepted in the United States of America.

We have also audited Schedule II for the years ended December 31, 2002 and 2001.
In our opinion,  the schedule when considered in relation to the basic financial
statements  taken as a whole,  presents  fairly,  in all material  aspects,  the
information therein.

//S//GRANT THORNTON LLP

Seattle, Washington
February 3, 2003

<PAGE>
--------------------------------------------------------------------------------

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

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

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

We have audited the accompanying statements of operations, stockholders' equity,
and cash flows of Data I/O Corporation for the year ended December 28, 2000. Our
audit also includes the financial statement schedule listed in the Index at Item
15(a).  These financial  statements and schedule are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements and schedule based on our audit.

We conducted our audit in accordance with auditing standards  generally accepted
in the 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. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audit  provides a  reasonable  basis for our
opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the consolidated results of operations and cash flows of
Data I/O  Corporation  for the year ended December 28, 2000, in conformity  with
accounting  principles  generally  accepted  in the United  States.  Also in our
opinion, the related financial statement schedule when considered in relation to
the  basic  financial  statements,  taken as a whole,  presents  fairly,  in all
material respects the information therein.

As discussed in Note 1 to the  consolidated  financial  statements,  in 2000 the
Company  changed its method of accounting for revenue  recognition in accordance
with  guidance  provided in SEC Staff  Accounting  Bulletin  No.  101,  "Revenue
Recognition in Financial Statements."

//S// Ernst & Young LLP
Seattle, Washington
February 7, 2001

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

                            REPORT OF MANAGEMENT

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

The Management of Data I/O  Corporation is responsible  for the  preparation and
integrity  of  Data  I/O's   consolidated   financial   statements  and  related
information that appears in this Annual Report on Form 10-K. Management believes
that  the  financial  statements  fairly  reflect  the  form  and  substance  of
transactions and reasonably  present Data I/O's financial  condition and results
of its operations,  in conformity with accounting  principles generally accepted
in the United States of America. Management has included in Data I/O's financial
statements, amounts that are based on estimates and judgments, which it believes
are reasonable under the circumstances.

Data I/O maintains a system of internal control,  which is designed to safeguard
Data I/O's assets and ensure that  transactions  are recorded in accordance with
Company policies.

The  Board  of  Directors  of  Data  I/O  has an  Audit  Committee  composed  of
non-management  Directors. The Committee meets with financial management and the
independent  auditors to review  internal  accounting  controls and  accounting,
auditing and financial reporting matters.

//S//Frederick R. Hume                                  //S//Joel S. Hatlen
FREDERICK R. HUME                                       Joel S. Hatlen
President and Chief Executive Officer                   Vice President
                                                        Chief Financial Officer
                                                        Secretary and Treasurer


<PAGE>

                              DATA I/O CORPORATION

                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
                                                                                       Dec.31,                   Dec. 31,
                                                                                        2002                      2001
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>                       <C>
(in thousands, except share data)
ASSETS
CURRENT ASSETS:
     Cash and cash equivalents                                                        $ 4,383                  $  2,656
     Marketable securities                                                              1,076                     3,236
     Trade accounts receivable, net of allowance for
        doubtful accounts of $187 and $372                                              4,328                     5,666
     Inventories                                                                        4,476                     6,388
     Other current assets                                                                 509                       485
                                                                                  -------------           -------------
        TOTAL CURRENT ASSETS                                                           14,772                    18,431

Property, plant and equipment - net                                                     1,508                     1,741
Other assets                                                                               87                       168
                                                                                  -------------           -------------

        TOTAL ASSETS                                                                  $16,367                   $20,340
                                                                                  =============           =============

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
     Accounts payable                                                                  $1,200                    $1,599
     Accrued compensation                                                                 826                       848
     Deferred revenue                                                                   1,613                     1,686
     Other accrued liabilities                                                          1,510                     1,871
     Accrued costs of business restructuring                                              204                        88
     Income taxes payable                                                                 294                       329
                                                                                   -------------          -------------
        TOTAL CURRENT LIABILITIES                                                       5,647                     6,421

Deferred gain on sale of property                                                       1,435                     1,765
                                                                                   -------------          -------------
                                                                                        7,082                     8,186

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, 7,767,630
           and 7,613,754 shares                                                        18,638                   18,500
     Retained deficit                                                                  (9,279)                  (6,173)
     Accumulated other comprehensive  loss                                                (74)                    (173)
                                                                                   -------------          -------------
        TOTAL STOCKHOLDERS' EQUITY                                                      9,285                   12,154
                                                                                   -------------          -------------

        TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                    $16,367                  $20,340
                                                                                   =============          =============
</TABLE>

See notes to consolidated financial statements.


<PAGE>


                              DATA I/O CORPORATION

                      CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>

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

                                                                              Dec. 31,            Dec. 31,            Dec. 28,
For the years ended                                                             2002                2001               2000
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>                 <C>                 <C>

(in thousands, except per share data)

Net sales                                                                       $22,838             $26,826            $42,909
Cost of goods sold                                                               11,556              15,078             22,760
                                                                             -----------         -----------       ------------
      Gross margin                                                              11,282              11,748             20,149
                                                                             -----------         -----------       ------------

Operating expenses:
      Research and development                                                    5,331               6,740              8,716
      Selling, general and administrative                                         8,254               9,707             10,616
      Net provision (reversal) for business restructuring                           632               1,211               (255)
                                                                             -----------         -----------       ------------
         Total operating expenses                                                14,217              17,658             19,077
                                                                             -----------         -----------       ------------

         Operating income (loss)                                                 (2,935)             (5,910)             1,072

Non-operating income (expense):
      Interest income                                                                87                 239                471
      Interest expense                                                              (18)                (16)               (25)
      Foreign currency exchange                                                    (301)                (99)               430
                                                                             ------------        -----------       ------------
         Total non-operating income (loss)                                         (232)                124                876
                                                                             ------------        -----------       ------------

Income (loss) from continuing operations before income taxes and
       cumulative effect of accounting change                                    (3,167)             (5,786)             1,948
Income tax (expense) benefit                                                         61                (224)               (36)
                                                                             -----------         -----------       ------------
Income (loss) from continuing operations before discontinued
        operations and cumulative effect of accounting change                    (3,106)             (6,010)             1,912
Discontinued operations, net of income taxes:
      Income from operations, net of income tax                                       -                   -                 90
Cumulative effect of accounting change, net of income tax                             -                   -             (2,531)
                                                                             -----------         ------------       ------------
Net  loss                                                                       ($3,106)            ($6,010)             ($529)
                                                                             ===========         ============       ============

