Data I/O
Annual Report 2015

Plain-text annual report

Letter to Shareholders 2015 Annual Report on Form 10-K Notice of 2016 Annual Meeting & Proxy Statement Award Winning LumenTMX Programming Platform Revolutionary Performance. Managed and Secure Programming. Revolutionary Value. 2015 Global Technology Award - Best Programmer 2016 Circuits Assembly NPI Award - Device Programming  Letter to Shareholders March 30, 2015 Dear Shareholder: 2015 was a year of continued progress for Data I/O. It was our third consecutive year of revenue growth, and second consecutive year of profitability. We introduced several new products and technologies, and managed our costs. We continue to lead in Automotive Programming, and are growing in Internet-of- Things (IoT) markets. New products continue to drive market share gains and growth. In 2015, we introduced the PSV5000 automated handler to fill out our line of automated handlers. We introduced the award winning LumenX programming engine, providing revolutionary performance in eMMC programming for automotive infotainment, and consumer applications. We also demonstrated best in class small parts handling for the emerging IoT security market, winning a breakthrough design against our top competitor. In 2015, 69% of our systems sales were from products we introduced in the past 2 ½ years. We continue to see strong secular growth in Automotive and IoT markets driven by new applications, significant code growth in existing applications, and the transition from manual to automated programming globally. Automotive was our largest end market in 2015, representing 39% of sales. We continue to see strong growth in infotainment systems, Advanced Driver Assist Systems (ADAS) and general electronic subsystem growth in support of autonomous vehicles sometime in the next 10 years. IoT is a broad term and growth is being driven by new applications and the ‘digitization’ of existing products and applications. Many of our new opportunities are for products that are familiar, but now require programming. Customers are demanding Managed and Secure Programming of their firmware, as well as the lowest total cost of programming. In 2016, we will continue the multiyear strategies we have outlined here. We will introduce new products and enhancements that provide managed and secure programming at the lowest the total cost for our customers. We will compete for the expanding global opportunities. We will remain focused on costs, even as we expand our served markets and customer base worldwide. We appreciate your continued support of Data I/O. Anthony Ambrose, CEO Alan Howe, Chairman (This page intentionally left blank) UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2015 or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _____________ Commission file number: 0-10394 DATA I/O CORPORATION (Exact name of registrant as specified in its charter) Washington (State or other jurisdiction of incorporation) 91-0864123 (I.R.S. Employer Identification No.) 6645 185th Ave NE, Suite 100, Redmond, Washington, 98052 (425) 881-6444 (Address, including zip code, of registrant’s principle executive offices and telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act Title of each class Common Stock (No Par Value) Name of each exchange on which registered Nasdaq Capital Market Securities registered pursuant to Section 12(g) of the Act None Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes __ No X Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes __ No X Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes _X_ No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” ”accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer __ Accelerated filer __ Non-accelerated filer __ Smaller reporting company X Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes __ No X Aggregate market value of voting and non-voting common equity held by non-affiliates on the registrant as of June 30, 2015: $25,317,395 Shares of Common Stock, no par value, outstanding as of March 24, 2016: 7,905,748 DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s Proxy Statement relating to its May 24, 2016 Annual Meeting of Shareholders are incorporated into Part III of this Annual Report on Form 10-K. 1 DATA I/O CORPORATION FORM 10-K For the Fiscal Year Ended December 31, 2015 INDEX Item 1. Business Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Properties Item 3. Legal Proceedings Item 4. Mine Safety Disclosures Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Item 6. Selected Financial Data Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions and Director Independence Item 14. Principal Accounting Fees and Services Part I Part II Part III Part IV Item 15. Exhibits, Financial Statement Schedules Signatures 2 Page 3 10 16 17 17 17 18 18 19 25 26 44 44 45 46 46 46 47 47 48 53 Item 1. Business PART I 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 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”, “We”, “Our”, “Us”) is a global market leader for advanced programming and associated intellectual property management solutions used in the manufacturing of flash, microcontrollers, and flash-memory-based intelligent devices. Data I/O® designs, manufactures and sells programming systems for electronic device manufacturers, specifically targeting high growth areas such as high-volume users of flash memory and microcontrollers. Most electronic products today incorporate one or more programmable semiconductor devices that contain data and operating instructions essential for the proper operation of the product. Our mission is to deliver high-value systems, software and services to the expanding programmable semiconductor market by providing a software-rich programming platform for content delivery. Programmable devices are used in products such as automobile electronics, smartphones, HDTV, tablets and gaming systems. Our solutions, some of which include associated intellectual property management, secure content management and process control capabilities, enable us to address the demanding requirements of the electronic device market, where applications and intellectual property protection are essential to our customer’s success. Our largest customers are heavy users of programmable semiconductor devices and include original equipment manufacturers (“OEMs”) in automotive electronics, wireless, consumer electronics and the Internet of Things (“IoT”) and their electronic manufacturing service (“EMS”) contract manufacturers. Data I/O was incorporated in the State of Washington in 1969 and its business was founded in 1972. Industry Background We enable companies to improve productivity and reduce costs by providing device programming solutions that allow our customers to take intellectual property (large design and data files) and protect and program it into memory, microcontroller and logic devices quickly and cost-effectively. We also provide services related to hardware support, system installation and repair, and device programming. Companies that design and manufacture products utilizing programmable electronic devices, ranging from automobiles to cell phones, purchase programming solutions from us. Trends of increasing device densities and customers increasing their software content file sizes, combined with the increasing numbers of intelligent devices such as automotive electronics and IoT applications, are driving demand for our solutions. Traditionally, our programming market opportunity focused on the number of semiconductor devices to be programmed, but because of the rapid increase in the density of devices, the focus has shifted in many cases from the number of devices to the number of bits per device to be programmed. With expected growth in IoT applications, the business opportunity for this market differentiates on quality and automation with increasing focus on security and very small devices. Our automated programming systems integrate both programming and handling functions into a single product solution. Quality conscious customers, particularly those in high-volume manufacturing and programming, continue to drive this portion of our business. Products In order to accommodate the expanding variety and quantities of programmable devices being manufactured today, we offer multiple solutions for the numerous types of device mix and volume usage by our customers in the various market segments and applications. We work closely with leading manufacturers of programmable devices to develop our products to meet the requirements of a particular device. Our newer products are positioned and recognized as some of the most advanced programming equipment and associated intellectual property management solutions. 3 Our PSV7000 Automated Programming System has continued to be adopted in the marketplace, in particular for automotive electronics customers, and has previously won the Global Technology Award at Productronica, the Circuits Assembly NPI Award and the EM Asia Innovation Award. Our PSV3000 Automated Programming System, developed for the local Asian automation market, was introduced in July 2014 and has previously won the Global Technology Award for Device Programming at SMTA International, the EM Asia Innovation Award and the SMT China Vision Award. Our PSV5000 automated programming system, which replaces our PS388 system with a more integrated solution at a lower cost, was introduced in April 2015. Our LumenXTM programmer won the Global Technology Award at Productronica in November 2015 and the Circuits Assembly NPI award in March 2016. In 2015, approximately 69% of our capital equipment sales came from PSV family and LumenX™ which were introduced over the last 3 years. Our programming solutions include a broad range of products, systems, modules and accessories, grouped into two general categories: automated programming systems and manual programming systems. We provide two categories of automated programming systems: off-line and in-line. Our automated systems have list selling prices ranging from $61,000 to $390,000 and our manual systems have list selling prices ranging from $9,500 to $27,000. Our common programming platform, FlashCORE™, and our universal job setup tool, Tasklink™ for Windows®, are available in each family of our automated programming systems and in FlashPAK™, our manual programming system. Our newest programming technology, LumenX™, is available on our PSV7000 and as a standalone manual programmer. 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 software algorithms for devices and developing socket adapters to hold and connect to the device for programming. Our products have both an upfront solution sale and recurring revenue elements. Adapters are a consumable item and software and maintenance are typically recurring under annual subscription contracts. We experienced a larger percentage of capital equipment sales in 2015 compared to 2014, which we believe was primarily due to a rebound in capital spending. Sales Percentage of Total Sales Breakdown by Type Sales Type Equipment Sales Adapter Sales Software and Maintenance Sales Total 2015 65% 25% 10% 100% 2014 60% 28% 12% 100% Drivers Capacity, Process improvement, Technology Capacity utilization, New customer products Installed base, Added capabilities The table below presents our main products and the key features that benefit our customers: Products PSV Handlers: Off-line (Automated) RoadRunner & RoadRunner3 Series Handlers: In-line, (Automated) Key Features   Fast program and verify speeds   Up to 114 programming sites  Up to 2000 devices per hour throughput  Supports LumenX™ and FlashCORE III programmers Supports multiple media types Supports quality options – fiber laser marking, 3D coplanarity Factory Integration Software & other Software Just-in-time in-line programming    Direct integration with placement machine supporting SIPLACE, Fuji NXT, Panasonic, Universal/Genesis and Assembleon Factory Integration Software Supports FlashCORE III programmers   Customer Benefits  Managed and secure programming  High throughput for high density Flash programming  High flexibility with respect to I/O options (tray, tape, tube), marking/labeling and vision for coplanarity inspection  Dramatic reduction in inventory carrying and rework costs “Zero” footprint   Rapid return on investment (“ROI”) typically realized in a matter of months Integration with factory systems  4 Key Features Extensible architecture for fast program, verify and download speeds Large file size support Secure Job creation 8 sockets with tool-less changeover with single socket adapters Scalability   Network control via Ethernet   Stand-alone operation or PC compatible Parallel programming Customer Benefits  Managed and secure programming Fast setup and job changeover   Highest yield and low total cost of programming  Validate designs before moving down the firmware supply chain  Unmatched ease of use in manual production systems  Breadth of device coverage  Universal programmer Products LumenXTM Programmer     FlashPAK III programmer: (Non-Automated) Sprint/Unifamily programmers: Off-line, Low Volume and Engineering (Non-Automated) (Legacy Equipment) Customers/Markets We sell our solutions to customers worldwide, many of whom are world-class manufacturers of electronic devices used in a broad range of industries, as described in the following table: Notable end customers Business drivers Programming equipment drivers Customer Types Automotive Electronics Delphi, Bosch, Alpine, Visteon, Kostal, Harman Becker, Denso, Continental, Panasonic, Magna, Magnetti Marelli Safety, navigation and infotainment devices, increased electronic content to support autonomous driving Process improvement and simplification, new product rollouts, growing file sizes, quality control and traceability OEMs IoT, Industrial, Consumer Electronics Square D, Siemens, Danfoss, Philips, Schneider, Endress+Hauser, Pilz, Insta, Carrier, Microsoft, Sony, Amazon, UTC Higher functionality driven by increasing electronic content. Shift from analog to connected intelligent devices, security Process improvement and simplification as well as new product rollouts Wireless LG, TCL, Blackberry, Sony, HTC, ZTE EMS Contract Manufacturers Pegatron, Flextronics, Jabil, Wistron, Sanmina SCI, Foxconn, Leesys, Calcomp Programming Centers Arrow, Avnet, BTV, HTV, CPS, EPS, Elmitech, Noa(Toshiba) Applications, features & functionality of converged devices, large memories, security Rollout of new products that incorporate higher functionality, more memory and new technology, e.g. e-MMC Acquisition of OEM factories, production contract wins Value-added services, logistics New contracts from OEMs, programming solutions specified by OEMs Capacity utilization of their installed base of equipment, small parts handling, security 5 Buying criteria Quality, reliability, configuration control, traceability, security Quality, reliability, configuration control, traceability, global support, intellectual property protection Throughput, technical capability to support evolving technology, global support, intellectual property protection, robust algorithms, low cost Lowest equipment procurement cost, global support Flexibility, lowest life- cycle cost-per programmed- part, low changeover time; use of multiple vendors provides negotiating leverage, device support availability Our solutions address the programming of devices. Semiconductor devices are a large, growing market, both in terms of devices and bits programmed. We believe that our sales are driven by many of the same forces that propel the semiconductor industry. We sell to the same firms that buy the semiconductors. When their business grows, they buy more semiconductors which, in turn, require additional programming equipment to maintain production speeds or program new device technologies, driving demand for our products or alternative programming methods. Our device programming solutions currently target two high growth, high volume markets: automotive electronics and IoT systems including Industrial and Consumer devices. We have derived estimates of the size of the pre-programming served available market that our programming systems address. We believe this market is expected to double over the next five years based on BI Intelligence estimates of IOT Unit Growth through 2019 and key automotive electronics forecasts. These forecasts include: Global Automotive Infotainment Operating System Sales Forecast by IHS Automotive, showing unit growth doubling over four years, as well as OEM Light Vehicle ADAS (Advanced Driver Assist Systems) Spend by Strategy Analytics for spending growth projected by year through 2021. Based on these market forecasts and assuming sustained capital spending in our other pre- programming market sectors, we believe we are well-positioned for growth in 2016 and beyond. Growth drivers for automotive electronics  Consumers desire advanced car features requiring higher levels of sophistication including infotainment products (audio, radio, dashboard displays, navigation and wireless connectivity) as well as increased safety features and optimized engine functionality Increasing numbers and size of microcontrollers per vehicle Proliferation of programmable microcontrollers to support the next-generation electronic car systems Increasing use of high-density flash to provide memory for advanced applications that require programming Increasing complexity to support autonomous vehicles     Securely controlling groups of connected devices Growth drivers for IoT: including industrial and consumer devices   Adding intelligence and processing into devices   Connecting previously unconnected devices to networks and the internet (such as intelligent thermostats and lighting) Emergence of new devices and applications (such as wearables) During 2015, we sold products to over 400 customers throughout the world. The following customers represented greater than 10% of sales in the applicable year: 2015 2014 2013 One customer, Data Copy Limited, our distributor in China accounted for approximately 15% of net sales. One customer, Data Copy Limited, our distributor in China accounted for approximately 12% of net sales. Two customers, Data Copy Limited, our distributor in China and Di-Tek Corporation, our distributor in Korea accounted for approximately 14% and 13% of net sales, respectively. 6 The following customers represented greater than 10% of our consolidated accounts receivable balance as of December 31 of the applicable year: 2015 2014 2013 Four customers accounted for greater than 10% of our consolidated accounts receivable balance at December 31, 2015: Data Copy Limited, our distributor in China and LeChamp, our distributor in south- east Asia, together represented 37% of that balance and our direct customers, Flextronics and Arrow, together represented 23%. No customers represented greater than 10% of our consolidated accounts receivable. Avnet accounted for approximately 12% of our consolidated accounts receivable. Geographic Markets and Distribution We market and sell 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 and realign them as necessary to ensure that we reach our existing and potential customers in the most effective and efficient manner possible. 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 direct telesales. Our U.S. independent sales representatives obtain orders on an agency basis, with shipments made directly to the customer by us. Net sales in the United States for 2015, 2014 and 2013 were (in millions) $2.2, $2.1 and $2.3 respectively. Some of our customer’s orders delivered internationally are heavily influenced by U.S. sales based efforts. International Sales International sales represented approximately 90%, 90% and 88% of net sales in 2015, 2014, and 2013, respectively. We make foreign sales through our wholly-owned subsidiaries in Germany and China, as well as through independent distributors and sales representatives located in 47 other countries. Our independent foreign distributors purchase our products for resale and we generally recognize the sale at the time of shipment to the distributor. As with U.S. sales representatives, sales made by international sales representatives are on an agency basis, with shipments made directly to the customer by us. Net international sales for 2015, 2014, and 2013 were (in millions) $19.8, $19.8 and $16.4, respectively. We determine international 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. International 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 difficulties to date as a result of these requirements. We have not made sales to Iran or any Iranian governmental entities or any other blacklisted companies or countries. 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 international sales. We cannot predict the effect of such factors on our business, but we try to consider and respond to changes in these factors, particularly as the majority of our costs are U.S. based while the vast majority of our sales are international. According to the Board of Governors of the Federal Reserve System (US), the U.S. Dollar strengthened on a trade weighted basis approximately 20% during 2015. This made our products priced in U.S. Dollars cost on average 20% more in a local currency or sales by our subsidiaries in their functional currency translate into less sales in U.S. Dollars. Competition The competition in the programming systems market is highly fragmented with a small number of organizations selling directly competitive solutions and a large number of smaller organizations offering less expensive solutions. In particular, low cost automated solutions have gained market share in recent years, where the competition is primarily based on price. Typically, their equipment meets a “good enough” standard, but with reduced quality, traceability, and other software features such as factory integration software. Many of these competitors compete on a regional basis, with local language and support. 7 In addition, we compete with multiple substitute forms of device programming including “home grown” solutions. Programming after device placement may be done with In System Programming (“ISP”). Some automotive products may also be programmed over the air (“OTA”). IoT devices may also be programmed with ISP or OTA. In addition, new security devices may be required to be programmed using device-specific programmers developed by the semiconductor manufacturer. While we are not aware of any published industry market information covering the programming systems market, according to our internal analysis of competitors’ revenues, we believe we continue to be the largest competitor in the programming systems equipment market and have been gaining market share especially with our new products. Business Restructure No additional restructuring activities were taken by Data I/O in 2015 or 2014 and our previous years’ restructure actions have been fully implemented. As a result of the lease amendment discussed in Note 7, “Operating Lease Commitments”, in July 2015, the balance of the restructure liability of approximately $120,000 was incorporated into our deferred rent liability as part of the new lease incentive. Manufacturing, Raw Materials and Backlog We strive to manufacture and provide the best solutions for advanced programming. We primarily assemble and test our products at our principal facilities in Redmond, Washington and Shanghai, China. We outsource our circuit board manufacturing and fabrication. We use a combination of standard components, proprietary custom integrated circuits (“ICs”) and fabricated parts manufactured to our specifications. Most components used are available from a number of different suppliers and subcontractors but certain items, such as some handler and programmer subassemblies, custom integrated circuits, hybrid circuits and connectors, are purchased from single sources. We believe that additional sources can be developed for present single-source components without significant difficulties in obtaining supplies. We cannot be sure that single-source components will always continue to be readily available. If we cannot develop alternative sources for these components, or if we experience deterioration in relationships with these suppliers, there may be price increases, minimum order quantities and 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 $700,000, $1,900,000, and $1,900,000 as of December 31, 2015, 2014, and 2013, respectively. The size of backlog at any particular date is not necessarily a meaningful indicator of the trend of our business. Research and Development We believe that continued investment in research and development is critical to our future success. We continue to develop new technologies and products and enhance existing products. Future growth is, to a large extent, dependent upon the timely development and introduction of new products, as well as the development of algorithms to support the latest programmable devices. Where possible, we may pursue partnerships and other strategic relationships to add new products, capabilities and services. We are currently focusing our research and development efforts on strategic growth markets, namely new programming technology and automated handling systems for managed and secure programming in the manufacturing environment, including new programmer technologies, support for the latest flash memories and microcontrollers, and new software capabilities. We also continue to focus on increasing our capacity and responsiveness for new device support requests from customers and programmable integrated circuit manufacturers by revising and enhancing our internal processes and tools. Our research and development efforts have resulted in the release of significant new products and product enhancements: 2013 – released our PSV7000 automated programming system; 2014 – released our PSV3000 automated programming system and enhancements for the PSV7000; 2015 - released our new LumenX programmer, our new PSV5000 programming system and enhancements for our PSV Systems. During 2015, 2014, and 2013, we made expenditures for research and development of (in millions) $4.7, $4.7, and $4.6, respectively, representing 21.4%, 21.5%, and 24.5% of net sales, respectively. Research and development costs are generally expensed as incurred. 8 Patents, Copyrights, Trademarks and Licenses We rely on a combination of 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 continue to apply for and add new patents to our patent portfolio as we develop strategic new technologies. We attempt to protect our rights in proprietary software, including LumenX software, Flashcore software, TaskLink software, Factory Integration software and other software products, by retaining the title to and copyright of the software and documentation, by including appropriate contractual restrictions on use and disclosure in our licenses, and by requiring our employees to execute non-disclosure agreements. Our software products are not typically sold separately from sales of programming systems. However, on those occasions where software is sold separately, revenue is recognized when a sales agreement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured. 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 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. As of December 31, 2015, there were no pending actions regarding infringement claims. Employees As of December 31, 2015, we had a total of 88 employees, of which 43 were located outside the U.S. and 7 of which were part time. We also utilize independent contractors for specialty work, primarily in research and development, and utilize temporary workers to adjust capacity to fluctuating demand and for special projects. 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. In foreign countries we have employment agreements or, in China, the Shanghai Foreign Services Co., Ltd. (“FSCO”) labor agreement. 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 24, 2016: Name Age Position Anthony Ambrose 54 President and Chief Executive Officer Joel S. Hatlen 57 Vice President and Chief Financial Officer Secretary and Treasurer Rajeev Gulati 52 Chief Technology Officer, Vice President of Engineering Anthony Ambrose joined Data I/O in October 2012 and is our President and Chief Executive Officer. He was appointed to the Board of Directors of Data I/O in October 2012. Prior to Data I/O, Anthony was Owner and Principal of Cedar Mill Partners, LLC, a strategy consulting firm. Until 2011, he was Vice President and General Manager at RadiSys Corporation, a leading provider of embedded wireless infrastructure solutions, where he led three product divisions and worldwide engineering. At RadiSys, he established the telecom platform business and grew it to over $125M in annual revenues. Until 2007, he was general manager and held several other progressively responsible positions at Intel Corporation, where he led development and marketing of standards based telecommunications platforms, and grew the industry standard server 9 business to over $1B in revenues. He is a member of the EvergreenHealth Foundation Board of Trustees. Mr. Ambrose has a Bachelors of Science in Engineering from Princeton University. Joel S. Hatlen joined Data I/O in September 1991 and is our Vice President, Chief Financial Officer, Secretary and Treasurer since January 1998. He served as Chief Accounting Officer since February 1997 and served as Corporate Controller from December 1993 to December 1997. Previously, he was Tax Manager and Senior Tax Accountant. From September 1981 until joining Data I/O, Joel was employed by Ernst & Young LLP as a Certified Public Accountant, where his most recent position was Senior Manager. Joel holds a Masters in Taxation from Golden Gate University and a Bachelors in Business Administration in Accounting from Pacific Lutheran University. Rajeev Gulati joined Data I/O in July 2013 and is our Chief Technology Officer and Vice President of Engineering. Prior to Data I/O, Rajeev served as Director of Software Engineering for AMD responsible for tools, compiler strategy and execution from 2006 to 2013. He has an extensive background in software, systems and applying technology to develop new markets. Previously, he served as Director of Strategy and Planning at Freescale from 2004 to 2006; as Director of Embedded Products at Metrowerks (acquired by Motorola) from 2000 to 2004 and Director of Compilers, Libraries & Performance Tools from 1997 to 2000; and engineering and programmer positions at Apple Computer, IBM and Pacific- Sierra Research. Rajeev holds a Master of Science in Electrical & Computer Engineering from the University of Texas, Austin and a BE in Electrical Engineering from Delhi College of Engineering, New Delhi. Item 1A. Risk Factors Cautionary Factors That May Affect Future Results Our 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, expected market growth, new technologies, establishing foreign operations, future performance or results of current and anticipated products, sales efforts, expenses, outsourcing of functions, outcome of contingencies, impact of regulatory requirements, restructure actions and financial results. Any or all of the forward-looking statements in this Annual Report or in any other public statement made may turn out to be wrong. They can be affected by inaccurate assumptions we might make, or known or unknown risks and uncertainties can affect these forward-looking statements. Many factors -- for example, product competition and product development -- will be important in determining future results. Moreover, neither Data I/O nor anyone else assumes responsibility for the accuracy and completeness of these forward-looking statements. Actual future results may materially vary. We undertake no obligation to publicly update any forward-looking statements after the date of this Annual Report, whether as a result of new information, future events or otherwise. The reader should not unduly rely on our forward- looking statements. The reader is advised, however, to consult any future disclosures we make on related subjects in our 10- Q, 8-K and 10-K reports to the SEC and press releases. Also, note that we provide the following cautionary discussion of risks, uncertainties and possible inaccurate assumptions relevant to our business. These are factors that we think could cause our actual results to differ materially from expected and historical results. Other factors besides those listed here could also adversely affect us. This discussion is permitted by the Private Securities Litigation Reform Act of 1995. RISK FACTORS Delays in development, introduction and shipment of new products or services may result in a decline in sales or increased costs. We develop new engineering and automated programming systems and services. Significant technological, supplier, manufacturing or other problems may delay the development, introduction or production of these products or services. For example, we may encounter these problems:   technical problems in the development of a new programming system platform or the robotics for new automated handing systems inability to hire qualified personnel or turnover in existing personnel 10   delays or failures to perform by us or third parties involved in our development projects development of new products or services that are not accepted by the market These problems may result in a delay or decline in sales or increased costs. Quarterly fluctuations in our operating results may adversely affect our stock price. Our 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:    increased competition timing of new product announcements and timing of development expenditures product or service releases and pricing changes by us or our competitors  market acceptance or delays in the introduction of new products or services               production constraints quality issues labor or material timing of significant orders timing of installation or customer acceptance requirements sales channel mix of direct vs. indirect distribution civil unrest, war or terrorism health issues (such as the outbreak of a virus impacting workers or travel) customers’ budgets adverse movements in exchange rates, interest rates or tax rates cyclical and seasonal nature of demand for our customers’ products general economic conditions in the countries where we sell products expenses and obtaining authorizations in setting up new operations or locations facilities relocations Due to any of the foregoing factors, it is possible that in some future quarters, our operating results will be below expectations of analysts and investors. Our international operations may expose us to additional risks that may adversely affect our business. International sales represented approximately 90%, 90%, and 88% of our net sales for the fiscal years ended December 31, 2015, 2014, and 2013, respectively. 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:  fluctuations in foreign currency exchange rates; with a significant impact due to the 2015 strength of the U.S. Dollar and relative weakness of the Euro, as 39% of our 2015 sales were European-based and of those, a large portion of sales through our German subsidiary are denominated in Euros. Because 90% of our sales are to international markets, volatile exchange rates may also impact our competiveness and margins  economic uncertainty related to the European sovereign debt situation 11  migration of manufacturing to low cost geographies         unexpected changes in regulatory requirements tariffs and taxes difficulties in staffing and managing foreign operations longer average payment cycles and difficulty in collecting accounts receivable compliance with applicable export licensing requirements and the Foreign Corrupt Practices Act product safety and other certification requirements difficulties in integrating foreign and outsourced operations civil unrest, political and economic instability Because we have customers located throughout the world, we have significant foreign receivables. We may experience difficulties in collecting these amounts as a result of payment practices of certain foreign customers, economic uncertainty and regulations in foreign countries, the availability and reliability of foreign credit information, and potential difficulties in enforcing collection terms. The European Union and European Free Trade Association (“EU”) has established certain electronic emission and product safety requirements (“CE”). As applicable, our products currently meet these requirements; however, failure to obtain either a CE certification or a waiver for any product may prevent us from marketing that product in Europe. The EU also has directives concerning the Reduction of Hazardous Substances (“RoHS”) and we believe we are classified within the EU RoHS Directive category list as Industrial Monitoring and Control Equipment (category 9), which is out of scope until the enforcement date of July 2017. Failure to meet applicable directives or qualifying exemptions may prevent us from marketing certain products in Europe or other territories with similar requirements. We have subsidiaries in Germany, China, Hong Kong, Brazil and Canada and large balances of cash are in our foreign subsidiaries (with 31% in China). Our business and financial condition is sensitive to currency exchange rates and any restrictions imposed on their currencies including restrictions on repatriations of cash. Any repatriation of cash could result in tax costs and corresponding deferred tax assets with related tax valuation allowances. Currency exchange fluctuations in these countries may adversely affect our investment in our subsidiaries. A decline in economic and market conditions may result in delayed or decreased capital spending and delayed or defaulted payments from our customers. Our business is highly impacted by capital spending plans and other economic cycles that affect the users and manufacturers of integrated circuits. These industries are highly cyclical and are characterized by rapid technological change, short product life cycles and fluctuations in manufacturing capacity and pricing and gross margin pressures. As we experienced in recent prior years, our operations may in the future reflect substantial fluctuations from period-to-period as a consequence of these industry patterns, general economic conditions affecting the timing of orders from major customers, and other factors affecting capital spending. In a difficult economic climate it may take us longer to receive payments from our customers and some of our customers’ business may fail, resulting in non-payment. Our market growth forecasts and related business decisions may be wrong. These factors could have a material adverse effect on our business and financial condition. Failure to adapt to technology trends in our industry may impact our competitiveness and financial results. Product and service technology in our industry evolves rapidly, making timely product innovation essential to success in the marketplace. Introducing products and services with improved technologies or features may render our existing products obsolete and unmarketable. Technological advances and trends that may negatively impact our business include:   new device package types, densities, chip interfaces and technologies requiring hardware and software changes in order to be programmed by our products, particularly certain segments of the high density flash memory markets where after placement programming is recommended by the semiconductor manufacturers reduction in semiconductor process geometries for certain Multi Level Cell (MLC) and Triple Level Cell (TLC) NAND and eMMC FLASH memories impact the product data retention through Surface Mount Technology (SMT) reflow or X-ray 12 inspection. Improper SMT process control can negatively impact the end customer’s ability to successfully program devices prior to placement in manufacturing. This can cause them to change their programing methods away from pre- programming to post placement programming techniques, including ISP. Data I/O is working with semiconductor manufacturers to develop best practices to minimize the impact of reflow and potential concerns about X-ray induced data loss.     electronics equipment manufacturing practices, such as widespread use of in-circuit programming or downloading adoption of proprietary security and programming protocols and additional security capabilities and requirements customer software platform preferences different from those on which our products operate customer adoption of newer semiconductor device technologies such as UFS memory or device interface methods such as PCI, particularly if these technologies are adopted by automotive electronics, IoT or wireless customers  more rigid industry standards, which would decrease the value-added element of our products and support services If we cannot develop products or services in a timely manner in response to industry changes, or if our products or services do not perform well, our business and financial condition may be adversely affected. Also, our new products or services 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. Failure to adapt to increasing automotive electronics customer requirements Quality standards and business requirements by our automotive electronics customers, driven in turn by their automotive manufacturer customers, may demand processes, and certifications at a higher level than we currently are structured to provide. For example, we may be required to meet the ISO 9001 standard with certified audits or other quality standards. In addition, contractual provisions may expose us to greater potential liability and costs and we may be required to provide higher service levels than we currently provide. If we cannot adapt to these industry requirements or manage these contractual provisions, our business may be adversely affected. We have a history of recent operating losses and may be unable to generate enough revenue to achieve and maintain profitability. We have incurred operating losses in two of the last five years and four of the last ten years. We operate in a cyclical industry. We will continue to examine our level of operating expense based upon our projected revenues. Any planned increases in operating expenses may result in losses in future periods if projected revenues are not achieved. As a result, we may need to generate greater revenues than we have recently in order to maintain profitability. However, we cannot provide assurance that our revenues will continue to increase and our business strategies may not be successful, resulting in future losses. We may face increased competition and may not be able to compete successfully with current and future competitors. Technological advances have reduced the barriers of entry into the programming systems market. We expect competition to increase from both established and emerging companies. If we fail to compete successfully against current and future sources of competition, our profitability and financial performance will be adversely impacted. If our relationships with semiconductor manufacturers deteriorate, our business may be adversely affected. We work closely with most semiconductor manufacturers to ensure that our programming systems comply with their requirements. In addition, many semiconductor manufacturers recommend our programming systems for use by users of their programmable devices. Consolidation within the semiconductor industry may impact us. These working relationships enable us to keep our programming systems product lines up to date and provide end-users with broad and current programmable device support. As technology changes occur that limit the effectiveness of pre-placement programming, particularly for very small high density NAND, e-MMC and UFS devices, certain semiconductor manufacturers may not recommend or may not continue recommending our programming systems for these devices. Our business may be adversely affected if our relationships with semiconductor manufacturers deteriorate. Our reliance on a small number of suppliers may result in a shortage of key components, which may adversely affect our business, and our suppliers may experience financial difficulties which could impact their ability to service our needs. 