Basic and diluted earnings (loss) per share:
      From continuing operations                                                 ($0.40)             ($0.79)             $0.26
      From discontinued operations                                                    -                   -               0.01
      From cumulative effect of accounting change                                     -                   -              (0.34)
                                                                             -----------         ------------       ------------
          Basic and diluted loss per share                                       ($0.40)             ($0.79)            ($0.07)
                                                                             ===========         ============       ============

Weighted-average basic and diluted shares outstanding                             7,704               7,572              7,405
</TABLE>

See notes to consolidated financial statements

<PAGE>


                              DATA I/O CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------

                                                                                Dec. 31,            Dec. 31,          Dec. 28,
For the years ended                                                              2002                2001              2000
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>                 <C>                <C>
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
     Income (loss) from continuing operations                                  $(3,106)            ($6,010)            $1,912
     Adjustments to reconcile income (loss) from continuing
       operations to net cash provided by (used in) operating activities:
       Depreciation and amortization                                             1,018               2,206              2,074
       Write off of assets                                                          11                  18                  -
       Amortization of deferred gain on sale                                      (330)               (329)              (331)
       Net change in:
          Trade accounts receivable                                              1,395               4,961             (5,079)
          Inventories                                                            1,902               2,778             (2,929)
          Recoverable income taxes                                                   1                  91                114
          Other current assets                                                     (19)                (48)               101
          Accrued cost of business restructuring                                   114                 (29)              (376)
          Accounts payable and accrued liabilities                                (859)             (1,212)              (589)
          Deferred revenue                                                         (70)               (951)                11
                                                                            ----------------    ---------------    --------------
     Cash provided by (used in) operating activities of continuing                  57               1,475             (5,092)
     operations
     Cash provided by operating activities of discontinued operations                -                   -                 90
     Cash used in cumulative effect of change in accounting principle                -                   -             (2,531)
                                                                            ----------------    ---------------    --------------

          Net cash provided by (used in) operating activities                       57               1,475             (7,533)

CASH FLOWS FROM INVESTING ACTIVITIES:
     Additions to property, plant and equipment                                   (726)               (785)            (1,111)
     Purchases of available-for-sale securities                                   (630)             (4,335)            (2,346)
     Proceeds from maturities of available-for-sale securities                   2,789               3,041             10,019
                                                                            ----------------    ---------------    --------------
       Cash provided by (used in) investing activities                           1,433              (2,079)             6,562

CASH FLOWS FROM FINANCING ACTIVITIES
     Sale of common stock                                                          130                 209                171
     Proceeds from exercise of stock options                                         8                   -                308
                                                                            ----------------    ---------------    --------------
       Cash provided by financing activities                                       138                 209                479
                                                                            ----------------    ---------------    --------------
Increase(decrease) in cash and cash equivalents                                  1,628                (395)              (492)

Effects of exchange rate changes on cash                                            99                 (82)                28
Cash and cash equivalents at beginning of year                                   2,656               3,133              3,597
                                                                            ----------------    ---------------    --------------
Cash and cash equivalents at end of year                                        $4,383            $  2,656           $  3,133
                                                                            ================    ===============    ==============


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
     Interest                                                                        $ 18        $      16         $       25
     Income taxes                                                                    $(61)        $    172         $       41

</TABLE>

See notes to consolidated financial statements.


<PAGE>

                              DATA I/O CORPORATION

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                          Accumulated
                                                                         Retained            Other                   Total
                                                Common Stock             Earnings        Comprehensive           Stockholders'
                                           ------------------------
                                             Shares        Amount        (Deficit)       Income (Loss)              Equity
                                           -----------    ---------      ----------     -----------------     --------------------
<S>                                          <C>           <C>           <C>             <C>                     <C>

(in thousands, except share data)

Balance at December 31, 1999                7,290,165      $17,813           $366             $(121)                 $18,058

Stock options exercised                        93,612          288              -                 -                      288
Issuance of stock through
      Director Fee Plan                        14,228           20              -                 -                       20
Issuance of stock through
      Employee Stock Purchase Plan             96,537          171              -                 -                      171
Comprehensive loss:
      Net loss                                      -            -           (529)                -                     (529)
      Translation adjustment                        -            -              -                28                       28
      Unrealized gain on
         marketable securities                      -            -              -                 3                        3
                                                                                                              --------------------
Total comprehensive loss                                                                                                (498)
                                                                                                              --------------------
                                           -----------    ---------      ----------     -----------------     --------------------
Balance at December 28, 2000                7,494,542       18,292           (163)               (90)                 18,039

Issuance of stock through
      Employee Stock Purchase Plan            119,212          208              -                  -                     208
Comprehensive loss:
      Net loss                                      -            -         (6,010)                 -                  (6,010)
      Translation adjustment                        -            -              -                (82)                    (82)
      Unrealized gain on marketable                 -            -              -                 (1)                     (1)
         securities
                                                                                                              --------------------
Total comprehensive loss                                                                                              (6,093)
                                           -----------    ---------      ----------     -----------------     --------------------
Balance at December 31, 2001                7,613,754       18,500         (6,173)              (173)                 12,154

Stock options exercised                         5,000            8              -                  -                       8
Issuance of stock through
      Employee Stock Purchase Plan            148,876          130              -                  -                     130
Comprehensive loss:
      Net loss                                      -            -         (3,106)                 -                  (3,106)
      Translation adjustment                        -            -              -                 99                      99

                                                                                                              --------------------
Total comprehensive loss                                                                                               (3007)
                                                                                                              --------------------
                                           -----------    ---------      ----------     -----------------     --------------------
Balance at December 31, 2002                7,767,630      $18,638        ($9,279)              ($74)                 $9,285
                                           ===========    =========      ==========     =================     ====================
</TABLE>

See notes to consolidated financial statements.


<PAGE>

                              DATA I/O CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Data  I/O(R)   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 system.

As a result  of our  significant  product  development,  customer  support,  and
selling and marketing efforts in a period of weak capital spending, Data I/O has
required substantial working capital to fund our operations.  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, 2003.  Any
substantial inability to achieve the current business plan could have a material
adverse impact on our financial position, liquidity, or result of operations and
may require us to reduce expenditures and/or seek additional financing to enable
us to continue operations through December 31, 2003.

Principles of Consolidation

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

Reporting Period

In 2001, Data I/O converted to reporting on a calendar  year-end basis.  Results
of  operations  for 2000 are for a fifty-two  week period.  The first quarter of
2001 covered the period December 29, 2000 to March 31, 2001.