13 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, if we experience deterioration in our relationship with these suppliers, or if these suppliers require financing, which is not available, 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 have a materially adverse effect on our business. For suppliers who discontinue parts, we may be required to make lifetime purchases covering future requirements. Over estimation of demand or excessive minimum order quantities will lead to excess inventories that may become obsolete. Certain of our sockets, parts, subassemblies and boards are currently manufactured to our specifications by third-party foreign contract manufacturers and we are sourcing certain parts or options from foreign manufacturers. We may not be able to obtain a sufficient quantity of these products if and when needed or the quality of these parts or options may not meet our standards, which may result in lost sales. If we are unable to attract and retain qualified third-party distributors and representatives, our business may be adversely affected. We have an internal sales force and also utilize third-party distributors and representatives. Therefore, the financial stability of these distributors and representatives is important. Their ability to operate, timely pay us, and to acquire any necessary financing may be affected by the current economic climate. Highly skilled professional engineers use most of our products. To be effective, third-party distributors and representatives must possess significant technical, marketing, customer relationships 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 and representatives. Our business will suffer if we cannot attract and retain a sufficient number of qualified third-party distributors and representatives to market our products. If we are unable to protect our intellectual property, we may not be able to compete effectively or operate profitably. We rely on patents, copyrights, trade secrets and trademarks to protect our intellectual property, as well as product development and marketing skill to establish and protect our market position. We attempt to protect our rights in proprietary software products, including our user interface, product firmware, software module options and other software products by retaining the title to and copyright of the software and documentation, by including appropriate contractual restrictions on use and disclosure in our licenses, and by requiring our employees to execute non-disclosure agreements. Because of the rapidly changing technology in the semiconductor, electronic equipment and software industries, portions of our products might possibly infringe upon existing patents or copyrights, and we may be required to obtain licenses or discontinue the use of the infringing technology. We believe that any exposure we may have regarding possible infringement claims is a reasonable business risk similar to that assumed by other companies in the electronic equipment and software industries. However, any claim of infringement, with or without merit, could be costly and a diversion of management’s attention, and an adverse determination could adversely affect our reputation, preclude us from offering certain products, and subject us to substantial liability. We may pursue business acquisitions that could impair our financial position and profitability. We may pursue acquisitions of complementary technologies, product lines or businesses. Future acquisitions may include risks, such as:      burdening management and our operating teams during the integration of the acquisition diverting management’s attention from other business concerns failing to successfully integrate or monetize the acquired products or technologies lack of acceptance of the acquired products by our sales channels or customers entering markets where we have no or limited prior experience 14   potential loss of key employees of the acquired company additional burden of support for an acquired programmer architecture Future acquisitions may also impact our financial position. For example, we may use significant cash or incur debt, which would weaken our balance sheet, or issue additional shares, potentially diluting existing shareholders. We may also capitalize goodwill and intangible assets acquired, the impairment of which would reduce our profitability. We cannot guarantee that future acquisitions will improve our business or operating results. The loss of key employees may adversely affect our operations. We have employees located in the U.S., Germany and China. We also utilize independent contractors for specialty work, primarily in research and development, and utilize temporary workers to adjust capacity to fluctuating demand. Many of our employees are highly skilled and our continued success will depend in part upon our ability to attract and retain employees who can be in great demand within the industry. None of our employees are represented by a collective bargaining unit and we believe relations with our employees are favorable, though no assurance can be made that this will be the case in the future. In China, our workers are “leased” with the arrangements made under the “FSCO” labor agreement and we could be adversely affected if we were unable to continue that arrangement. Failure to comply with increasing regulatory requirements may adversely affect our stock price and business. As a public company, we are subject to numerous governmental and stock exchange requirements, with which we believe we are in compliance. Our failure to meet regulatory requirements and exchange listing standards may result in actions such as: the delisting of our stock, impacting our stock’s liquidity; SEC enforcement actions; and securities claims and litigation. The Sarbanes-Oxley Act of 2002 and the Securities and Exchange Commission (SEC) have requirements that we may fail to meet or we may fall out of compliance with, such as the internal controls auditor attestation required under Section 404 of the Sarbanes-Oxley Act of 2002, with which we are not currently required to comply as we are a smaller reporting company. We assume that we will continue to have the status of a smaller reporting company based on the aggregate market value of the voting and non-voting shares held as of June 30, 2015. If we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. Moreover, effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to help prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could drop significantly. While we have policies and procedures in place designed to prevent corruption and bribery, because our business is significantly international, violations of the Foreign Corrupt Practices Act (FCPA) could have a significant adverse effect on our business due to the disruption and distraction of an investigation, financial penalties and criminal penalties. Government regulations regarding the use of "conflict" minerals could adversely affect our prospects and results of operations. Regulatory requirements regarding disclosure of our use of “conflict” minerals mined from the Democratic Republic of Congo and adjoining countries could affect the sourcing and availability of minerals used in the manufacture of certain products. Although we do not buy raw materials, manufacture, or produce any electronic equipment using conflict minerals directly, some components provided by our suppliers and contained in our products contain conflict minerals. Our goal is for our products to be conflict free. As a result, there may only be a limited pool of suppliers who provide conflict free metals, and we cannot assure you that we will be able to obtain products in sufficient quantities or at competitive prices. Single source suppliers may not respond or respond negatively regarding conflict mineral sourcing and we may be unable to find alternative sources to replace them. Also, because our supply chain is complex, we may face reputational challenges with our customers and other stakeholders if we are unable to sufficiently verify the origins for all metals used in the products that we sell. Further, if we are unable to comply with the new laws or regulations or if our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us. We may need to incur 15 additional costs and invest additional resources, including management’s time, in order to comply with the new regulations and anticipated additional reporting and disclosure obligations. We may need to raise additional capital and our future access to capital is uncertain. Our past revenues have sometimes been, and our future revenues may again 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, lease 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 that we have sufficient cash or working capital available under our operating plan to fund our operations and capital requirements through at least the next one-year period. In the event we may require additional cash for U.S. operations or other needs, it may cause the potential repatriation of cash from the $6.2 million held in our foreign subsidiaries. Although we have no current repatriation plans, there may be tax, legal and other impediments to any repatriation actions. Our working capital may be used to fund possible losses, business growth, project initiatives, share repurchases and business development initiatives including acquisitions, which could reduce our liquidity and result in a requirement for additional cash before that time. Any substantial inability to achieve our current business plan could have a material adverse impact on our financial position, liquidity, or results of operations and may require us to reduce expenditures and/or seek additional financing. 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 given the current economic climate and our financial results, 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. Our stock price may be volatile and, as a result, you may lose some or all of your investment. The stock prices of technology companies tend to fluctuate significantly. We believe factors such as announcements of new products or services by us or our competitors and quarterly variations in financial results and outlook may cause the market price of our 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 our Common Stock. Cyber security breaches or terrorism could result in liabilities or costs as well as damage to or loss of our data or customer access to our website and information systems. The collection, storage, transmission, use and disclosure of user data and personal information, if accessed improperly, could give rise to liabilities or additional costs as a result of laws, governmental regulations and evolving views of personal privacy rights. Cyber security breaches or terrorism could result in the exposure or theft of private or confidential information as well as interrupt our business, including denying customer access to our website and information systems. We transmit, and in some cases store, end-user data, including personal information. In jurisdictions around the world, personal information is becoming increasingly subject to legislation and regulations intended to protect consumers’ privacy and security. The interpretation of privacy and data protection laws and regulations regarding the collection, storage, transmission, use and disclosure of such information in some jurisdictions is unclear and evolving. These laws may be interpreted and applied in conflicting ways from country to country and in a manner that is not consistent with our current data protection practices. Complying with these varying international requirements could cause us to incur additional costs and change our business practices. Because our services are accessible in many foreign jurisdictions, some of these jurisdictions may claim that we are required to comply with their laws, even where we have no local entity, employees or infrastructure. We could be forced to incur significant expenses if we were required to modify our products, our services or our existing security and privacy procedures in order to comply with new or expanded regulations. Item 1B. Unresolved Staff Comments None. 16 Item 2. Properties During the second quarter of 2015, we amended our lease agreement for the Redmond, Washington headquarters facility effective July 8, 2015. The amended lease resulted in our headquarters relocating to a nearby building, extending the term through April 2021, lowering the square footage to approximately 20,460, providing lease inducement incentives and lowering the rental rate. The new lease commitment of approximately $1.7 million will be paid over the term of the lease. As a result of this lease amendment, the remaining balance of the restructure liability relating to the lease of approximately $120,000 was incorporated into our deferred rent liability in July, 2015. The lease base annual rental payments during 2015, 2014, and 2013 were approximately $296,000, $531,000, and $501,000, respectively. In addition to the Redmond facility, approximately 14,000 square feet is leased at two foreign locations, including our German sales, service and engineering operations located in Munich, Germany, and a sales, service, operations and engineering office located in Shanghai, China. During the first quarter of 2014, we renewed our lease agreement for our Munich, Germany facility effective February 1, 2015 and extending the term through January 2018 and lowering the square footage to approximately 4,306 square feet. Effective June 1, 2014, the landlord was able to lease the excess space abandoned as part of Q2 2013 restructure actions to another tenant and the lease was revised to end May 31, 2017. During the second quarter of 2015, we renewed our lease agreement for our Shanghai, China facility, effective June 15, 2015, extending the term through December 31, 2015. Operations were arranged to continue in this facility through January 31, 2016. In October 2015, we signed a lease agreement for a new facility located in Shanghai, China which was effective November 1, 2015 and extends through October 31, 2021. The new lease will approximately double our space to 19,400 square feet at approximately 54% of the current lease rate. In February 2016, we moved our Shanghai operations into this new facility. Item 3. Legal Proceedings From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of December 31, 2015, we were not a party to any legal proceedings or aware of any indemnification agreement claims, 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. Item 4. Mine Safety Disclosures Not Applicable. 17 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The following table shows, for the periods indicated, the high and low price information for our Common Stock as reported by the NASDAQ Capital Market (NASDAQ symbol is DAIO). The closing price was $2.52 on December 31, 2015. 2015 2014 Period Fourth Quarter Third Quarter Second Quarter First Quarter Fourth Quarter Third Quarter Second Quarter First Quarter High $3.20 3.62 3.80 3.75 $3.83 3.63 3.15 3.48 Low $2.34 2.26 2.85 3.01 $2.92 2.67 2.18 2.16 The approximate number of shareholders of record as of March 24, 2016 was 482. Except for special cash dividend of $4.15 per share paid on March 8, 1989, we have not paid cash dividends on our Common Stock and do not anticipate paying regular cash dividends in the foreseeable future. No sales of unregistered securities were made by us during the periods ended December 31, 2015 and 2014. See Item 12 for the Equity Compensation Plan Information. ISSUER PURCHASES OF EQUITY SECURITIES Not applicable for 2015. On February 24, 2016, our Board of Directors approved a share repurchase program with provisions to buy back up to $1 million dollars of our stock during the period from March 2, 2016 through March 31, 2017. The program is expected to be established under a 10b5-1 plan under the Exchange Act to provide flexibility to make purchases throughout the period. Item 6. Selected Financial Data Not applicable. 18 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 economic outlook, industry prospects and trends; future results of operations or financial position; breakeven revenue point; expected market growth; integration of acquired products and operations; market acceptance of our newly introduced or upgraded products or services; development, introduction and shipment of new products or services; changing foreign operations; and any other guidance on future periods are forward- looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, achievements, or other future events. Moreover, neither Data I/O nor anyone else assumes responsibility for the accuracy and completeness of these forward-looking statements. We are under no duty to update any of these forward-looking statements after the date of this Annual Report. The Reader should not place undue reliance on these forward-looking statements. The following discussions and the section entitled “Risk Factors – Cautionary Factors That May Affect Future Results” describes some, but not all, of the factors that could cause these differences. OVERVIEW We continued our focus on managing the core programming business profitably, while developing and enhancing products to drive future revenue and earnings growth. Our challenge continues to be operating in a cyclical and rapidly evolving industry environment. We are continuing our efforts to balance business geography shifts, exchange rate volatility, increasing costs and strategic investments in our business with the level of demand and mix of business we expect. We continue to manage our costs carefully and create strategies for cost reduction. We are focusing our research and development efforts in our strategic growth markets, namely new programming technology, automated programming systems and their enhancements for the manufacturing environment and software. We continue to focus on extending the capabilities and support for our product lines and supporting the latest semiconductor devices, including NAND Flash, e-MMC, and microcontrollers on our newer products. In 2015, we announced our new PSV5000 and our new LumenX™ programmer. Our customer focus has been on strategic high volume manufacturers in key market segments like automotive electronics, IoT (Internet of Things), industrial controls, consumer electronics and wireless as well as programming centers. 