Use of Estimates

The  preparation  of the  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. Data I/O applies APB Opinion 25,  Accounting  for Stock Issued
to Employees,  and related  Interpretations  in accounting for our plans.  Stock
expense in 2002,  2001,  and 2000  would have been the result of options  issued
with an exercise price below the underlying  stock's market price. The following
table  illustrates  the  effect  on net loss and loss per  share if Data I/O had
applied the fair value recognition  provisions of FASB Statement 123, Accounting
for Stock-Based Compensation, using the assumptions described in Note 12, to our
stock-based employee plans.

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

                                                                                    Year Ended December
                                                                      -------------------------------------------------
                                                                           2002            2001             2000
                                                                      ---------------  ----------------  --------------

<S>                                                                      <C>             <C>               <C>
           Net  loss - as reported                                       ($3,106)        ($6,010)          ($529)

           Deduct:  Total stock-based employee compensation expense
           determined under fair value based method for awards
           granted, modified, or settled, net of related tax effects
                                                                            (392)           (440)           (673)
                                                                      ---------------  --------------  ----------------
           Net loss - pro forma                                          ($3,498)        ($6,450)        ($1,202)
                                                                      ===============  ==============  ================

           Basic and diluted loss per share - as reported                 ($0.40)         ($0.79)         ($0.07)
           Basic and diluted loss per share - pro forma                   ($0.45)         ($0.85)         ($0.16)

</TABLE>

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.  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, 2002, we had a notional value of approximately  $1,300,000 in three
foreign exchange contracts outstanding,  the fair value of which was a liability
of  $96,000.  The  contract  terms are 75-90  days.  The  hedges  are  perfectly
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  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.

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  is due from  companies in the
electronics manufacturing industries.  Credit is extended based on an evaluation
of a customers' financial condition and, generally,  collateral is not required.
Accounts  receivable  are 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 our 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 only 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.

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 and other assets are evaluated on an annual basis for impairment.  In
this  connection,  we reviewed  the  expected  cash flows to be generated by the
Sprint  product  line to  determine  that  they  are  adequate  compared  to the
remaining net book value of long lived assets from the SMS acquisition.

Revenue Recognition

Sales of Data  I/O's  semiconductor  programming  equipment  products  requiring
installation by us that is other than perfunctory are recorded when installation
is  complete,  or at the later of customer  acceptance  or  installation,  if an
acceptance  clause is specified in the sales  terms.  We recognize  revenue from
other product sales at the time of shipment.  We record revenue from the sale of
service and update  contracts  as  deferred  revenue  and we  recognize  it on a
straight-line basis over the contractual period.

Data  I/O  previously  recognized  revenue  from  product  sales  at the time of
shipment,  or at customer  acceptance,  if an acceptance clause was specified in
the  sales  terms.  Effective  December  31,  1999,  we  changed  our  method of
accounting for product sales requiring Company  installation,  when installation
is other than  perfunctory,  to recognize  such  revenues when  installation  is
complete,  or at  the  later  of  customer  acceptance  or  installation,  if an
acceptance  clause is  specified  in the sales  terms.  We believe the change in
accounting  principle  is  preferable  based on  guidance  provided in SEC Staff
Accounting  Bulletin  No.  101  (SAB  101),  Revenue  Recognition  in  Financial
Statements.  This change in accounting  principle  did not impact taxes,  as all
affected jurisdictions had net operating loss carryforwards.

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 collectibility 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
related to continuing operations were $468,000,  $487,000, and $904,000 in 2002,
2001, and 2000, 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  we  recently  introduced,  carries  a
three-year  warranty on some components.  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/(loss)  per
share are computed using the weighted-average number of common shares and common
stock equivalent shares outstanding  during the period.  Common stock equivalent
shares are excluded from the computation if their effect is antidilutive.

Earnings per share as presented on the statement of operations  exclude employee
stock options that were  antidilutive  of 1,141,412,  1,115,508 and 1,128,750 in
2002, 2001 and 2000, respectively.

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.  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.

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 fair value of the
open hedge  contracts  as of December  31, 2002 is a liability of $96,000 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 June 2001,  the FASB issued  Statement 143,  Accounting for Asset  Retirement
Obligations  (SFAS 143). This statement  requires entities to record a liability
for the estimated retirement and removal costs of assets used in their business.
The liability should be recorded at its fair value,  with a corresponding  asset
that should be  depreciated  over the  remaining  useful life of the  long-lived
asset to which the liability  relates.  Period  expenses will also be recognized
for changes in the original value of the liability as a result of the passage of
time and  revisions  in the  undiscounted  cash flows  required  to satisfy  the
obligation.  The provisions of SFAS 143 are effective for fiscal years beginning
after June 15, 2002.  Data I/O is currently  assessing and quantifying the asset
retirement  obligations associated with our long-lived assets and estimates that
the  impact on future  annual net income  will not be  material  due to the long
period over which the costs will be depreciated.

The FASB issued SFAS No. 145,  "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB  Statement  No. 13, and Technical  Corrections,"  on April 30,
2002.  Statement No. 145 rescinds  Statement No.4,  which required all gains and
losses  from  extinguishments  of  debt  to  be  aggregated  and,  if  material,
classified as an  extraordinary  item,  net of related  income tax effect.  Upon
adoption of Statement No. 145,  companies will be required to apply the criteria
in APB  Opinion No. 30,  "Reporting  the Results of  Operations,  Reporting  the
Effects of Disposal of a Segment of a Business,  and Extraordinary,  Unusual and
Infrequently   Occurring   Events   and   Transactions"   in   determining   the
classification of gains and losses resulting from the  extinguishments  of debt.
Statement  No. 145 is effective for fiscal years  beginning  after May 15, 2002.
While we have no current  debt  outstanding,  we are  currently  evaluating  the
requirements  and  impact of this  statement  on our  operations  and  financial
position.

In June 2002,  the FASB issued  Statement 146,  Accounting for Costs  Associated
with Exit or Disposal Activities.  This statement requires entities to recognize
costs associated with exit or disposal  activities when liabilities are incurred
rather than when the entity  commits to an exit or disposal  plan,  as currently
required.  Examples of costs covered by this guidance include one-time  employee
termination  benefits,  costs to terminate  contracts other than capital leases,
costs to consolidate facilities or relocate employees, and certain other exit or
disposal  activities.  This  statement is effective  for fiscal years  beginning
after  December 31,  2002,  and will impact any exit or disposal  activities  we
initiate after that date.

In December  2002,  the FASB issued  Statement  148 (SFAS 148),  Accounting  for
Stock-Based  Compensation  -- Transition  and  Disclosure:  an amendment of FASB
Statement  123 (SFAS  123),  to provide  alternative  transition  methods  for a
voluntary  change to the fair value based method of accounting  for  stock-based
employee compensation.  In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require  prominent  disclosures  in annual  financial  statements
about the method of accounting for stock-based employee compensation and the pro
forma  effect on reported  results of applying  the fair value based  method for
entities that use the intrinsic value method of accounting. The pro forma effect
disclosures  are also  required to be  prominently  disclosed in interim  period
financial  statements.  This statement is effective for financial statements for
fiscal  years ending after  December  15, 2002 and is  effective  for  financial
reports containing  condensed financial statements for interim periods beginning
after December 15, 2002, with earlier  application  permitted.  We do not plan a
change to the fair value based method of  accounting  for  stock-based  employee
compensation  and have  included  the  disclosures  required  by SFAS 148 in the
accompanying financial statements.

In November 2002, FASB Interpretation 45, Guarantor's  Accounting and Disclosure
Requirements for Guarantees,  Including  Indirect  Guarantees of Indebtedness of
Others  (FIN 45),  was  issued.  FIN 45  requires  a  guarantor  entity,  at the
inception  of  a  guarantee  covered  by  the  measurement   provisions  of  the
interpretation,  to  record a  liability  for the fair  value of the  obligation
undertaken  in  issuing  the  guarantee.  Data I/O  previously  did not record a
liability when guaranteeing  obligations unless it became probable that we would
have to perform under the guarantee.  FIN 45 applies prospectively to guarantees
we issue or modify  subsequent to December 31, 2002, but has certain  disclosure
requirements  effective for interim and annual periods ending after December 15,
2002. Data I/O has  historically  issued  guarantees only on a limited basis and
does not  anticipate  FIN 45 will have a material  effect on our 2003  financial
statements.  Disclosures  required by FIN 45 are  included  in the  accompanying
financial statements.

In November 2002, the Emerging Issues Task Force reached a consensus  opinion on
EITF 00-21,  "Revenue  Arrangements with Multiple  Deliverables."  The consensus
provides that revenue arrangements with multiple  deliverables should be divided
into separate units of accounting if certain criteria are met. The consideration
for the  arrangement  should be allocated to the  separate  units of  accounting
based on their relative fair values, with different provisions if the fair value
of all deliverables are not known or if the fair value is contingent on delivery
of specified items or performance  conditions.  Applicable  revenue  recognition
criteria  should be considered  separately for each separate unit of accounting.
EITF 00-21 is effective for revenue  arrangements entered into in fiscal periods
beginning  after  June 15,  2003.  Entities  may elect to report the change as a
cumulative  effect  adjustment  in  accordance  with APB Opinion 20,  Accounting
Changes. Data I/O has not determined the effect of adoption of EITF 00-21 on our
financial statements or the method of adoption it will use.

NOTE 2 - PROVISION FOR BUSINESS RESTRUCTURING

The economic slowdown continued in 2002 and significantly affected our business.
During  2002,  we  continued  the  restructuring  process from 2001 and recorded
restructuring  charges in the third and fourth  quarter of 2002 of $497,000  and
$135,000  respectively for a total of $632,000  associated with actions taken to
reduce our breakeven  point and realign Data I/O with our market  opportunities.
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.

We reduced our quarterly  breakeven point from  approximately  $7 million of net
sales at the beginning of 2002 to approximately $5.7 million at the end of 2002.
Most of these reductions were achieved by reducing our personnel from 155 at the
beginning of 2002 to 125 at the end of 2002.

During 2001, we took a number of strategic  restructuring  actions to reduce our
breakeven point. Repositioning included the following: a reduction in our global
workforce  from  224 at  the  start  of the  year  to  155 at the  end of  2001;
discontinuance or reallocation of numerous projects and activities not essential
to our  long-term  goals;  streamlining  activities  to  decrease  discretionary
marketing,  distribution  and promotional  expenses,  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.

At December 31, 2002 all restructuring  expenses  associated with the activities
detailed above had been paid except approximately $204,000,  which was primarily
associated with severance, facility, consulting and legal fees.

An analysis of the restructuring is as follows (in thousands):
<TABLE>
<CAPTION>

                                               2001          Reserve                            2002           Reserve
                               2001         Payments/      Balance at          2002          Payments/        Balance at
 Description                 Expenses      Write-offs    Dec. 31, 2001       Expenses        Write-offs     Dec. 31, 2002
 -----------------         -------------  -------------  ---------------  --------------   --------------  ---------------
<S>                           <C>           <C>           <C>                <C>             <C>            <C>

 Downsizing U.S.
 Operations:
    Employee severance        $ 729          $ 725               $ 4           $556             $391             $169

    Redmond facility
       consolidation             (5)            56                46             10               46               10

    Consulting and legal
       expenses                  71             52                19             58               52               25

    Downsizing Foreign
       Operations               416            407                19              8               27                -
                          -------------  -------------  ---------------  ---------------   ---------------  ---------------
 Total                       $1,211         $1,240               $88           $632             $516             $204
                         ==============  =============  ===============  ===============   ===============  ===============

</TABLE>


<PAGE>

NOTE 3 - MARKETABLE SECURITIES

The estimated fair value of marketable securities consisted of the following (in
thousands):
<TABLE>
<CAPTION>

                                                                           Dec. 31,             Dec. 31,
                                                                             2002                2001
                                                                        -------------      -------------
<S>                                                                     <C>                 <C>

            Corporate bonds                                                 $  734            $ 1,534
            Medium- and short-term notes                                         -                  -
            Euro-dollar bonds                                                  342                399
            Taxable auction securities                                           -                800
            Asset backed securities                                              -                503
                                                                        -------------      -------------
                                                                            $1,076             $3,236
                                                                        =============      =============
</TABLE>

At December 31, 2002, cost approximated market value for Data I/O's portfolio of
marketable securities and there were no significant  unrealized gains or losses.
The maturity for all marketable  securities  held at December 31, 2002 is within
calendar year 2003.  The cost of  securities  sold is determined by the specific
identification method.

NOTE 4 - ACCOUNTS RECEIVABLE

Receivables consist of the following (in thousands):
<TABLE>
<CAPTION>

                                                                           Dec. 31,              Dec. 31,
                                                                             2002                 2001
                                                                      ---------------      ----------------
<S>                                                                      <C>                   <C>

             Trade receivables                                              $4,436              $5,937
             Other                                                              79                 101
                                                                      -----------------    ----------------
                         Total                                               4,515               6,038
             Less allowance for doubtful receivables                           187                 372
                                                                      -----------------    ----------------
                         Net receivables                                    $4,328              $5,666
                                                                      =================    ================
</TABLE>

Trade  receivables  relate to sales of parts, for which credit is extended based
on the customer's credit history.  Other  receivables  represent amounts due for
subcontracting work performed for others.