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, we evaluate our estimates, including those related to sales returns, bad debts, inventories, 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 capital equipment industry. We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements: Revenue Recognition: We recognize revenue at the time the product is shipped. We have determined that our programming equipment has reached a point of maturity and stability such that product acceptance can be assured by testing at the factory prior to shipment and that the installation meets the criteria to be considered a separate element. These systems are standard products with published product specifications and are configurable with standard options. The evidence that these systems could be deemed as accepted was based upon having standardized factory production of 19 the units, results from batteries of tests of product performance to our published specifications, quality inspections and installation standardization, as well as past product operation validation with the customer and the history provided by our installed base of products upon which the current versions were based. The revenue related to products requiring installation that is perfunctory is recognized at the time of shipment. Installation that is considered perfunctory includes any installation that can be performed by other parties, such as distributors, other vendors, or in most cases the customers themselves. This takes into account the complexity, skill and training needed as well as customer expectations regarding installation. We enter into multiple deliverables arrangements that arise during the sale of a system that includes an installation component, a service and support component and a software maintenance component. We allocate the value of each element based on relative selling prices. Relative selling price is based on the selling price of the standalone system. For the installation and service and support components, we use what we charge to distributors who perform these components. For software maintenance components, we use what we charge for annual software maintenance renewals after the initial year the system is sold. Revenue is recognized on the system sale based on shipping terms, installation revenue is recognized after the installation is performed, and hardware service and support and software maintenance revenue is recognized ratably over the term of the agreement, typically one year. When we sell software separately, we recognize software revenue upon shipment provided that only inconsequential obligations remain on our part and substantive acceptance conditions, if any, have been met. We recognize revenue when persuasive evidence of an arrangement exists, shipment has occurred, the price is fixed or determinable, the buyer has paid or is obligated to pay, collectability is reasonably assured, substantive acceptance conditions, if any, have been met, the obligation is not contingent on resale of the product, the buyer’s obligation would not be changed in the event of theft, physical destruction or damage to the product, the buyer acquiring the product for resale has economic substance apart from us and we do not have significant obligations for future performance to directly bring about the resale of the product by the buyer. We establish a reserve for sales returns based on historical trends in product returns and estimates for new items. We transfer certain products out of service from their internal use and make them available for sale. The products transferred are our standard products in one of the following areas: service loaners, rental or test units; engineering test units; or sales demonstration equipment. Once transferred, the equipment is sold by our regular sales channels as used equipment inventory. These product units often involve refurbishing and an equipment warranty, and are conducted as sales in our normal and ordinary course of business. The transfer amount is the product unit’s net book value and the sale transaction is accounted for as revenue and cost of goods sold. Allowance for Doubtful Accounts: We base the allowance for doubtful accounts receivable on our assessment of the collectability of specific customer accounts and the aging of accounts receivable. If there is deterioration of a major customer’s credit worthiness or actual defaults are higher than historical experience, our estimates of the recoverability of amounts due to us could be adversely affected. Inventory: Inventories are stated at the lower of cost or market. Adjustments are made to standard cost, which approximates actual cost on a first-in, first-out basis. We estimate reductions to inventory for obsolete, slow-moving, excess and non-salable inventory by reviewing current transactions and forecasted product demand. We evaluate our inventories on an item by item basis and record inventory adjustments accordingly. If there is a significant decrease in demand for our products, uncertainty during product line transitions, or a higher risk of inventory obsolescence because of rapidly changing technology and customer requirements, we may be required to increase our inventory adjustments and our gross margin could be adversely affected. Warranty Accruals: We accrue for warranty costs based on the expected material and labor costs to fulfill our warranty obligations. If we experience an increase in warranty claims, which are higher than our historical experience, our gross margin could be adversely affected. Tax Valuation Allowances: Given the uncertainty created by our loss history, as well as the ongoing uncertain economic outlook for our industry and capital and geographic spending, we expect to continue to limit the recognition of net deferred tax assets and accounting for uncertain tax positions and maintain the tax valuation allowances. At the current time, we expect, therefore, that reversals of the tax valuation allowance will take place only as we are able to take advantage of the underlying tax loss or other attributes in carry forward. The transfer pricing and expense or cost sharing arrangements are 20 complex areas where judgments, such as the determination of arms-length arrangements, can be subject to challenges by different tax jurisdictions. Share-based Compensation: We account for share-based awards made to our employees and directors, including employee stock option awards and restricted stock unit awards, using the estimated grant date fair value method of accounting. For options, we estimate the fair value using the Black-Scholes valuation model and an estimated forfeiture rate, which requires the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. The expected stock price volatility assumption was determined using the historical volatility of our common stock. Changes in the subjective assumptions required in the valuation model may significantly affect the estimated value of the awards, the related stock-based compensation expense and, consequently, our results of operations. Restricted stock unit awards are valued based on the average of the high and low price on the date of the grant. For both options and restricted awards, expense is recognized as compensation expense on the straight-line basis. Employee Stock Purchase Plan (“ESPP”) shares were issued under provisions that do not require us to record any equity compensation expense. 21 RESULTS OF OPERATIONS: NET SALES Net sales by product line (in thousands) Automated programming systems Non-automated programming systems Total programming systems Net sales by location (in thousands) United States % of total International % of total 2015 Change 2014 $16,692 5,325 $22,017 8.5% (18.6%) 0.4% $15,380 6,544 $21,924 2015 Change 2014 $2,229 10.1% $19,788 89.9% 5.9% (0.2%) $2,104 9.6% $19,820 90.4% Net sales were approximately the same for the years ended December 31, 2015 and 2014. On a regional basis, net sales increased approximately 49% in Asia and 1% in Europe but declined 39% in the Americas. Automated system sales increased 17% during 2015 while non-automated system sales declined 27%. We expect to continue to see increases in automated system sales. On a product basis, sales increased primarily due to sales of our PSV product family, offset in part, by declines in the Roadrunner, PS, FLX, FlashPak and legacy (Unifamily and Sprint) product lines compared to 2014. During 2015, we experienced a strengthening U.S. Dollar versus foreign currencies, which is significant because approximately 90% of our sales are from international markets. Approximately 39% of our 2015 sales were European based and of those, a large portion of our sales through our German subsidiary are denominated in Euros. Order bookings were $20.3 million for 2015 down 11% compared to $22.8 million in 2014. Backlog at December 31, 2015 and 2014 was $.7 million and $1.9 million, respectively. GROSS MARGIN (in thousands) Gross margin Percentage of net sales 2015 Change 2014 $11,544 52.4% (2.4%) $11,825 53.9% Gross margin as a percentage of sales for the year ended December 31, 2015 was 52.4%, compared to 53.9% in 2014. The decrease in gross margin was primarily due to the unfavorable impact of foreign currency exchange rates and a less favorable product and channel mix. RESEARCH AND DEVELOPMENT (in thousands) Research and development Percentage of net sales 2015 Change 2014 $4,701 21.4% (0.1%) $4,708 21.5% Research and development (“R&D”) was approximately the same for the years ended December 31, 2015 and 2014, with higher contractor costs, R&D materials and severance, offset by lower depreciation and recruiting costs. 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. In addition to product development, a significant part of R&D spending is on creating software and support for new devices introduced by the semiconductor companies. We are focusing our R&D efforts on solutions for strategic growth markets, including new programming technology, automated programming systems for the manufacturing environment and extending the capabilities and support for our programmer architecture. Our R&D spending fluctuates based on the number, type, and the development stage of our product initiatives and projects. 22 SELLING, GENERAL AND ADMINISTRATIVE (in thousands) Selling, general & administrative Percentage of net sales 2015 Change 2014 $5,850 26.6% (2.5%) $5,997 27.4% Selling, General and Administrative (“SG&A”) expenses decreased $147,000 for the year ended December 31, 2015 compared to 2014. The decrease was primarily related to lower commissions due to channel mix, rent and IT consulting savings, offset in part by the one-time expense of our Redmond headquarters move and higher investor relations and marketing costs. INTEREST (in thousands) Interest income 2015 Change 2014 $105 (34.0%) $159 Interest income was lower for the year ended December 31, 2015 compared to 2014, primarily due to lower invested cash balances. INCOME TAXES (in thousands) Income tax (expense) benefit * not meaningful 2015 Change 2014 $5 * ($7) Income tax expense decreased by $12,000 for the year ended December 31, 2015 compared to 2014, primarily resulting from foreign subsidiary income tax offset in part by a refund adjustment for the 2014 tax year relating to foreign subsidiary incentive tax credits and deductions. The effective tax rate differed from the statutory tax rate primarily due to the effect of valuation allowances, as well as foreign taxes. We have a valuation allowance of $11.7 million and $11.8 million as of December 31, 2015 and 2014, respectively. Our deferred tax assets and valuation allowance have been reduced by approximately $210,000 and $197,000 associated with the requirements of accounting for uncertain tax positions as of December 31, 2015 and 2014, respectively. Given the uncertainty created by our loss history, as well as the ongoing uncertain economic outlook for our industry as well as capital and geographic spending, we expect to continue to limit the recognition of net deferred tax assets and accounting for uncertain tax positions and maintain the tax valuation allowances. INFLATION AND CHANGES IN FOREIGN CURRENCY EXCHANGE RATES Sales and expenses incurred by foreign subsidiaries are denominated in the subsidiary’s local currency and translated into U.S. Dollar amounts at average rates of exchange during the year. We recognized foreign currency transaction gains and (losses) of ($176,000) and ($160,000) in 2015 and 2014, respectively. The transaction gains or losses resulted primarily from translation adjustments to foreign inter-company accounts and U.S. Dollar accounts held by foreign subsidiaries; sales by our German subsidiary to certain customers, which were invoiced in U.S. Dollars; and Brazilian intercompany balances. Because 90% of our sales are to international markets, volatile exchange rates may also impact our competiveness and margins. 23 FINANCIAL CONDITION: LIQUIDITY AND CAPITAL RESOURCES (in thousands) Working capital 2015 Change 2014 $13,823 $760 $13,063 At December 31, 2015, our principal sources of liquidity consisted of existing cash and cash equivalents. Our working capital increased by $760,000 for the twelve month period ending December 31, 2015 primarily due to the net income for the year. Our current ratio was 4.1 and 3.5 for December 31, 2015 and 2014, respectively. For the twelve month period ending December 31, 2015, our cash position increased $1,907,000 primarily resulting from unusually strong collections converting customer receivables to cash. We expect our working capital cash mix will revert back to historical levels during 2016. Although we have no significant external capital expenditure plans currently, we expect that we will continue to make capital expenditures to support our business. We plan to increase our internally developed sales demonstration and test equipment as we develop and release new products. Capital expenditures are expected to be funded by existing and internally generated funds or lease financing. As a result of our significant product development, customer support, selling and marketing efforts, we have required substantial working capital to fund our operations. In 2015 and recent years, we have managed balancing profitable operations, while addressing rising costs and foreign exchange rate challenges. This included geographic shifts in our operations, optimized real estate usage strategies and differentiated product development and cost strategies. We believe that we have sufficient cash or working capital available under our operating plan to fund our operations and capital requirements through at least the next one-year period. We may require additional cash for U.S. operations, which could cause potential repatriation of cash from the $6.2 million held in our foreign subsidiaries. Although we have no current repatriation plans, there may be tax and other impediments to any repatriation actions. Our working capital may be used to fund possible losses, business growth, project initiatives, share repurchases and business development initiatives including acquisitions, which could reduce our liquidity and result in a requirement for additional cash before that time. Any substantial inability to achieve our current business plan could have a material adverse impact on our financial position, liquidity, or results of operations and may require us to reduce expenditures and/or seek additional financing. OFF-BALANCE SHEET ARRANGEMENTS Except as noted in the accompanying consolidated financial statements in Note 7, “Operating Lease Commitments” and Note 8, “Other Commitments”, we had no off-balance sheet arrangements. SHARE REPURCHASE PROGRAM No stock repurchase programs were in effect during the twelve month period ending December 31, 2015 and 2014. On February 24, 2016, our Board of Directors approved a share repurchase program with provisions to buy back up to $1 million dollars of our stock during the period from March 2, 2016 through March 31, 2017. The program is expected to be established under a 10b5-1 plan under the Exchange Act to provide flexibility to make purchases throughout the period. 24 NON-GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) FINANCIAL MEASURES Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) and Adjusted EBITDA excluding equity compensation (a non-cash item) and the 2014 restructure charge are set forth below. Non-GAAP financial measures should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. We believe that these non-GAAP financial measures provide meaningful supplemental information regarding our results and facilitate the comparison of results. A reconciliation of net income to EBITDA and adjusted EBITDA follows: (in thousands) Net Income Interest income Taxes Depreciation & amortization EBITDA earnings Equity compensation Restructure charge Adjusted EBITDA earnings excluding equity compensation and restructure charge NEW ACCOUNTING PRONOUNCEMENTS Year Ended December 31, 2015 2014 $927 (105) (5) 542 $1,359 435 - $1,794 $1,099 (159) 7 593 $1,540 400 13 $1,953 In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (ASU 2014-09). The standard provides companies with a single model for accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance. ASU 2014-09 was originally effective for annual reporting periods beginning after December 15, 2016. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers” (ASU 2015-14). ASU 2015-14 defers the effective date of the new revenue recognition standard by one year. As such, it now takes effect for public entities in fiscal years beginning after December 15, 2017. All other entities have an additional year. However, early adoption is permitted for any entity that chooses to adopt the new standard as of the original effective date. We are in the process of evaluating the impact of adoption on our consolidated financial statements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not applicable. Item 8. Financial Statements and Supplementary Data See pages 26 through 44. 25 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Data I/O Corporation We have audited the accompanying consolidated balance sheets of Data I/O Corporation (a Washington Corporation) and subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2015. Our audits of the basic consolidated financial statements included the consolidated financial statement schedule listed in the index appearing under Item 15 (Schedule II). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Data I/O Corporation and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /S/GRANT THORNTON LLP Seattle, Washington March 28, 2016 26 DATA I/O CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except share data) December 31, 2015 December 31, 2014 ASSETS CURRENT ASSETS: Cash and cash equivalents Trade accounts receivable, net of allowance for doubtful accounts of $43 and $93, respectively Inventories Other current assets TOTAL CURRENT ASSETS Property, plant and equipment – net Other assets TOTAL ASSETS LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable Accrued compensation Deferred revenue Other accrued liabilities Accrued costs of business restructuring TOTAL CURRENT LIABILITIES Long-term other payables 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, 7,943,720 shares as of December 31, 2015 and 7,861,141 shares as of December 31, 2014 Accumulated earnings (deficit) Accumulated other comprehensive income TOTAL STOCKHOLDERS’ EQUITY TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY See notes to consolidated financial statements 27 $11,268 2,790 3,705 577 18,340 1,237 63 $19,640 $1,250 1,689 1,038 540 - 4,517 429 - $9,361 4,109 4,445 426 18,341 926 65 $19,332 $968 1,756 1,801 640 113 5,278 183 - - - 19,051 (5,016) 659 14,694 $19,640 18,704 (5,943) 1,110 13,871 $19,332 DATA I/O CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) Net Sales Cost of goods sold Gross margin Operating expenses: Research and development Selling, general and administrative Provision for business restructuring Total operating expenses Operating income Non-operating income (expense): Interest income Foreign currency transaction gain (loss) Total non-operating income (expense) Income before income taxes Income tax (expense) benefit Net income Basic earnings per share Diluted earnings per share Weighted-average basic shares Weighted-average diluted shares See notes to consolidated financial statements For the Years Ended December 31, 2015 2014 $22,017 10,473 11,544 4,701 5,850 - 10,551 993 105 (176) (71) 922 5 $927 $0.12 $0.12 7,907 8,054 $21,924 10,099 11,825 4,708 5,997 13 10,718 1,107 159 (160) (1) 1,106 (7) $1,099 $0.14 $0.14 7,826 7,948 28 DATA I/O CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) Net Income Other comprehensive income: Foreign currency translation gain (loss) Comprehensive income See notes to consolidated financial statements For the Years Ended December 31, 2015 2014 $927 (451) $476 $1,099 (451) $648 29 DATA I/O CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (in thousands, except share amounts) Common Stock Shares Amount Retained Earnings (Deficit) Accumulated and Other Comprehensive Income (Loss) Total Stockholders' Equity 7,786,053 1,721 $18,343 - ($7,042) - $1,561 - $12,862 - 68,291 (50) - - (50) 5,076 - - - 7,861,141 1,360 77,226 3,993 - - - 7,943,720 15 396 - - $18,704 (2) (83) 12 420 - - $19,051 - - 1,099 - ($5,943) - - - 927 - ($5,016) - - - (451) $1,110 - - - - (451) $659 15 396 1,099 (451) $13,871 (2) (83) 12 420 927 (451) $14,694 Balance at December 31, 2013 Stock options exercised Stock awards issued, net of tax withholding Issuance of stock through: Employee Stock Purchase Plan Share-based compensation Net income