Changes  in Data I/O's  allowance  for  doubtful  accounts  are as  follows  (in
thousands):
                                        Dec. 31,             Dec. 31,
                                          2002                 2001
                                   ----------------     -----------------

 Beginning balance                        $372                 $350
   Bad debt expense (reversal)            (162)                  64
   Accounts written-off                    (37)                 (42)
   Recoveries                               14                    -
                                   ----------------     -----------------
 Ending balance                           $187                 $372
                                   ================     =================

NOTE 5 - INVENTORIES

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

                                         Dec. 31,             Dec. 31,
                                           2002                 2001
                                  ------------------   -------------------

   Raw material                          $2,308                $3,588
   Work-in-process                          875                 1,354
   Finished goods                         1,293                 1,446
                                  ------------------   -------------------
                                         $4,476                $6,388
                                  ==================   ===================


Reserves for excess and obsolete  inventory  are  $3,267,000  and  $2,469,000 at
December  31, 2002 and  December 31,  2001,  respectively.  Freight  expense for
incoming raw materials and freight out for product  shipments is charged to cost
of goods sold.

Certain parts used in Data I/O's products are currently  available from either a
single  supplier or from a limited  number of  suppliers.  If we cannot  develop
alternative sources for these components,  or if 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 Data I/O relies 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.

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

NOTE 6 - SALE - LEASEBACK

In May 1997, Data I/O completed the sale of the land and building comprising our
Redmond,  Washington,  corporate  headquarters.  The  sale  includes  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.

NOTE 7 - PROPERTY, PLANT AND EQUIPMENT

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


                                             Dec. 31,             Dec. 31,
                                               2002                 2001
                                         --------------     --------------

   Leasehold  improvements                  $   239              $   229
   Equipment                                 12,132               12,188
                                          --------------      --------------

                                             12,371               12,417
   Less accumulated depreciation             10,863               10,676
                                          --------------      --------------

   Property, plant and equipment - net      $ 1,508              $ 1,741
                                          ==============      ==============


Total  depreciation  recorded for 2002,  2001, and 2000 was $670,000,  $940,000,
$1,036,000, respectively.

NOTE 8 - OTHER ASSETS

Other assets consisted of the following components (in thousands):


                                           Dec. 31,             Dec. 31,
                                             2002                 2001
                                          --------------     --------------

   Long-term lease deposits                 $   66               $   66
   Investment in product lines: SMS          3,272                3,272
                                          --------------     --------------
                                             3,338                3,338
   Less accumulated amortization             3,251                3,170
                                          --------------     --------------

          Other assets - net                $   87               $  168
                                          ==============     ==============

Total amortization recorded for 2002, 2001, and 2000 was $81,000, $969,000,
$1,038,000, respectively.

Investment in Product Lines: SMS

In November 1998,  Data I/O acquired SMS Holding GmbH. In related  transactions,
we  acquired  a  license  to  the   technology,   manufacturing   and  worldwide
distribution rights to Unmanned Solutions' AH 400 robotic handler, which is used
in the fine pitch automated programming system, now the PS300 product family. Of
the total acquisition costs of these transactions, approximately $3.3 million of
developed  technology and other various  intangible assets are reported as Other
Assets in the accompanying  balance sheets and are being amortized  ratably over
the economic life of the specific assets acquired (three to five years). The net
book value of the assets capitalized in Other Assets related to this acquisition
is $59,000,  $102,000 and $1.2  million at December 31, 2002,  2001 and December
28, 2000, respectively. As part of the SMS acquisition $1.9 million was recorded
as an expense for in-process research and development in 1998.

NOTE 9 - WARRANTY

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

                                         December 31,          December 31,
                                             2002                 2001
                                     ------------------    -----------------

   Liability, beginning of year              $578                  $671
   Net expense, accrual revisions
   and warranty claims                        (59)                  (93)
                                     ------------------    -----------------
   Liability, end of year                    $519                  $578
                                     ==================    =================

NOTE 10 - COMMITMENTS

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 are as  follows  for the year  ending  December  31(in
thousands):

                        2003                   $1,345
                        2004                    1,321
                        2005                    1,274
                        2006                    1,182
                        2007                      493
                                           --------------
                        Total                  $5,615
                                           ==============

Lease and rental  expense was  $1,387,000,  $1,342,000,  and $1,348,000 in 2002,
2001, and 2000  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. So long as we are not in material default of the terms of the
lease nor has there been a material adverse change in the financial condition of
Data I/O,  then we have the  option to extend the lease for an  additional  five
years on the same terms as the balance of the lease, except the rent shall be at
the then  prevailing  fair market rental rate. We will also have the right for a
second five-year extension by giving written notice at least six months prior to
the end of the first extension.

As part of our restructuring plan implementation,  Data I/O vacated one floor of
our leased Redmond  facility  (approximately  25,000 square feet) and has sublet
the majority of this space for a period of 28 months beginning  January 1, 2000.
This sublease ended in June 2002. We have not been successful in subleasing this
space since June 2002 and believe the market for this space is  currently  quite
limited.

NOTE 11 - STOCK AND RETIREMENT PLANS

Stock Option Plans

At December 31, 2002,  there were 1,614,623  shares of common stock reserved for
issuance of which 473,211 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. On May 15, 2002, Data I/O's shareholders  approved an
amendment to the Data I/O  Corporation  2000 Stock Incentive  Compensation  Plan
increasing the number of shares  reserved for issuance under the 2000 Plan by an
additional 200,000 shares of common stock.

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 2002, 2001 and 2000, a total of
148,876, 119,212, and 96,537 shares, respectively, were purchased under the plan
at  average  prices of $0.87,  $1.66,  and $1.78  per  share,  respectively.  At
December 31, 2002, a total of 169,115 shares were reserved for future issuance.

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
2002,  2001 and 2000 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 2002,  2001 and 2000,  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  $173,000,  $271,000,  and $275,000 in 2002,
2001 and 2000, respectively.

Share Repurchase Program

Under a previously announced share repurchase program, Data I/O is authorized to
repurchase  up to  1,123,800  shares  (approximately  14.8%) 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. Through December
31, 2002, 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.  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:
<TABLE>
<CAPTION>

                                      Employee Stock                   Employee Stock                       Director
                                         Options                        Purchase Plan                       Fee Plan
                              -------------------------------  --------------------------------  -------------------------------
                                2002       2001       2000       2002       2001       2000        2002       2001       2000
                              ---------  ---------  ---------  ---------  ---------  ----------  ---------  ---------  ---------
<S>                             <C>        <C>        <C>        <C>        <C>        <C>         <C>        <C>        <C>

Risk-free interest rates        3.80       4.81       5.65       1.66       4.86       5.94        N/A        N/A        N/A
Volatility factors               .94        .70        .63        .94        .70        .63        N/A        N/A        N/A
Expected life of the option
     in years                   4.31       4.31       4.31        .50        .50        .50        N/A        N/A        N/A
Expected dividend yield         None       None       None       None       None       None        None       None       None
</TABLE>

For purposes of pro forma  disclosures,  the estimated fair value of the options
granted,  which is estimated to be $0.92,  $1.36, $2.05 per share for 2002, 2001
and 2000,  respectively,  is  amortized  to expense  over the  options'  vesting
period.