Other comprehensive income (loss) Balance at December 31, 2014 Stock options exercised Stock awards issued, net of tax withholding Issuance of stock through: Employee Stock Purchase Plan Share-based compensation Net income Other comprehensive income (loss) Balance at December 31, 2015 30 DATA I/O CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization Equipment transferred to cost of goods sold Share-based compensation Net change in: Trade accounts receivable Inventories Other current assets Accrued cost of business restructuring Accounts payable and accrued liabilities Deferred revenue Other long-term liabilities Deposits and other long-term assets Net cash provided by (used in) operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment Cash provided by (used in) investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock, net of tax withholding Cash provided by (used in) financing activities Increase/(decrease) in cash and cash equivalents Effects of exchange rate changes on cash Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Supplemental disclosure of cash flow information: Cash paid (received) during the period for: Income Taxes See notes to consolidated financial statements For the Years Ended December 31, 2015 2014 $927 $1,099 542 192 435 1,204 645 (169) (66) 20 (652) 289 - 3,367 (1,045) (1,045) (73) (73) 2,249 (342) 9,361 $11,268 593 726 400 (2,270) (754) (40) (687) 982 742 (72) 20 739 (1,402) (1,402) (35) (35) (698) (367) 10,426 $9,361 ($13) $16 31 DATA I/O CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Data I/O Corporation (“Data I/O”, “We”, “Our”, “Us”) 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 Far East, Europe and the Americas. Our manufacturing operations are currently located in Redmond, Washington, United States and Shanghai, China. Principles of Consolidation The consolidated financial statements include the accounts of Data I/O Corporation and our wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) 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. Significant estimates include:  Revenue Recognition  Allowance for Doubtful Accounts   Warranty Accruals   Tax Valuation Allowances Share-based Compensation Inventory Foreign Currency Translation Assets and liabilities of foreign subsidiaries are translated at the exchange rate on the balance sheet date. Revenues, costs and expenses of foreign subsidiaries are translated at average rates of exchange prevailing during the year. Translation adjustments resulting from this process are charged or credited to stockholders’ equity, net of taxes recognized. Realized and unrealized gains and losses resulting from the effects of changes in exchange rates on assets and liabilities denominated in foreign currencies are included in non-operating expense as foreign currency transaction gains and losses. Cash and Cash Equivalents All highly liquid investments purchased with an original maturity of 90 days or less are considered cash equivalents. We maintain our cash and cash equivalents with major financial institutions in the United States of America, which are insured by the Federal Deposit Insurance Corporation (FDIC), and foreign jurisdictions. Deposits in U.S. banks exceed the FDIC insurance limit. We have not experienced any losses on our cash and cash equivalents. Cash and cash equivalents held in foreign bank accounts, primarily China, Germany and Canada, totaled (in millions) $6.2 at December 31, 2015 and $6.7 at December 31, 2014. Fair Value of Financial Instruments Certain financial instruments are carried at cost on the consolidated balance sheets, which approximates fair value due to their short-term, highly liquid nature. These instruments include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, and other short-term liabilities. 32 Accounts Receivable The majority of our accounts receivable are due from companies in the electronics manufacturing industries. Credit is extended based on an evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are typically due within 30 to 60 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts receivable outstanding longer than the contractual payment terms are considered past due. We determine the allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the industry and geographic payment practices involved, our previous bad debt experience, the customer’s current ability to pay their obligation to us, and the condition of the general economy and the industry as a whole. We write off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. Interest may be accrued, at the discretion of management and according to our standard sales terms, beginning on the day after the due date of the receivable. However, interest income is subsequently recognized on these accounts either to the extent cash is received, or when the future collection of interest and the receivable balance is considered probable by management. Inventories Inventories are stated at the lower of cost or market with cost being the currently adjusted standard cost, which approximates cost on a first-in, first-out basis. We estimate changes to inventory for obsolete, slow-moving, excess and non-salable inventory by reviewing current transactions and forecasted product demand. We evaluate our inventories on an item by item basis and record an adjustment (lower of cost or market) accordingly. 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. We regularly review all of our property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If the total of future undiscounted cash flows is less than the carrying amount of these assets, an impairment loss, if any, based on the excess of the carrying amount over the fair value of the assets, is recorded. Based on this evaluation, no impairment was noted for property, plant and equipment for the years ended December 31, 2015 and 2014. Patent Costs We expense external costs, such as filing fees and associated attorney fees, incurred to obtain initial patents, but capitalize as intangible assets acquired patents. We also expense costs associated with maintaining and defending patents subsequent to their issuance. Income Taxes Income taxes are computed at current enacted tax rates, less tax credits using the asset and liability method. Deferred taxes are adjusted both for items that do not have tax consequences and for the cumulative effect of any changes in tax rates from those previously used to determine deferred tax assets or liabilities. Tax provisions include amounts that are currently payable, changes in deferred tax assets and liabilities that arise because of temporary differences between the timing of when items of income and expense are recognized for financial reporting and income tax purposes, and any changes in the valuation allowance caused by a change in judgment about the reliability of the related deferred tax assets. A valuation allowance is established when necessary to reduce deferred tax assets to amounts expected to be realized. Share-Based Compensation All stock-based compensation awards are measured based on estimated fair values on the date of grant and recognized as compensation expense on the straight-line single-option method. Our share-based compensation is reduced for estimated forfeitures at the time of grant and revised as necessary in subsequent periods if actual forfeitures differ from those estimates. 33 Revenue Recognition We recognize revenue at the time the product is shipped. We have determined that our programming equipment has reached a point of maturity and stability such that product acceptance can be assured by testing at the factory prior to shipment and that the installation meets the criteria to be considered a separate element. These systems are standard products with published product specifications and are configurable with standard options. The evidence that these systems could be deemed as accepted was based upon having standardized factory production of the units, results from installation batteries of tests of product performance to our published specifications, quality standardization, as well as past product operation validation with the customer and the history provided by our installed base of products upon which the current versions were based. inspections and The revenue related to products requiring installation that is perfunctory is recognized at the time of shipment. Installation that is considered perfunctory includes any installation that can be performed by other parties, such as distributors, other vendors, or in most cases the customers themselves. This takes into account the complexity, skill and training needed as well as customer expectations regarding installation. We enter into multiple deliverables arrangements that arise during the sale of a system that includes an installation component, a service and support component and a software maintenance component. We allocate the value of each element based on relative selling prices. Relative selling price is based on the selling price of the standalone system. For the installation and service and support components, we use what we charge to distributors who perform these components. For software maintenance components, we use what we charge for annual software maintenance renewals after the initial year the system is sold. Revenue is recognized on the system sale based on shipping terms, installation revenue is recognized after the installation is performed, and hardware service and support and software maintenance revenue is recognized ratably over the term of the agreement, typically one year. When we sell software separately, we recognize software revenue upon shipment provided that only inconsequential obligations remain on our part and substantive acceptance conditions, if any, have been met. We recognize revenue when persuasive evidence of an arrangement exists, shipment has occurred, the price is fixed or determinable, the buyer has paid or is obligated to pay, collectability is reasonably assured, substantive acceptance conditions, if any, have been met, the obligation is not contingent on resale of the product, the buyer’s obligation would not be changed in the event of theft, physical destruction or damage to the product, the buyer acquiring the product for resale has economic substance apart from us and we do not have significant obligations for future performance to directly bring about the resale of the product by the buyer. We establish a reserve for sales returns based on historical trends in product returns and estimates for new items. Sales were recorded net of actual sales returns and changes to the associated sales return reserve. Sales return reserves were $61,000 and $55,000 at December 31, 2015 and 2014, respectively. We transfer certain products out of service from their internal use and make them available for sale. The products transferred are our standard products in one of the following areas: service loaners, rental or test units; engineering test units; or sales demonstration equipment. Once transferred, the equipment is sold by our regular sales channels as used equipment inventory. These product units often involve refurbishing and an equipment warranty, and are conducted as sales in our normal and ordinary course of business. The transfer amount is the product unit’s net book value and the sale transaction is accounted for as revenue and cost of goods sold. Research and Development Research and development costs are expensed as incurred. Advertising Expense Advertising costs are expensed as incurred. Total advertising expenses were approximately $137,000 and $78,000 in 2015 and 2014, respectively. 34 Warranty Expense We record a liability for an estimate of costs that we expect 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 normally provide a warranty for our products against defects for periods ranging from ninety days to one year. We provide for the estimated cost that may be incurred under our product warranties and periodically assess the adequacy of our warranty liability based on changes in the above factors. We record revenues on extended warranties on a straight-line basis over the term of the related warranty contracts. Service costs are expensed as incurred. Earnings (Loss) Per Share Basic earnings (loss) per share exclude any dilutive effects of stock options. Basic earnings (loss) per share are computed using the weighted-average number of common shares outstanding during the period. Diluted earnings per share are computed using the weighted-average number of common shares and common stock equivalent shares outstanding during the period. The common stock equivalent shares from equity awards used in calculating diluted earnings per share were 147,000 and 122,000 for the years ended December 31, 2015 and 2014, respectively. Options to purchase 166,720 and 361,161 shares of common stock were outstanding as of December 31, 2015 and 2014, respectively, but were excluded from the computation of diluted EPS for the period then ended because the options were anti-dilutive. Diversification of Credit Risk Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of trade receivables. Our trade receivables are geographically dispersed and include customers in many different industries. As of December 31, 2015, four customers accounted for greater than 10% of our consolidated accounts receivable balance at December 31, 2015: Data Copy Limited, our distributor in China and LeChamp, our distributor in south-east Asia, together represented 37% of that balance and our direct customers, Flextronics and Arrow, together represented 23%. As of December 31, 2014, no customers accounted for more than 10% of our consolidated accounts receivable balance. Our consolidated accounts receivable balance as of December 31, 2015 and 2014 includes foreign accounts receivable in the functional currency of our foreign subsidiaries amounting to $569,000 and $1,208,000, respectively. We generally do business with our foreign distributors in U.S. Dollars. We believe that 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, or prepayment whenever deemed necessary. New Accounting Pronouncements In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (ASU 2014-09). The standard provides companies with a single model for accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance. ASU 2014-09 was originally effective for annual reporting periods beginning after December 15, 2016. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers” (ASU 2015-14). ASU 2015-14 defers the effective date of the new revenue recognition standard by one year. As such, it now takes effect for public entities in fiscal years beginning after December 15, 2017. All other entities have an additional year. However, early adoption is permitted for any entity that chooses to adopt the new standard as of the original effective date. We are in the process of evaluating the impact of adoption on our consolidated financial statements. NOTE 2-PROVISION FOR BUSINESS RESTRUCTURING Our previous years’ restructure actions have been fully implemented and a true up of estimates resulted in a $13,000 charge during the first quarter of 2014. As a result of the lease amendment discussed in Note 7, “Operating Lease Commitments”, in July 2015, the balance of the restructure liability of approximately $120,000 was incorporated into our deferred rent liability as part of the new lease incentive. 35 An analysis of the restructuring is as follows: Reserve Balance Dec. 31, 2013 2014 Expense 2014 Payments/ Write-Offs Reserve Balance Dec. 31, 2014 2015 Expense 2015 Payments/Reclass/ Write-Offs Reserve Balance Dec. 31, 2015 (in thousands) Downsizing US operations: Employee severance Other costs Downsizing foreign operations: $230 240 ($16) 25 $214 94 $0 171 Employee severance Other costs Total 372 31 $873 16 (12) $13 371 19 $698 17 - $188 $0 - - - $0 $0 171 17 - $188 $0 - - - $0 NOTE 3 – ACCOUNTS RECEIVABLE, NET Receivables consist of the following: (in thousands) Trade accounts receivable Less allowance for doubtful receivables Trade accounts receivable, net December 31, 2015 December 31, 2014 $2,833 43 $2,790 $4,202 93 $4,109 Changes in Data I/O’s allowance for doubtful accounts are as follow: (in thousands) Beginning balance Bad debt expense (reversal) Accounts written-off Recoveries Ending balance NOTE 4 – INVENTORIES Inventories consisted of the following components: (in thousands) Raw material Work-in-process Finished goods Inventories December 31, 2015 December 31, 2014 $93 (36) (14) - $43 $87 6 - - $93 December 31, 2015 December 31, 2014 $2,262 1,099 344 $3,705 $2,429 1,288 728 $4,445 36 NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET Property and equipment consisted of the following components: (in thousands) Leasehold improvements Equipment Less accumulated depreciation Property and equipment, net December 31, 2015 December 31, 2014 $77 5,739 5,816 4,579 $1,237 $415 6,208 6,623 5,697 $926 Total depreciation expense recorded for 2015 and 2014 was $542,000 and $593,000, respectively. NOTE 6 – OTHER ACCRUED LIABILITIES Other accrued liabilities consisted of the following components: (in thousands) Product warranty Sales return reserve Other taxes Other Other accrued liabilities December 31, 2015 December 31, 2014 $368 61 92 19 $540 $339 55 87 159 $640 The changes in our product warranty liability for the year ending December 31, 2015 are follows: (in thousands) Liability, beginning balance Net expenses Warranty claims Accrual revisions Liability, ending balance December 31, 2015 $339 789 (789) 29 $368 37 NOTE 7 –OPERATING LEASE COMMITMENTS We have commitments under non-cancelable operating leases and other agreements, primarily for factory and office space, with initial or remaining terms of one year or more as follows: For the years ending December 31: (in thousands) 2016 2017 2018 2019 2020 Thereafter Total Operating Leases $757 828 813 846 843 436 $4,523 Lease and rental expense was $955,000 and $1,041,000 in 2015 and 2014, respectively. Rent expense is recorded on a straight line basis, over the term of the lease, for leases that contain fixed escalation clauses, and excludes the portion that was charged to restructure expense. During the second quarter of 2015, we amended our lease agreement for the Redmond, Washington headquarters facility effective July 8, 2015. The amended lease resulted in our headquarters relocating to a nearby building, extending the term through April 2021, lowering the square footage to approximately 20,460, providing lease inducement incentives and lowering the rental rate. The new lease commitment of approximately $1.7 million will be paid over the term of the lease. As a result of this lease amendment, the remaining balance of the restructure liability of approximately $120,000 was incorporated into our deferred rent liability in July, 2015. The lease base annual rental payments during 2015, 2014, and 2013 were approximately $296,000, $531,000, and $501,000, respectively. In addition to the Redmond facility, approximately 14,000 square feet is leased at two foreign locations, including our German sales, service and engineering operations located in Munich, Germany, and a sales, service, operations and engineering office located in Shanghai, China. During the first quarter of 2014, we renewed our lease agreement for our Munich, Germany facility effective February 1, 2015 and extending the term through January 2018 and lowering the square footage to approximately 4,306 square feet. Effective June 1, 2014, the landlord was able to lease the excess space abandoned as part of Q2 2013 restructure actions to another tenant and the lease was revised to end May 31, 2017. During the second quarter of 2015, we renewed our lease agreement for our Shanghai, China facility, effective June 15, 2015, extending the term through December 31, 2015. Operations were arranged to continue in this facility through January 31, 2016. In October 2015, we signed a lease agreement for a new facility located in Shanghai, China which was effective November 1, 2015 and extends through October 31, 2021. The new lease will approximately double our space to 19,400 square feet at approximately 54% of the current lease rate. NOTE 8 –OTHER COMMITMENTS We have purchase obligations for inventory and production costs as well as other obligations such as capital expenditures, service contracts, marketing, and development agreements. Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure and approximate timing of the transaction. Most arrangements are cancelable without a significant penalty, and with short notice, typically less than 90 days. At December 31, 2015, the purchase commitments and other obligations totaled $965,000 of which all but $54,000 are expected to be paid over the next twelve months. 38 NOTE 9 – CONTINGENCIES As of December 31, 2015, we were not a party to any legal proceedings or aware of any indemnification agreement claims, 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. NOTE 10 – STOCK AND RETIREMENT PLANS Stock Option Plans At December 31, 2015, there were 693,436 shares available for future grant under Data I/O Corporation 2000 Stock Compensation Incentive Plan (“2000 Plan”). At December 31, 2015 there were 963,100 shares of Common Stock reserved for issuance consisting of 644,350 under the 2000 plan and 318,750 under the inducement grant reserves. Pursuant to this 2000 Plan, 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. Options granted under the plans have a maximum term of six years from the date of grant. Stock awards may also be granted under the 2000 Plan. Inducement grants were made in 2012 and 2013. In 2012, inducement grants were made to our chief executive officer consisting of 200,000 options and 75,000 restricted shares, of which 18,750 shares were issued in both 2015 and 2014. In 2013, an inducement grant was made to our chief technology officer consisting of 100,000 options. The inducement grants were not made out of the 2000 Plan shares but were made under the terms of the 2000 Plan. Employee Stock Purchase Plan Under the Employee Stock Purchase Plan (“ESPP”), eligible employees may purchase shares of our Common Stock at six- month intervals at 95% of the fair market value on 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 2015 and 2014, a total of 3,993 and 5,076 shares, respectively, were purchased under the plan at average prices of $2.90 and $2.89 per share, respectively. At December 31, 2015, a total of 56,373 shares were reserved for future issuance. Stock Appreciation Rights Plan We have a Stock Appreciation Rights Plan (“SAR”) under which each director, executive officer or holder of 10% or more of our Common Stock has a SAR with respect to each exercisable stock option. The SAR entitles the SAR holder to receive cash from us 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 our 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 We have 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 our Common Stock. No shares were issued from the plan for 2015 or 2014 board service and 151,332 shares remain available in the plan as of December 31, 2015. Retirement Savings Plan We have 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 or post-tax salary if Roth is elected, subject to IRS limitations. In fiscal years 2015 and 2014, we contributed one dollar for each dollar contributed by a participant, with a maximum contribution of 4% of a participant’s eligible earnings. Our matching contribution expense for the savings plan was approximately $174,000 and $173,000 in 2015 and 2014, respectively. Employer matching contributions owed to the plan were $178,000 and $160,000 at December 31, 2015 and 2014, respectively. 39 NOTE 11– SHARE-BASED COMPENSATION For share-based awards granted, we have recognized compensation expense based on the estimated grant date fair value method. For these awards we have recognized compensation expense using a straight-line amortization method and reduced for estimated forfeitures. The impact on our results of operations of recording share-based compensation for the year ended December 31, 2015 and 2014 was as follows: (in thousands) Cost of goods sold Research and development Selling, general and administrative Total share-based compensation Impact on net income per share: Basic and diluted Year Ended December 31, 2015 2014 $13 76 346 $435 $6 80 314 $400 ($0.05) ($0.05) An immaterial amount of share-based compensation was capitalized into inventory as overhead for the years ended December 31, 2015 and 2014, respectively. The fair values of share-based awards for employee stock option awards were estimated at the date of grant using the Black-Scholes valuation model. The volatility and expected life of the options used in calculating the fair value of share- based awards may exclude certain periods of historical data that we considered atypical and not likely to occur in future periods. The following weighted average assumptions were used to calculate the fair value of options granted during the years ended December 31: Risk-free interest rates Volatility factors Expected life of the option in years Expected dividend yield Employee Stock Options 2015 - - - - 2014 1.31% 0.51 4.00 None There were no stock option awards in 2015. The risk-free interest rate used in the Black-Scholes valuation method is based on the implied yield currently available in U.S. Treasury securities at maturity with an equivalent term. We have not recently declared or paid any dividends and do not currently expect to do so in the future. The expected term of options represents the period that our stock-based awards are expected to be outstanding and was determined based on historical weighted average holding periods and projected holding periods for the remaining unexercised shares. Consideration was given to the contractual terms of our stock-based awards, vesting schedules and expectations of future employee behavior. Expected volatility is based on the annualized daily historical volatility of our stock over a representative period. The weighted average grant date fair value of options granted under our stock option plans for the twelve month period ending December 31, 2015 and 2014 was $0 and $.94, respectively. The following table summarizes stock option activity under our stock option plans for the twelve months ended December 31: 40 2015 Weighted- Average Exercise Price Weighted- Average Remaining Contractual Life in Years 2014 Weighted- Average Exercise Price Weighted- Average Remaining Contractual Life in Years Options Options Outstanding at beginning of year Granted Exercised Cancelled, Expired or Forfeited 606,187 - (20,625) $3.02 0.00 3.03 904,656 3,000 (31,250) $3.49 2.30 3.07 (11,562) 5.39 (270,219) 4.60 Outstanding at end of year 574,000 $2.97 2.40 606,187 $3.02 3.29 Vested or expected to vest at the end of the period Exercisable at end of year 564,527 467,126 $2.99 $3.19 2.39 2.24 574,188 383,001 $3.07 $3.49 3.25 2.90 The aggregate intrinsic value of outstanding options is $206,152. This represents the total pretax intrinsic value, based on the closing stock price of $2.52 at December 31, 2015, which would have been received by award holders had all award holders exercised their stock options that were in-the-money as of that date. The aggregate intrinsic value of awards exercised during the twelve month period ended December 31, 2015 was $6,892. Restricted stock award including performance-based stock award activity under our share-based compensation plan was as follows: 2015 2014 Outstanding at beginning of year Granted Vested Cancelled Outstanding at end of year Awards 320,900 193,800 (109,250) (16,350) 389,100 Weighted - Average Grant Date Fair Value $2.57 3.16 2.58 2.60 $2.86 Awards 247,075 189,900 (85,200) (30,875) 320,900 Weighted - Average Grant Date Fair Value $2.18 2.88 2.22 2.28 $2.57 The remaining unamortized expected future compensation expense and remaining amortization period associated with unvested option grants and restricted stock awards are: Unamortized future compensation expense $1,028,961 $896,450 Remaining weighted average amortization period in years 2.59 2.60 December 31, 2015 December 31, 2014 41 NOTE 12– INCOME TAXES Components of income (loss) before taxes: Components of income (loss) before taxes: (in thousands) U.S. operations Foreign operations Total income (loss) before taxes Income tax expense (benefit) consists of: (in thousands) Current tax expense (benefit) U.S. federal State Foreign Deferred tax expense (benefit) – U.S. federal Total income tax expense (benefit) Year Ended December 31, 2015 2014 $420 502 $922 $1,011 95 $1,106 Year Ended December 31, 2014 2015 $0 (1) (4) (5) - ($5) $0 (4) 11 7 - $7 $376 (80) (289) $7 A reconciliation of our effective income tax and the U.S. federal tax rate is as follows: (in thousands) Statutory tax State and foreign income tax, net of federal income tax benefit Valuation allowance for deferred tax assets Total income tax expense (benefit) Year Ended December 31, 2014 2015 $313 (105) (213) ($5) 42 The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets are presented below: (in thousands) Deferred income tax assets: Allowance for doubtful accounts Inventory and product return reserves Compensation accruals Accrued liabilities Book-over-tax depreciation and amortization Foreign net operating loss carryforwards U.S. net operating loss carryforwards U.S. credit carryforwards Valuation Allowance Total Deferred Income Tax Assets Year Ended December 31, 2014 2015 $11 723 1,533 311 99 809 6,919 1,264 11,669 (11,669) $ - $25 739 1,392 106 1,018 970 6,340 1,212 11,802 (11,802) $ - The valuation allowance for deferred tax assets decreased $133,000 during the year ended December 31, 2015, and decreased $239,000 during the year ended December 31, 2014. The net deferred tax assets have a full valuation allowance provided due to uncertainty regarding our ability to utilize such assets in future years. This full valuation allowance evaluation is based upon our volatile history of losses and the cyclical nature of our industry and capital spending. Credit carryforwards consist primarily of research and experimental and alternative minimum tax credits with expiration years from 2020 to 2035. U.S. net operating loss carryforwards are $20,349,000 at December 31, 2015 with expiration years from 2020 to 2035. 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. The gross changes in uncertain tax positions resulting in unrecognized tax benefits are presented below: (in thousands) Unrecognized tax benefits, opening balance Prior period tax position increases Additions based on tax positions related to current year Unrecognized tax benefits, ending balance Year Ended December 31, 2014 2015 $197 (3) 16 $210 $180 - 17 $197 Historically, we have not incurred any interest or penalties associated with tax matters and no interest or penalties were recognized during 2015. However, we have adopted a policy whereby amounts related to penalties associated with tax matters are classified as general and administrative expense when incurred and amounts related to interest associated with tax matters are classified as interest income or interest expense. Tax years that remain open for examination include 2012, 2013, 2014 and 2015 in the United States of America. In addition, tax years from 2000 to 2011 may be subject to examination in the event that we utilize the net operating losses and credit carryforwards from those years in our current or future year tax returns. NOTE 13 – SEGMENT AND GEOGRAPHIC INFORMATION We consider our operations to be a single operating segment, focused on the design, manufacturing and sale of programming systems used by designers and manufacturers of electronic products. 43 Major operations outside the U.S. include sales, engineering and service support subsidiaries in Germany and China. For the years ended December 31, 2015 and 2014, one customer, Data Copy Limited, our distributor in China, accounted for approximately 15% and 12% of net sales, respectively. The following tables provide summary operating information by geographic area: (in thousands) Net sales: U.S. Europe Rest of World Included in Europe and Rest of World net sales are the following significant balances: Germany China Operating income (loss): U.S. Europe Rest of World Identifiable assets: U.S. Europe Rest of World Year Ended December 31, 2015 2014 $2,229 8,744 11,044 $22,017 $3,702 $4,682 $473 (356) 876 $993 $9,441 3,128 7,071 $19,640 $2,104 8,596 11,224 $21,924 $4,856 $2,733 $284 274 549 $1,107 $7,215 3,689 8,428 $19,332 NOTE 14 –SUBSEQUENT EVENTS On February 24, 2016, our Board of Directors approved a share repurchase program with provisions to buy back up to $1 million dollars of our stock during the period from March 2, 2016 through March 31, 2017. The program is expected to be established under a 10b5-1 plan under the Exchange Act to provide flexibility to make purchases throughout the period. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A._ Controls and Procedures (a) Evaluation of disclosure controls and procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this report (the “Evaluation Date”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective at the reasonable assurance level. Disclosure controls are controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed to ensure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. 44  (b) Management’s Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control systems are designed to provide reasonable assurance to the Company’s management and board of directors regarding reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting is defined in Rule 13a- 15(f) promulgated under the Exchange Act and includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. All internal controls, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statements preparation and presentation. Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework (2013). Based on this assessment we concluded that, as of December 31, 2015, our internal control over financial reporting was effective. This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which permanently exempts non-accelerated filers from complying with Section 404(b) of the Sarbanes-Oxley Act of 2002. (c) Changes in internal controls. There were no changes made in our internal controls during the period covered by this report that has materially affected or is reasonably likely to materially affect our internal control over financial reporting. Item 9B._Other Information None. 45 Item 10. Directors, Executive Officers and Corporate Governance PART III Information regarding the Registrant’s directors is set forth under “Election of Directors” in our Proxy Statement relating to our annual meeting of shareholders to be held on May 24, 2016 and is incorporated herein by reference. Such Proxy Statement will be filed within 120 days of our year-end. Information regarding the Registrant’s executive officers is set forth in Item 1 of Part I herein under the caption “Executive Officers of the Registrant.” Code of Ethics We have adopted a Code of Ethics that applies to all directors, officers and employees of Data I/O, including the Chief Executive Officer and Chief Financial Officer. The key principles of the Code of Ethics are to act legally and with integrity in all work for Data I/O. The Code of Ethics is posted on the corporate governance page of our website at http://www.dataio.com/Company/InvestorRelations/CorporateGovernance.aspx. We will post any amendments to our Code of Ethics on our website. In the unlikely event that the Board of Directors approves any sort of waiver to the Code of Ethics for our executive officers or directors, information concerning such waiver will also be posted on our website. In addition to posting information regarding amendments and waivers on our website, the same information will be included in a Current Report on Form 8-K within four business days following the date of the amendment or waiver, unless website posting of such amendments or waivers is permitted by Nasdaq’s rules. Item 11. Executive Compensation Information called for by Part III, Item 11, is included in our Proxy Statement relating to our annual meeting of shareholders to be held on May 24, 2016 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 our 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 our Proxy Statement relating to our annual meeting of shareholders to be held on May 24, 2016 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 our year end. 46 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, 2015. See Notes 10 and 11 of “Notes to Consolidated Financial Statements.” (a) Number of securities to be issued upon the exercise of outstanding options, warrants and rights (b) Weighted– average exercise price of outstanding options, warrants and rights (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) 276,028 $4.10 747,781 300,000 576,028 $1.94 $2.97 - 747,781 Equity compensation plans approved by the security holders (1) (2) Equity compensation plans not approved by the security holders (3) Total (1) Represents shares of our Common Stock issuable pursuant to the Data I/O Corporation 2000 Stock Incentive Compensation Plan, 1982 Employee Stock Purchase Plan and 1996 Director Fee Plan. Table excludes unvested restricted stock awards of 389,100 from the 2000 Plan. (2) Stock Appreciation Rights Plan (“SAR”) provides that directors, executive officers or holders of 10% or more of our 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. (3) Represents inducement grants of 200,000 nonqualified stock options to Anthony Ambrose as part of his hiring and inducement grants of 100,000 nonqualified stock options to Rajeev Gulati as part of his hiring. Table excludes unvested restricted stock award inducement grants of 18,750 to Anthony Ambrose. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this item is contained in, and incorporated by reference from, the Proxy Statement for our 2016 Annual Meeting of Shareholders under the caption “Certain Relationships and Related Transactions.” Item 14._ Principle Accounting Fees and Services The information required by this Item with respect to principal accountant fees and services is incorporated by reference to the section captioned “Principal Accountant’s Fees and Services” in the Proxy Statement relating to our annual meeting of shareholders to be held on May 24, 2016. Such Proxy Statement will be filed within 120 days of our year-end. 47 Item 15. Exhibits, Financial Statement Schedules Executive Compensation Plans and Arrangements PART IV 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 10.5. (2) Data I/O Corporation Tax Deferral Retirement Plan and Trust with Great West Financial (formerly Orchard Trust Company). See Exhibits 10.15, 10.16, 10.17 and 10.30. (3) Summary of Amended and Restated Management Incentive Compensation Plan. See Exhibit 10.2. (4) Amended and Restated 1983 Stock Appreciation Rights Plan. See Exhibit 10.1. (5) Amended and Restated Executive Agreements. See Exhibit 10.8, 10.20, and 10.23. (6) 1996 Director Fee Plan. See Exhibit 10.4. (7) Data I/O Corporation 2000 Stock Compensation Incentive Plan. See Exhibit 10.6, 10.11, 10.22 and 10.26. (8) Form of Option Agreement. See Exhibit 10.7. (9) Form of Indemnification Agreement. See Exhibit 10.18. (10) Letter Agreement with Anthony Ambrose. See Exhibit 10.21. (11) Letter Agreement with Rajeev Gulati. See Exhibit 10.24. (12) Form of Restricted Stock Agreement. See Exhibit 10.12. (13) Letter Agreement with Joel S. Hatlen. See Exhibit 10.28. (14) Form of Executive Agreement. See Exhibit 10.27. (15) Form of Restricted Stock Unit Award Agreement. See Exhibit 10.25. (a) List of Documents Filed as a Part of This Report: (1) Index to Financial Statements: Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2015 and 2014 Consolidated Statements of Operations for each of the two years ended December 31, 2015 and December 31, 2014 Consolidated Statements of Comprehensive Income (Loss) for each of the two years ended December 31, 2015 and December 31, 2014 Page 26 27 28 29 Consolidated Statements of Stockholders’ Equity for each of the two years ended December 31, 2015 and December 31, 2014 30 48 Consolidated Statements of Cash Flows for each of the two years ended December 31, 2015 and December 31, 2014 31 Notes to Consolidated Financial Statements 32 (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 3.2 3.3 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)). Data I/O’s Bylaws as amended and restated as of July 20, 2011 (Incorporated by reference to Data I/O’s Current Report on Form 8-K filed July 26, 2011). Certification of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock (Incorporated by reference to Exhibit 1 of Data I/O’s Registration Statement on Form 8-A filed March 13, 1998 (File No. 0-10394)). 4 Instruments Defining the Rights of Security Holders, Including Indentures: 4.1 4.2 4.3 4.4 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). 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). 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). Amendment No. 2 to Rights Agreement, dated as of April 3, 2008, between Data I/O Corporation and Computershare (formerly BNY Mellon Investor Services LLC, and ChaseMellon Shareholder Services, L.L.C.). (Incorporated by reference to Exhibit 4.3 of Data I/O’s Form 8-K dated April 3, 2008). 10 Material Contracts: 10.1 Amended and Restated 1983 Stock Appreciation Rights Plan dated February 3, 1993 (Incorporated by reference to Exhibit 10.23 of Data I/O’s 1992 Annual Report on Form 10-K (File No. 0-10394)). 49 10.2 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)). 10.3 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)). 10.4 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)). 10.5 Amended and Restated 1982 Employee Stock Purchase Plan dated May 16, 2003 (Incorporated by reference to Data I/O’s 2003 Proxy Statement dated March 31, 2003). 10.6 Amended and Restated Data I/O Corporation 2000 Stock Compensation Incentive Plan dated May 24, 2006 (Incorporated by reference to Data I/O’s 2006 Proxy Statement dated April 6, 2006). 10.7 Form of Option Agreement (Incorporated by reference to Data I/O’s 2004 Annual Report on Form 10-K (File No. 0-10394)). 