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

<TABLE>
<CAPTION>

                                           December 31, 2002              December 31, 2001              December 28, 2000
                                      ----------------------------    --------------------------    ----------------------------
                                                     Weighted-                      Weighted-                       Weighted-
                                                      Average                        Average                         Average
                                                      Exercise                      Exercise                        Exercise
                                       Options         Price          Options         Price          Options          Price
                                    --------------- -------------   -------------  ------------   --------------- ---------------
<S>                                    <C>            <C>             <C>           <C>              <C>             <C>
Outstanding at beginning of year        1,115,508         2.89        1,128,750        2.98           946,325          2.57
   Granted                                328,000         1.33          117,500        2.35           327,500          4.00
   Exercised                               (5,000)        1.33                -           -           (99,877)         2.41
   Expired or forfeited                  (297,096)        2.48         (130,742)       3.19           (45,198)         3.06
                                    ---------------                 -------------                 ---------------
Outstanding - end of year               1,141,412         2.56        1,115,508        2.89         1,128,750          2.98
                                    ===============                 =============                 ===============

Exercisable at end of year               705,477          2.80          675,050        2.86           500,876          2.90
</TABLE>

<PAGE>

The following table summarizes  information  about stock options  outstanding at
December 31, 2002:
<TABLE>
<CAPTION>

                                        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
                       ----------------- ----------------- ------------------     --------------- ------------------
<S>                      <C>              <C>                  <C>                 <C>                <C>
    $1.16 - $1.75           476,751            3.92               1.51                197,515            1.67
    $2.20 - $3.47           345,161            3.92               2.65                251,899            2.58
    $3.48 - $4.69           301,500            2.10               3.97                238,563            3.80
    $5.00 - $5.19            18,000            1.37               5.16                 17,500            5.16
                       -----------------                                          ---------------
    $1.16-$5.19           1,141,412            3.40               2.56                705,477            2.80
                       =================                                          ===============

</TABLE>

NOTE 13 - ACCUMULATED OTHER COMPREHENSIVE LOSS

Ending  accumulated  balances for each item in accumulated  other  comprehensive
loss are as follows:
<TABLE>
<CAPTION>

(in thousands)                                                                   December 31,            December 31,
                                                                                     2002                    2001
                                                                              -------------------       ----------------
<S>                                                                              <C>                      <C>
Unrealized currency loss                                                            ($74)                   ($ 175)
Unrealized gain on marketable securities                                               -                         2
                                                                              -------------------       ----------------
Total accumulated other comprehensive loss                                          ($74)                    ($173)
                                                                              ===================       ================
</TABLE>

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.

Components of income (loss) from continuing operations before taxes:
<TABLE>
<CAPTION>

                                                                                        Year Ended December
                                                                         ---------------------------------------------------
(in thousands)                                                               2002               2001              2000
                                                                        ---------------    ---------------   ----------------
<S>                                                                         <C>                <C>              <C>
     U.S. operations                                                        ($3,506)           ($6,122)          $1,615
     Foreign operations                                                         339                336              333
                                                                        ---------------    ---------------   ----------------
                                                                            ($3,167)           ($5,786)          $1,948
                                                                        ===============    ===============   ================

Income tax expense (benefit) consists of:
     Current tax expense (benefit):
         U.S. federal                                                          (198)               (11)               -
         State                                                                    4                  6                -
         Foreign                                                                (61)               223               36
                                                                        ---------------     ---------------   ----------------
                                                                               (255)               218               36
     Deferred tax expense (benefit) - U.S. federal                              194                  6                -
                                                                        ---------------     ---------------    ---------------
            Total income tax expense (benefit)                                 ($61)            $  224          $    36
                                                                        ===============     ===============   ================
</TABLE>

For federal  income tax  purposes,  a deduction  is  received  for stock  option
compensation gains.


<PAGE>

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

                                                                                          Year Ended December
                                                                          ----------------------------------------------------
                                                                             2002               2001               2000
                                                                          ---------------   --------------    ---------------
<S>                                                                         <C>                <C>                <C>
         Statutory rate                                                      34.0%              34.0%              34.0%
         Foreign Sales Corporation tax benefit                                  -                  -               (5.3)
         State and foreign income tax, net of
            federal income tax benefit                                        1.3               (8.5)               0.3
         Valuation allowance for deferred tax assets                        (33.6)             (28.8)             (27.9)
         Other                                                                0.2               (0.6)               0.7
                                                                        ---------------    ---------------    ---------------
                                                                              1.9%               3.9%               1.8%
                                                                        ===============    ===============    ===============
</TABLE>

The tax effects of temporary  differences that gave rise to significant portions
of the deferred tax assets and deferred tax  liabilities are presented below (in
thousands):
<TABLE>
<CAPTION>

                                                                           Dec. 31,             Dec. 31,
                                                                             2002                 2001
                                                                        -------------       --------------
<S>                                                                       <C>                 <C>
Deferred income tax assets:
     Allowance for doubtful accounts                                        $   49              $   77
     Inventory and product return reserves                                   2,135               1,498
     Compensation accruals                                                     111                 123
     Accrued liabilities                                                     1,037               1,116
     Book-over-tax depreciation and amortization                               818                 904
     Foreign net operating loss carryforwards                                    5                  73
     US net operating loss carryforwards and credit carryforwards            5,969               5,162
     Other, net                                                                 16                  14
                                                                        ---------------    ----------------
                                                                            10,140               8,967
     Valuation allowance                                                   (10,140)             (8,967)
                                                                        ---------------    ----------------
         Total deferred income tax assets                                      $-                  $-
                                                                        ===============    ================

</TABLE>

The  valuation  allowance  for  deferred  tax assets  increased  $1,173,000  and
$1,985,000  during the years ended  December  31, 2002 and  December  31,  2001,
respectively,  due primarily to the taxable  losses and to credit  carryforwards
generated  in those years.  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 2021 and 2022.  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.


<PAGE>

NOTE 15 - SEGMENT AND GEOGRAPHIC INFORMATION

In 2002 and 2001,  no  customer  accounted  for 10% of Data  I/O's  consolidated
revenues.  In 2000,  one customer  accounted for 23% of Data I/O's  revenue;  no
other customer  accounted for more than 10%. Major  operations  outside the U.S.
include sales and service support subsidiaries in Germany,  Canada and China.