10.8 Amended and Restated Executive Agreement with Joel S. Hatlen dated December 31, 2011 (Incorporated by reference to Data I/O’s 2011 Annual Report on Form 10K (File No. 0-10394)). 10.9 Lease, Redmond East Business Campus between Data I/O Corporation and Carr Redmond PLCC dated February 28, 2006 (Incorporated by reference to Data I/O’s 2005 Annual Report on Form 10K (File No. 0-10394)). 10.10 Second Amendment to Lease, (Redmond East) between Data I/O Corporation and Arden Realty Limited Partnership, made as of January 31, 2011. (Incorporated by reference to Data I/O’s 2010 Annual Report on Form 10-K (File No. 0-10394)). 10.11 Amended and Restated Data I/O Corporation 2000 Stock Compensation Incentive Plan approved May 17, 2011 (Incorporated by reference to Data I/O’s 2011 Proxy Statement filed April 5, 2011). 10.12 Form of Restricted Stock Award Agreement (Incorporated by reference to Exhibit 10.29 of Data I/O’s June 30, 2006 Quarterly Report on Form 10-Q (File No. 0-10394)). 10.13 Patent Purchase Agreement (Incorporated by reference to Data I/O’s Current Report on Form 8-K filed on March 25, 2008)). 10.14 First Amendment to the Patent Purchase Agreement (Incorporated by reference to Data I/O’s Current Report on Form 8-K filed on March 25, 2008). 10.15 Great West Financial (formerly Orchard Trust Company) Defined Contribution Prototype Plan and Trust (Incorporated by reference to Data I/O’s 2007 Annual Report on Form 10-K (File No. 0-10394)). 10.16 Great West Financial (formerly Orchard Trust Company) Non-standardized 401(k) Plan (Incorporated by reference to Data I/O’s 2007 Annual Report on Form 10-K (File No. 0-10394)). 50 10.17 Great West Financial (formerly Orchard Trust Company) Defined Contribution Prototype Plan and Trust Amendment for Pension Protection Act and Heart Act. (Incorporated by reference to Data I/O’s 2009 Annual Report on Form 10-K (File No. 0-10394)). 10.18 Form of Indemnification Agreement. (Incorporated by reference to Data I/O’s 2010 Annual Report on Form 10-K (File No. 0-10394)). 10.19 Asset Purchase Agreement dated April 29, 2011, with the Miller Trust, for acquisition of Software Technology (Incorporated by reference to Data I/O’s Current Report on Form 8-K filed May 3, 2011 with portions omitted pursuant to a confidential treatment request, and by reference to Data I/O’s Form 10-Q filed April 3, 2012, which included the redacted portions that had been made in the original Form 8-K filing). 10.20 Executive Agreement with Anthony Ambrose dated October 25, 2012. (Incorporated by reference to Data I/O’s 2012 Annual Report on Form 10-K (File No. 0-10394)). 10.21 Letter Agreement with Anthony Ambrose (Incorporated by reference to Data I/O’s Current Report on Form 8-K filed on October 29, 2012). 10.22 Amended and Restated Data I/O Corporation 2000 Stock Compensation Incentive Plan approved May 10, 2012 (Incorporated by reference to Data I/O’s 2012 Proxy Statement filed April 3, 2012). 10.23 Executive Agreement with Rajeev Gulati dated July 25, 2013. (Incorporated by reference to Data I/O’s 2013 Annual Report on Form 10-K (File No. 0- 10394)). 10.24 Letter Agreement with Rajeev Gulati (Incorporated by reference to Data I/O’s Current Report on Form 8-K filed on July 31, 2013). 10.25 Form of Restricted Stock Unit Award Agreement (Incorporated by reference to Exhibit 10.29 of Data I/O’s March 31, 2014 Quarterly Report on Form 10-Q (File No. 0-10394)). 10.26 Amended and Restated Data I/O Corporation 2000 Stock Compensation Incentive Plan approved April 30, 2014 (Incorporated by reference to Exhibit 10.30 of Data I/O’s March 31, 2014 Quarterly Report on Form 10-Q (File No. 0-10394)). 10.27 Form of Executive Agreement (Incorporated by reference to Exhibit 10.31 of Data I/O’s June 30, 2014 Quarterly Report on Form 10-Q (File No. 0-10394)) 10.28 Letter Agreement with Joel S. Hatlen (Incorporated by reference to Exhibit 10.32 of Data I/O’s June 30, 2014 Quarterly Report on Form 10-Q (File No. 0- 10394)). 10.29 Third Amendment to Lease, (Redmond East) between Data I/O Corporation and Arden Realty Limited Partnership, made as of June 1, 2015 (Incorporated by reference to Exhibit 10.29 of Data I/O’s June 30, 2015 Quarterly Report on Form 10-Q (File No. 0-10394)). 10.30 Great West Financial Adoption Agreement #005 Non-standardized 401(k) Plan (Incorporated by reference to Data I/O’s 2015 Annual Report on Form 10-K (File No. 0-10394)). 51 21.1 Subsidiaries of the Registrant 23.1 Consent of Independent Registered Public Accounting Firm 31 Certification – Section 302: 31.1 31.2 Chief Executive Officer Certification Chief Financial Officer Certification 32 Certification – Section 906: 32.1 32.2 Chief Executive Officer Certification Chief Financial Officer Certification 101 Interactive Date Files Pursuant to Rule 405 of Regulation S-T 55 56 57 58 59 60 52 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. DATED: March 28, 2016 DATA I/O CORPORATION (REGISTRANT) By: /s/Anthony Ambrose Anthony Ambrose 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/Anthony Ambrose________ March 28, 2016 Anthony Ambrose President and Chief Executive Officer (Principal Executive Officer), Director By: /s/Joel S. Hatlen____________ March 28, 2016 Joel S. Hatlen Chief Financial Officer Vice President Secretary, Treasurer (Principal Financial and Accounting Officer) By: /s/Douglas W. Brown_______ _ March 28, 2016 Director Douglas W. Brown By: /s/Brian T. Crowley_______ ___ March 28, 2016 Director Brian T. Crowley By: /s/Alan B. Howe____________ _ March 28, 2016 Alan B. Howe Director By: /s/Mark J. Gallenberger_______ March 28, 2016 Mark J. Gallenberger Director 53 DATA I/O CORPORATION SCHEDULE II – CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS Balance at Beginning of Period Charged/ (Credited) to Costs and Expenses Deductions- Describe Balance at End of Period $87 $6 $ - (1) $93 $93 ($36) ($14) (1) $43 (in thousands) Year Ended December 31, 2014: Allowance for bad debts Year Ended December 31, 2015: Allowance for bad debts (1) Uncollectable accounts written off, net of recoveries 54 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: Name of Subsidiary Data I/O International, Inc. RTD, Inc. State or Jurisdiction of Organization Washington Washington Data I/O FSC International, Inc. Territory of Guam Data I/O Canada Corporation Canada Data I/O China, Ltd. Data I/O GmbH Hong Kong, China Germany Data I/O Electronics (Shanghai) Co., Ltd. China Brazil Data I/O Programação de Sistemas Ltda. Percentage of Voting Securities Owned 100% 100% 100% 100% 100% 100% 100% 100% 55 EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We have issued our report dated March 28, 2016, with respect to 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, 2015. We consent to the incorporation by reference of said report in the Registration Statements of Data I/O Corporation on Form S-8 (File Nos. 002-76164, 002-86785, 002-98115, 002-78394, 33-95608, 33-66824, 33-42010, 33-26472, 33-54422, 333-20657, 333- 55911, 33-02254, 33-03958, 333-107543, 333-81986, 333-48595, 333-121861, 333-151006, 333-166730, and 333-175840) and on Form S-3 (File No. 333-121566). /s/Grant Thornton LLP Seattle, Washington March 28, 2016 56 EXHIBIT 31.1 Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 I have reviewed this annual report on Form 10-K of Data I/O Corporation; I, Anthony Ambrose, certify that: 1) 2) Based upon my knowledge, this annual report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)0 for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and d) Disclosed in this annual report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. 5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting. Date: March 28, 2016 /s/ Anthony Ambrose Anthony Ambrose Chief Executive Officer (Principal Executive Officer) 57 EXHIBIT 31.2 Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 I have reviewed this annual report on Form 10-K of Data I/O Corporation; I, Joel S. Hatlen, certify that: 1) 2) Based upon my knowledge, this annual report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)0 for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and d) Disclosed in this annual report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. 5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting. Date: March 28, 2016 /s/ Joel S. Hatlen Joel S. Hatlen Chief Financial Officer (Principal Financial Officer) 58 Exhibit 32.1 Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the annual report of Data I/O Corporation (the “Company”) on Form 10-K for the period ended December 31, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Anthony Ambrose, 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) (2) The Report fully complies with the requirements of § 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Anthony Ambrose Anthony Ambrose Chief Executive Officer (Principal Executive Officer) Date: March 28, 2016 59 Exhibit 32.2 Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the annual report of Data I/O Corporation (the “Company”) on Form 10-K for the period ended December 31, 2015 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) (2) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 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) Date: March 28, 2016 60 DATA I/O CORPORATION NOTICE OF 2016 ANNUAL MEETING and PROXY STATEMENT DATA I/O CORPORATION April 4, 2016 To Our Shareholders: You are cordially invited to attend the 2016 Annual Meeting of Data I/O Corporation, which will be held at Data I/O’s headquarters at 6645 185th Ave NE, Suite 100, Redmond, Washington 98052 (Our new location). The meeting will begin at 9:00 a.m. Pacific Daylight Time on Tuesday, May 24, 2016. Officers of Data I/O will be attending and will respond to questions after the meeting. Formal business will include the election of directors, ratification of the continued appointment of Grant Thornton LLP as Data I/O’s independent auditors, and an advisory vote on executive compensation. Please read the proxy materials carefully. Your vote is important. Data I/O appreciates you considering and acting on the proposals presented. We look forward to seeing you on May 24, 2016. Sincerely, Anthony Ambrose President and Chief Executive Officer DATA I/O CORPORATION NOTICE OF ANNUAL MEETING OF SHAREHOLDERS - May 24, 2016 To the Shareholders of Data I/O Corporation: NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Data I/O Corporation (the “Company” or “Data I/O”) will be held at 9:00 a.m. Pacific Daylight Time, on Tuesday, May 24, 2016, at Data I/O’s principal offices, 6645 185th Ave NE, Suite 100, Redmond, Washington 98052, for the following purposes: (1) (2) (3) (4) Election of Directors: To elect five directors, each to serve until the next annual meeting of shareholders or until his or her successor is elected and qualified or until such director’s earlier death, resignation, or removal. Ratification of Independent Auditors: To ratify the continued appointment of Grant Thornton LLP as Data I/O’s independent auditors for the calendar year ended December 31, 2016. Say on Pay – Advisory Vote on Executive Compensation: To consider and vote on an advisory resolution on the compensation of our named executive officers. Other Business: To consider and vote upon such other business as may properly come before the meeting or any adjournments or postponements thereof. Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting To Be Held on May 24, 2016. The proxy statement and annual report to security holders are also available at http://www.dataio.com/company/ investorrelations/annualmeeting.aspx. The Board of Directors has fixed the close of business on March 24, 2016, as the Record Date for the determination of shareholders entitled to notice of, and to vote at, the 2016 Annual Meeting and any adjournment or postponement thereof. By Order of the Board of Directors /s/ Anthony Ambrose Anthony Ambrose President and Chief Executive Officer Redmond, Washington April 4, 2016 YOUR VOTE IS IMPORTANT Whether or not you expect to attend the meeting in person, we urge you to sign, date and return the accompanying proxy card at your earliest convenience, or you may vote by the internet at http://www.investorvote.com/DAIO or by telephone at 1-800-652-8683, as provided in the instructions on the proxy card. This will ensure the presence of a quorum at the meeting. Promptly returning a signed and dated proxy card, or voting by the internet or by telephone, will save Data I/O the extra expense of additional solicitation. Your proxy is revocable at your request any time before it is voted. If you attend the meeting, you may vote in person if you wish, even if you have previously returned your proxy card. If you vote by mail, an addressed, postage-paid envelope is provided in order to make certain that your shares will be represented at the Annual Meeting. DATA I/O CORPORATION 6645 185th Ave NE, Suite 100 Redmond, Washington 98052 ____________________ PROXY STATEMENT ANNUAL MEETING OF SHAREHOLDERS May 24, 2016 INFORMATION REGARDING PROXY This Proxy Statement and the accompanying form of proxy are furnished in connection with the solicitation of proxies by the Board of Directors (“Board of Directors”) of Data I/O Corporation (the “Company” or “Data I/O”) for use at the Annual Meeting of Shareholders to be held on Tuesday, May 24, 2016, at 9:00 a.m. Pacific Daylight Time at Data I/O’s principal offices, 6645 185th Ave NE, Suite 100, Redmond, Washington 98052, and at any adjournment of the meeting (the “Annual Meeting”). Shareholders of record at the close of business on March 24, 2016 (the “Record Date”) are entitled to notice of, and to vote at, the Annual Meeting. This Proxy Statement and a copy of Data I/O’s 2015 Annual Report to Shareholders are being mailed to shareholders on or about April 13, 2016. A proxy card is enclosed for your use. You are requested on behalf of the Board of Directors to sign, date, and return the proxy card in the accompanying envelope, which is postage-paid if mailed in the United States or Canada, or you may vote by the internet at http://www.investorvote.com/DAIO, or by telephone at 1-800-652-8683, as provided in the instructions on the proxy card. If you vote by the internet or by telephone, you do not need to mail back the proxy card. A proxy in the accompanying form, which is properly signed, dated and returned and not revoked, will be voted in accordance with its instructions. To vote on the election of directors, check the appropriate box under Proposal 1 on your proxy card. You may (a) vote “FOR” all of the director nominees as a group, (b) “WITHOLD” authority to vote for all director nominees as a group, or (c) vote “FOR” all director nominees as a group except those nominees indicated to the contrary. To vote on Proposal 2 to ratify the continued appointment of Grant Thornton LLP as Data I/O’s independent auditors for the calendar year ended December 31, 2016, check the appropriate box under Proposal 2 on your proxy card. You may (a) vote “FOR” approval of the ratification of Grant Thornton LLP as Data I/O’s independent auditors, (b) vote “AGAINST” approval of the ratification of Grant Thornton LLP as Data I/O’s independent auditors, or (c) “ABSTAIN” from voting on the ratification of Grant Thornton LLP as Data I/O’s independent auditors. To vote on Proposal 3, Say on Pay – Advisory Vote on Executive Compensation, you may vote (a) “FOR” the advisory resolution, (b) “AGAINST” the advisory resolution, or (c) “ABSTAIN” from voting on the advisory resolution on executive compensation. Proxies which are returned to Data I/O without instructions will be voted as recommended by the Board of Directors. Any shareholder who returns a proxy may revoke it at any time prior to voting on any matter (without, however, affecting any vote taken prior to such revocation) by (i) delivering written notice of revocation to the Secretary of Data I/O at Data I/O’s principal offices, (ii) executing and delivering to Data I/O another proxy dated as of a later date, or (iii) voting in person at the Annual Meeting. VOTING SECURITIES AND PRINCIPAL HOLDERS The only outstanding voting securities of Data I/O are shares of common stock (the “Common Stock”). As of the Record Date, there were 7,905,748 shares of Common Stock issued and outstanding, and each such share is entitled to one vote at the Annual Meeting. The presence in person or by proxy of holders of record of a majority of the outstanding shares of Common Stock is required for a quorum for transacting business at the Annual Meeting. Shares of Common Stock underlying abstentions will be considered present at the Annual Meeting for the purpose of calculating a quorum. Under Washington law and Data I/O’s charter documents, if a quorum is present, the five nominees for election to the Board of Directors who receive the greatest number of affirmative votes cast at the Annual Meeting will be elected directors. Abstentions and broker non-votes will have no effect on the election of directors because they are not cast in favor of any particular candidate. The proposal to ratify the continued appointment of Grant Thornton as Data I/O’s independent auditors will be approved, if a quorum is present, if the number of votes cast in favor of the proposal exceeds the number of votes cast against the proposal. Abstentions and broker non-votes on the proposal will have no effect because approval of the proposal is based solely on the votes cast. 1 Proxy Say on Pay – The advisory vote on the compensation of Data I/O’s named executive officers will be approved, if a quorum is present, if the number of votes cast in favor of the advisory resolution exceeds the number of votes cast against the advisory resolution. Abstentions and broker non-votes on the advisory resolution will have no effect because approval of the advisory resolution is based solely on the votes cast. Proxies and ballots will be received and tabulated by Computershare Shareowner Services LLC, an independent business entity not affiliated with Data I/O. Effect of Not Casting Your Vote If you hold your shares in street name, it is critical that you instruct your broker or bank how to vote if you want it to count in Proposal 1, the election of directors; and Proposal 3, Say on Pay. Regulations no longer allow your bank or broker to vote your uninstructed shares in the election of directors on a discretionary basis. If you hold your shares in street name and you do not instruct your bank or broker how to vote in the Proposal 1, election of directors; and Proposal 3, Say on Pay, votes will not be cast on your behalf for these Proposals. Your bank or broker will, however, continue to have discretion to vote any uninstructed shares on Proposal 2, ratification of the appointment of Data I/O’s independent auditors. If you are a shareholder of record and you do not cast your vote, votes will not be cast on your behalf on any of the items of business at the Annual Meeting. The Common Stock is traded on The NASDAQ Capital Market under the symbol “DAIO”. The last sale price for the Common Stock, as reported by The NASDAQ Capital Market on March 24, 2016, was $2.24 per share. Principal Holders of Data I/O’s Common Stock The following table sets forth information for to all shareholders known by Data I/O to be the beneficial owners of more than five percent of its outstanding Common Stock as of March 25, 2016. Except as noted below, each person or entity has sole voting and investment powers with for the shares shown. Amount and Nature of Beneficial Ownership Percent of Shares Outstanding 521,390 (1) 6.6% 440,187 (2) 5.6% Name and Address Penbrook Management, LLC AnKap Partners, L.P. AnKap, LLC Robert S. Anderson, Ralph Kaplan Barbara Burke DiCostanzo Ward Anderson 880 Third Avenue, 16th Floor New York, NY 10022 Mercury Fund XI, Ltd. Mercury Ventures III, Ltd. Mercury Management, L.L.C. Kevin C. Howe 501 Park Lane Drive, McKinney, TX 75070 (1) The holding shown is as of December 31, 2015 as jointly reported by Penbrook Management, LLC; AnKap Partners, L.P.; AnKap, LLC; Robert S. Anderson; Ralph Kaplan; Barbara Burke DiCostanzo; and Ward Anderson, on the most recent (filed February 25, 2016) Schedule 13G filed pursuant to Rule 13d-1 under the Securities Exchange Act of 1934. The Schedule 13G indicates that Penbrook Management has sole dispositive power of 521,390 shares and disclaims beneficial ownership of them; AnKap Partners has sole voting power and dispositive power for 110,000 shares; AnKap, LLC has sole voting power and dispositive power for 110,000 shares and disclaims beneficial ownership of them; Robert S. Anderson has sole voting and dispositive power for 51,300 shares, shared voting power for 110,000 shares and shared dispositive power for 469,090 shares, with an aggregate amount of 520,390 shares, however disclaiming beneficial ownership of shares managed by Penbrook Management and AnKap Partners; Ralph Kaplan has shared voting power for 110,000 shares and shared dispositive power for 469,090 shares, with an aggregate amount of 469,090 shares, however disclaiming beneficial ownership of shares managed by Penbrook Management