We present  geographic  information of the  continuing  operations for the three
years ended December 31, 2002 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.

 <TABLE>
<CAPTION>

                                                                                Year Ended December
                                                         ------------------------------------------------------------------
    (in thousands)                                            2002                     2001                      2000
                                                         ---------------          --------------           ----------------
<S>                                                          <C>                      <C>                      <C>
         Net sales:
         U.S.                                                $8,347                   $9,526                   $15,588
         Europe                                               7,662                    8,730                    19,678
         Rest of World                                        6,829                    8,570                     7,643
                                                         ---------------          --------------           ----------------
                                                            $22,838                  $26,826                   $42,909
                                                         ===============          ==============           ================

    Operating income (loss) from continuing operations:
         U.S.                                               ($2,754)                 ($4,710)                  ($3,070)
         Europe                                                 772                   (1,437)                    3,968
         Rest of World                                         (953)                     237                       174
                                                         ---------------          --------------           ----------------
                                                            ($2,935)                 ($5,910)                   $1,072
                                                         ===============          ==============           ================

    Identifiable assets of the continuing operations:
         U.S.                                               $10,273                  $13,248                   $17,808
         Europe                                               3,235                    4,059                     7,692
         Rest of World                                        2,859                    3,033                     3,246
                                                                                  --------------           ----------------
                                                         ---------------
                                                            $16,367                  $20,340                   $28,746
                                                         ===============          ==============           ================

</TABLE>


<PAGE>


NOTE 16 - QUARTERLY FINANCIAL INFORMATION (unaudited)

The following table sets forth unaudited selected  quarterly  financial data for
Data I/O for 2002 and 2001. 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  acquisitions  and  dispositions,   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.

<TABLE>
<CAPTION>

                                                                               Year Ended December 2002
(in thousands except per share data)
                                                           -----------------------------------------------------------------
For the quarters ended:                                        Mar 31          June 30          Sept 30            Dec 31
                                                           -------------    -------------    -------------     -------------
<S>                                                           <C>             <C>              <C>                <C>
     Net sales                                                 $5,389           $4,797           $6,443            $6,209
     Gross margin                                               2,502            2,005            3,271             3,504
     Income (loss) from continuing operations before cum-
        ulative effect of change in accounting principle       (1,154)          (1,368)            (833)              251
     Net income (loss)                                         (1,154)          (1,368)            (833)              251
     Basic and diluted earnings (loss) per share from
        continuing operations (1)                              ($0.15)          ($0.18)          ($0.11)            $0.03
     Basic and diluted earnings (loss) per share (1)           ($0.15)          ($0.18)          ($0.11)            $0.03

</TABLE>

 (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.

<TABLE>
<CAPTION>

(in thousands except per share data)                                           Year Ended December 2001
                                                           -----------------------------------------------------------------
For the quarters ended                                        Mar 30          June 28          Sept 30            Dec 31
                                                          -------------    -------------    -------------     -------------
<S>                                                           <C>             <C>              <C>               <C>
     Net sales                                                $7,883           $6,487           $6,479            $5,977
     Gross margin                                              2,736            2,810            3,355             2,847
     Income (loss) from continuing operations before cum-
        ulative effect of change in accounting principle      (2,147)          (1,900)            (501)           (1,238)
     Net income (loss)                                        (2,149)          (1,920)            (571)           (1,370)
     Basic and diluted earnings (loss) per share from
        continuing operations (1)                             ($0.28)          ($0.25)          ($0.07)           ($0.16)
     Basic and diluted earnings (loss) per share (1)          ($0.58)          ($0.25)          ($0.08)           ($0.18)

</TABLE>

NOTE 17 - LONG-TERM DEBT

As of December 31, 2002 and  December 31, 2001, 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.


<PAGE>

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

Not Applicable


                                    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  20,  2003  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."

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 20, 2003 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 20, 2003 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.

Item 13. Certain Relationships and Related Transactions

None.

Item 14. 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-14(c) and Rule 15d-14(c)  under the Exchange
Act) as of a date (the  "Evaluation  Date")  within 90 days  prior to the filing
date of this report. 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  significant  changes  made in our  internal  controls  or, to our
knowledge,  in other  factors that could  significantly  affect  these  controls
subsequent to the date of their evaluation.

<PAGE>


                                    PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

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 10.7.

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

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

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

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

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

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

(8) Letter Agreement with Frederick R. Hume. See Exhibit 10.21.

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

    (1) Index to Financial Statements:

        Report of Grant Thornton LLP, Independent Certified Public
        Accountants                                                      21

        Report of Ernst & Young LLP, Independent Auditors                22

        Report of Management                                             22

        Consolidated Balance Sheets as of December 31, 2002 and 2001     23

        Consolidated Statements of Operations for each of the three
        years ended December 31, 2002                                    24

        Consolidated Statements of Cash Flows for each of the three
        years ended December 31, 2002                                    25

        Consolidated Statement of Stockholders' Equity for each of
        the three years ended December 31, 2001                          26

        Notes to Consolidated Financial Statements                       27

<PAGE>


(2)  Index to Financial Statement Schedules:

          Schedule II - Consolidated Valuation and Qualifying Accounts

          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
                      March 2001.

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

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

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

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

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

          10   Material Contracts:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

               10.19  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)).

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

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

               10.22  Letter Agreement dated May 28, 1999, among
                      Data I/O Corporation, JTAG Technologies B.V.,
                      and JTAG Holding B.V.

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

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

               21.1   Subsidiaries of the Registrant                         49

               23.1   Consent of Grant Thornton LLP, Independent Certified
                      Public Accountants                                     50

               23.2   Consent of Ernst & Young LLP, Independent Auditors     50

               99.1   Certification by Chief Executive Officer               51

               99.2   Certification by Chief Financial Officer               52


(b)  Form 8-K:

            None
<PAGE>

                                   SIGNATURES


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


                                      DATA I/O CORPORATION
                                      (REGISTRANT)

DATED:   March 28, 2003               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 3-28-2003  President and Chief Executive Officer
------------------------------------
Frederick R. Hume                     (Principal Executive Officer)

By: //S//Joel S. Hatlen 3-28-2003     Chief Financial Officer
------------------------------------
Joel S. Hatlen                        Vice President
                                      Secretary, Treasurer
                                      (Principal Financial and Accounting
                                      Officer)

By: //S//Glen F. Ceiley 3-25-2003     Director
------------------------------------
Glen F. Ceiley

By: //S//Paul A. Gary 3-27-2003       Director
------------------------------------
Paul A. Gary

By: //S//Edward D. Lazowska 3-24-2003 Director
-------------------------------------
Edward D. Lazowska

By: //S//Daniel A. DiLeo 3-26-2003    Director
-------------------------------------
Daniel A. DiLeo

By: //S//Steven M. Quist 3-25-2003    Director
-------------------------------------
Steven M. Quist

<PAGE>

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  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
     a) designed such disclosure controls and procedures 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  within 90 days prior to the filing date of this  annual  report
     (the "Evaluation Date"); and
     c) presented in this annual report our conclusions  about the effectiveness
     of the disclosure controls and procedures based on our evaluation as of the
     Evaluation Date;
5)   The registrant's other certifying  officers and I have disclosed,  based on
     our  most  recent  evaluation,  to  the  registrant's  auditors  and  audit
     committee of the registrant's  board of directors (or persons of equivalent
     functions):
     a) all  significant  deficiencies  in the design or  operation  of internal
     controls which could adversely affect the  registrant's  ability to record,
     process,  summarize and report  financial data and have  identified for the
     registrant's auditors any material weakness in internal controls; 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; and
6)   The  registrant's  other  certifying  officers and I have indicated in this
     annual report whether there were significant  changes in internal  controls
     or in other  factors  that could  significantly  affect  internal  controls
     subsequent  to the  date  of our  most  recent  evaluation,  including  any
     corrective  actions with regard to  significant  deficiencies  and material
     weaknesses.

Date: March 28, 2003

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

<PAGE>

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  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
     a) designed such disclosure controls and procedures 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  within 90 days prior to the filing date of this  annual  report
     (the "Evaluation Date"); and
     c) presented in this annual report our conclusions  about the effectiveness
     of the disclosure controls and procedures based on our evaluation as of the
     Evaluation Date;
5)   The registrant's other certifying  officers and I have disclosed,  based on
     our  most  recent  evaluation,  to  the  registrant's  auditors  and  audit
     committee of the registrant's  board of directors (or persons of equivalent
     functions):
     a) all  significant  deficiencies  in the design or  operation  of internal
     controls which could adversely affect the  registrant's  ability to record,
     process,  summarize and report  financial data and have  identified for the
     registrant's auditors any material weakness in internal controls; 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; and
6)   The  registrant's  other  certifying  officers and I have indicated in this
     annual report whether there were significant  changes in internal  controls
     or in other  factors  that could  significantly  affect  internal  controls
     subsequent  to the  date  of our  most  recent  evaluation,  including  any
     corrective  actions with regard to  significant  deficiencies  and material
     weaknesses.

Date: March 28, 2003

                   /s/ Joel S. Hatlen
                  Joel S. Hatlen
                  Chief Financial Officer
                  (Principal Financial Officer)
<PAGE>


                              DATA I/O CORPORATION

          SCHEDULE II - CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>

                                                                 Charged/
                                                                (Credited)
                                              Balance at         to Costs                            Balance at
                                               Beginning            and          Deductions-           End of
                                               of Period         Expenses          Describe            Period
                                            ----------------  ----------------  ---------------  --------------------
(in thousands)
<S>                                            <C>               <C>             <C>                  <C>
Year Ended December 28, 2000:
     Reserves and allowances
        deducted from asset accounts:
        Allowance for bad debts                 $  464            $   24          ($  138) (1)        $  350
        Inventory reserves                      $4,569            $  438          ($2,420) (2)        $2,587

Year Ended December 31, 2001:
     Reserves and allowances
        deducted from asset accounts:
        Allowance for bad debts                 $  350            $   64          ($   42) (1)        $  372
        Inventory reserves                      $2,587            $1,122          ($1,240) (2)        $2,469

Year Ended December 31, 2002:
     Reserves and allowances
        deducted from asset accounts:
        Allowance for bad debts                 $  372            $ (162)            $(23) (1)        $  187
        Inventory reserves                      $2,469            $  871             $(73) (2)        $3,267

</TABLE>

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

<PAGE>

                                  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:
<TABLE>
<CAPTION>

                                                                            State or                 Percentage
                                                                          Jurisdiction                of Voting
                                                                               of                    Securities
         Name of Subsidiary                                               Organization                  Owned
        -------------------                                            -------------------        ----------------
<S>                                                                       <C>                        <C>
         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                                                  China                     100%

         Data I/O GmbH                                                       Germany                    100%

         RTD, Inc. (formerly Reel-Tech, Inc.)                              Washington                   100%
</TABLE>

<PAGE>

    CONSENT OF GRANT THORNTON LLP, INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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

We have issued our report dated February 3, 2003,  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,  2002 and 2001.  We
hereby  consent  to  the  incorporation  by  reference  of  said  report  in the
Registration  Statement  of Data I/O on Form S-8  (File  No.  333-20657  and No.
33-66824)  pertaining to the Company's  1982  Employee  Stock  Purchase Plan and
Director Fee Plan, and Registration Statements Forms S-8 (File No. 33-95608, No.
33-54422,  No.  333-55911,   No.  33-02254,  No.  33-03958  and  No.  333-48595)
pertaining to the Company's 1986 Stock Option Plan.

//s//GRANT THORNTON LLP

Seattle, Washington
March 28, 2003


              CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

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

We consent to the  incorporation  by  reference in the  Registration  Statements
(Form S-8 No. 333-81986,  No. 333-20657 and No. 33-66824) pertaining to the 1982
Employee Stock Purchase Plan and Director Fee Plan, As Amended and 1996 Director
Fee Plan, and Registration  Statements (Form S-8 No. 33-95608, No. 33-54422, No.
333-55911,  No. 33-02254,  and No. 33-03958) pertaining to the 1986 Stock Option
Plan, As Restated and Amended as of May 12, 1998 of Data I/O  Corporation of our
report dated February 7, 2001,  with respect to the  consolidated  statements of
operations,  stockholders'  equity,  and cash  flows  and  schedule  of Data I/O
Corporation for the year ended December 28, 2000,  included in the Annual Report
(Form 10-K) for the year ended December 31, 2002.

//S//ERNST & YOUNG LLP
ERNST & YOUNG LLP
Seattle, Washington
March 28, 2003

<PAGE>

Exhibit 99.1

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, 2002 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 28, 2003

<PAGE>


Exhibit 99.2

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, 2002 as filed with the  Securities
and Exchange  Commission on the date hereof (the  "Report"),  I, Joel S. Hatlen,
Chief  Financial  Officer of the Company,  certify,  that  pursuant to 18 U.S.C.
Section 1350, as adopted  pursuant to Section 906 of the  Sarbanes-Oxley  Act of
2002, that:

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


/s/ Joel S. Hatlen
Joel S. Hatlen
Chief Financial Officer
(Principal Financial Officer)
March 28, 2003






</TEXT>
</DOCUMENT>