and AnKap Partners; Barbara Burke DiCostanzo has shared voting power for 110,000 share and shared 2 Proxy dispositive power for 469,090 shares; with an aggregate amount of 469,090 shares, however disclaiming beneficial ownership of shares managed by Penbrook Management and AnKap Partners; and Ward Anderson has sole voting and dispositive power for 1,000 shares and shared voting power for 0 shares and shared dispositive power for 359,090 shares, with an aggregate amount of 360,090 shares, however disclaiming beneficial ownership of these shares managed by Penbrook Management. (2) The holding shown is as of December 31, 2015 as jointly reported by Mercury Fund XI, Ltd.; Mercury Ventures III, Ltd.; Mercury Management, L.L.C.; and Kevin C. Howe, on the most recent (filed January 20, 2016) Schedule 13G/A filed pursuant to Rule 13d-1under the Securities Exchange Act of 1934. The Schedule 13G/A indicates that Mr. Howe, manager, exercises voting and dispositive power of 440,187 shares on behalf of Mercury Management, the general partner of Mercury Ventures III, Ltd., which is the general partner of Mercury Fund XI, Ltd. Directors’ and Officers’ Share Ownership The following table indicates ownership of Data I/O’s Common Stock by each director of Data I/O, each executive officer named in the compensation tables appearing later in this Proxy Statement, and by all directors and executive officers as a group, all as of March 25, 2016. Data I/O is not aware of any family relationships between any director, director nominee or executive officer of Data I/O. Name Anthony Ambrose Joel S. Hatlen Rajeev Gulati Douglas W. Brown Brian T. Crowley Alan B. Howe Mark J. Gallenberger All current directors and executive officers as a group (7 persons) Amount and Nature of Beneficial Ownership Percent of Shares Outstanding 251,305 264,812 106,750 58,200 40,454 30,350 25,350 777,221 (1) (2) (3) (4) (5) (6) (7) (8) 3.2% 3.3% 1.4% (9) (9) (9) (9) 9.8% (1) Includes options to purchase 175,000 shares exercisable within 60 days. (2) Includes options to purchase 90,000 shares exercisable within 60 days. (3) Includes options to purchase 68,750 shares exercisable within 60 days. (4) Includes options to purchase 27,500 shares exercisable within 60 days. (5) Includes options to purchase 13,750 shares exercisable within 60 days. (6) Includes options to purchase 11,250 shares exercisable within 60 days. (7) Includes options to purchase 11,250 shares exercisable within 60 days. (8) Includes options to purchase 397,500 shares exercisable within 60 days. (9) Less than 1 percent each. Data I/O is not aware of any arrangement the operation of which may at a subsequent date result in a change of control of Data I/O. 3 Proxy Board Charters CORPORATE GOVERNANCE The Board of Directors has adopted Corporate Governance and Nominating Committee, Audit Committee and Compensation Committee Charters. All our Charters are reviewed and updated periodically by our Board of Directors. All of our Charters were reviewed during 2015 and no changes were made. The current versions of our Charters are posted on the corporate governance page of our website at www.dataio.com/company/investorrelations/corporategovernance.aspx. All of these Charters are consistent with the applicable requirements of United States security laws and our NASDAQ listing standards. Code of Ethics Our Code of Ethics was reviewed by our Board of Directors during 2015 and no changes were made. The current version of our Code of Ethics is posted on the corporate governance page of our website at www.dataio.com/company/corporategovernance.axp. Data I/O’s Code of Ethics apply to all directors, officers and employees of Data I/O, including the named executive officers. The key principles of the Code are to act legally, and with integrity in all work for Data I/O. We will post any amendments to our Code of Ethics on the corporate governance page of our website at www.dataio.com/company/investorrelations/corporategovernance.aspx. In the unlikely event that the Board of Directors approves any waiver to the Code of Ethics for our executive officers or directors, information concerning such waiver will also be posted on our website. In addition to posting information regarding amendments and waivers on our website, the same information will be included in a Current Report on Form 8-K within four business days following the date of the amendment or waiver, unless website posting of such amendments or waivers is permitted by the rules of The NASDAQ Stock Market LLC. Risk Oversight Our Board of Directors consists of four independent directors, and one non-independent director, our Chief Executive Officer. Risk oversight is generally handled by our entire Board of Directors, although certain risk oversight areas such as internal control and cyber risk are handled by our Audit Committee, and compensation is handled by our Compensation Committee, respectively. Director Independence Messrs. Crowley, Gallenberger, Howe and Brown are independent directors, as defined by applicable NASDAQ listing standards. Mr. Ambrose, our Chief Executive Officer, is not an independent director. Leadership Structure Our Chairman, Mr. Howe, is an independent director and Mr. Ambrose is our Chief Executive Officer, President and Director. PROPOSAL 1: ELECTION OF DIRECTORS At the 2015 Annual Meeting, the shareholders elected five directors to serve until the next Annual Meeting or until such director’s successor has been qualified and elected or such director’s earlier death, resignation or removal. For the 2016 Annual Meeting, the Board of Directors has approved the five nominees named below. All the nominees are currently members of the Board of Directors. Each of the nominees has indicated that they are willing and able to serve as directors. However, should one or more of the nominees not accept the nomination, or otherwise be unwilling or unable to serve, it is intended that the proxies will be voted for the election of a substitute nominee or nominees designated by the Board of Directors. RECOMMENDATION: The Board of Directors recommends a vote FOR each of the director nominees. Anthony Ambrose, age 54, was appointed a director of Data I/O effective October 25, 2012. He joined Data I/O October 25, 2012 and has served as President and Chief Executive Officer (“CEO”). Prior to Data I/O, Mr. Ambrose was Owner and Principal of Cedar Mill Partners, LLC, a strategy consulting firm since 2011. From 2007 to 2011, he was Vice President and General Manager at RadiSys Corporation, a leading provider of embedded wireless infrastructure solutions, where he led three product divisions and worldwide engineering. At RadiSys, he established the telecom platform business and grew it to over $125M in annual revenues. Until 2007, he was general manager and held several other progressively responsible positions at Intel Corporation, where he led development and marketing of standards based telecommunications platforms, and grew the industry standard server business to over $1B in revenues. He is a member of the EvergreenHealth Foundation Board of Trustees. Mr. Ambrose has a Bachelors of Science in Engineering from Princeton University. 4 Proxy Mr. Ambrose has extensive semiconductor and mobile broadband networks industry operating experience. He has significant executive experience in strategy development, business management, marketing, engineering and new product development. His role as our President and CEO gives him knowledge as well as unique insight into our challenges, opportunities and operations that the Board of Directors believes qualifies him to serve as a director of Data I/O. Douglas W. Brown, age 60, was appointed a director of Data I/O effective April 1, 2011. Mr. Brown is currently Executive Chairman of All Star Directories, Inc., Seattle, Washington, a Web-based publisher of post-secondary online and career school directories which he joined as President in 2005 and served in that capacity until 2015. From 2003 to 2005, he provided governance and interim executive services, with engagements including Interim President and Board member, to venture-backed clients. From 1998 to 2003, he was a Board member of GoAhead Software and was appointed its President in 2001. From 1993 to 1999, he was a President of a Seattle-area manufacturing company which became a Division of Leggett & Platt in 1996. Prior to that time, he was the Chief Financial Officer (“CFO”) of Seattle Silicon, and Executive Vice President, Finance and Operations at Phamis. He started his career as a Certified Public Accountant at Arthur Young & Co, now Ernst & Young, in Seattle. Mr. Brown is a member of the Board of Directors of the Washington Technology Industry Association. Mr. Brown has a Bachelors degree in Business from University of Idaho. Mr. Brown has extensive software, financial, CEO, CFO and board level experience that the Board of Directors believes qualifies him to serve as a director of Data I/O. Brian T. Crowley, age 55, was appointed a director of Data I/O effective June 5, 2012. Mr. Crowley is currently Chief Operating Officer of Symbio, a global R&D and software engineering company. From April 2014 to July 2015, he served as Vice President of Engineering and Operations at Snupi Technologies, an Internet of Things startup. From July 2003 to September 2013, Mr. Crowley served as the President and CEO for BSquare Corporation (NASDAQ: BSQR) in Bellevue, Washington, the leading provider of embedded solutions, engineering services and production ready software products for the smart device market. Previously, he had served as Vice President, Product Development since joining BSquare in April 2002. From April 1999 to December 2001, Mr. Crowley was with DataChannel, a developer of enterprise portals where he held executive positions including Vice President of Engineering and Vice President of Marketing. From December 1997 to April 1999, he was Director of Development at Sequel Technology, a network solutions provider. From 1986 to December 1997, he held various positions at Applied Microsystems Corporation, including Vice President and General Manager of the Motorola products and quality assurance divisions. He serves on the Western Washington University Business School Deans Advisory Board. Mr. Crowley has a Bachelors of Science in Electrical Engineering from Arizona State University. Mr. Crowley has experience as a CEO and public company director, as well as prior executive management experience in industries related to ours in product development, engineering, technology, and mergers and acquisitions that the Board of Directors believes qualifies him to serve as a director of Data I/O. Mark J. Gallenberger, age 52, was appointed a director of Data I/O effective January 31, 2013. He is currently the Senior Vice President, Chief Financial Officer, Chief Operating Officer and Treasurer of Xcerra Corporation (formerly called LTX-Credence Corporation) (NASDAQ:XCRA), a global provider of test and handling capital equipment, interface products, test fixtures, and services to the semiconductor, industrial, and electronics manufacturing industries, which he joined in 2000. For the six years prior, he was Vice President/Senior Manager with Ernst &Young (Cap Gemini) in their consulting practice, establishing the Deals & Acquisitions Group. Previously, he held management and technical positions with Digital Equipment Corporation. He has a Masters of Business Administration from Northwestern University and a Bachelors of Science – Electrical Engineering from Rochester Institute of Technology. Mr. Gallenberger has extensive semiconductor equipment industry, mergers & acquisition, capital markets, engineering technical, financial, and CFO experience that the Board of Directors believes qualifies him to serve as a director of Data I/O. Alan B. Howe, age 54, was appointed a director of Data I/O effective January 31, 2013. He has served as the Co-founder and Managing Partner of Broadband Initiatives LLC, a boutique corporate advisory and consulting firm, since 2001. He served as Vice President of Strategic and Wireless Business Development for Covad Communications, Inc., a national broadband telecommunications company from May 2005 to October 2008. He served as CFO and Vice President of Corporate Development for Teletrac, Inc. from April 1995 to April 2001. Previously, he held various executive management positions for Sprint PCS, and Manufacturers Hanover Trust Company. He is currently a board member and Vice Chairman of Determine, Inc. (NASDAQ: DTRM) and has served on a number of private and public boards including in the past five years former reporting companies Qualstar, Ditech Networks, Inc., Altigen Communications, Inc., Proxim Wireless Corporation, and Crossroads Systems, Inc.. He has a Masters of Business Administration in Finance from Indiana University and a Bachelors of Science – Business Administration and Marketing from University of Illinois. 5 Proxy Mr. Howe has extensive wireless, business development, financial, CEO, CFO and board level and Chairman experience that the Board of Directors believes qualifies him to serve as a director of Data I/O. Communications with the Board of Directors THE BOARD OF DIRECTORS Shareholders may communicate with the Board of Directors by sending an email or by sending a letter to Data I/O Corporation Board of Directors, c/o the Secretary, 6645 185th Ave NE, Suite 100, Redmond, WA 98052. The Secretary will receive the correspondence and forward it to the Chairman of the applicable Board of Directors Committee or to any individual director or directors to whom the communication is directed. BOARD COMMITTEES During the year ended December 31, 2015, there were six meetings of the Board of Directors. Each of the incumbent directors who was on the Board of Directors during 2015 attended at least 75% of the aggregate of the total number of meetings of the Board of Directors and the total number of meetings held by all committees of the Board of Directors on which he served during his term of service on the Board of Directors. Data I/O does not have a policy requiring members of the Board of Directors to attend the Annual Meeting, although we typically encourage our Board of Directors to attend. Mr. Brown and Mr. Ambrose attended our 2015 Annual Meeting in person and Mr. Crowley, Mr. Gallenberger, and Mr. Howe attended via telephone. The Board of Directors had three standing Committees during 2015: the Corporate Governance and Nominating Committee, the Audit Committee, and the Compensation Committee. Each committee was comprised solely of independent directors during 2015, as defined by applicable NASDAQ listing standards including director independence generally as well as additional independence requirements for audit and compensation committees, and the Sarbanes-Oxley Act of 2002. The following table shows the composition of the Board Committees and Board Leadership structure during 2015 and through the date of this Proxy Statement. Director M=member Doug Brown Brian Crowley Alan Howe Audit Committee M – Chair after 2015 Annual Meeting M – Chair until 2015 Annual Meeting Mark Gallenberger M Anthony Ambrose Compensation Committee M M Chair Corporate Governance and Nominating Committee Corporate Governance and Nominating Committee M Chair M M Comments Chairman of the Board through the 2015 Annual Meeting Chairman of the Board since the 2015 Annual Meeting. President & CEO The Corporate Governance and Nominating Committee, or “CGNC”, develops, recommends to the Board of Directors, and monitors a set of corporate governance principles applicable to Data I/O. The CGNC seeks qualified candidates to serve on the Board of Directors, recommends them for the Board of Directors’ consideration for election as directors at the Annual Meeting of Shareholders and proposes candidates to fill vacancies on the Board of Directors. The CGNC met one time in 2015. The CGNC continues to seek qualified candidates and recommends the director nominees to the Board of Directors. The CGNC identifies, evaluates, and recommends director nominees and Committee assignments which are described in greater detail below. Audit Committee The Audit Committee appoints, oversees, evaluates, and engages independent certified public accountants for the ensuing year and approves the compensation and other terms of such engagement; reviews the scope of the audit; periodically reviews Data I/O’s program of internal control and audit functions; receives and reviews the reports of the independent accountants; and reviews the annual financial report to the directors and shareholders of Data I/O. Each member of the Audit Committee is an independent director, as defined by applicable NASDAQ listing standards and the Sarbanes-Oxley Act of 2002. During 2015 and through the date of this Proxy statement, all Audit Committee members are “audit committee financial experts” as defined by the applicable Securities and Exchange (“SEC”) rules adopted pursuant to the Sarbanes-Oxley Act of 2002. The Audit Committee met five times during 2015. See the “Report of the Audit Committee” for additional information. 6 Proxy Compensation Committee The Compensation Committee is composed entirely of independent directors, as defined by applicable NASDAQ listing standards for compensation committees. The Compensation Committee is responsible for setting and administering the policies which govern all of the compensation programs of Data I/O. The Compensation Committee makes recommendations to the Board of Directors concerning the compensation of Data I/O’s executive officers. The Compensation Committee administers Data I/O’s long-term equity incentive plans. The Compensation Committee reviews all employee benefit programs and approves significant changes in major programs and all new programs. The Compensation Committee met two times during 2015. As authorized by the Compensation Committee charter, the Compensation Committee may retain consultants or other advisors to assist in carrying out its responsibilities. No compensation consultants were engaged for 2015, however compensation surveys were purchased. Consideration of Director Nominees The Corporate Governance and Nominating Committee, has developed, and the Board has approved as part succession planning, Board Responsibilities and Director Recruitment Objectives, which further outline our directors roles and responsibilities and desired traits, characteristics, experience and criteria for selection. The Corporate Governance and Nominating Committee, or the independent members of the Board of Directors, as applicable, in evaluating and determining whether to recommend a person as a candidate for election as a director consider, in light of the Board Responsibilities and Director Recruitment Objectives, the relevant management and/or technology industry experience of potential director candidates (such as experience as chief executive, operations or financial officer, or similar positions); business development, mergers and acquisitions experience, public/corporate board experience, diversity, knowledge of Data I/O; educational experience; commitment to maximizing shareholder value; certain values such as integrity, accountability, judgment and adherence to high performance standards; independence pursuant to applicable guidelines; ability and willingness to undertake the required time commitment to Board functions; shareholder input; and an absence of conflicts of interest with Data I/O. Director Diversity The Corporate Governance and Nominating Committee also considers issues of diversity, such as diversity of gender, race and national origin, education, professional experience and differences in viewpoints and skills. The CGNC does not have a formal policy on Board diversity; however, the CGNC believes that it is important for Board members to represent diverse viewpoints. In considering candidates for the Board, the CGNC considers the entirety of each candidate’s credentials in the context of these standards. With respect to evaluating the nomination of continuing directors for re-election, the individual’s contributions to the Board are also considered. Identifying Director Nominees; Consideration of Nominees of the Shareholders The Corporate Governance and Nominating Committee may employ a variety of methods for identifying and evaluating nominees for director. The CGNC regularly assesses the size of the Board, the need for particular expertise on the Board, and whether any vacancies on the Board are expected due to retirement or otherwise. In the event that vacancies are anticipated, or otherwise arise, the CGNC considers various potential candidates for director which may come to the CGNC’s attention through current Board members, professional search firms, shareholders, or other persons and evaluates these candidates in light of the Board Responsibilities and Director Recruitment Objectives. These candidates are evaluated at regular or special meetings of the CGNC, and may be considered at any point during the year. The Corporate Governance and Nominating Committee will consider candidates recommended by shareholders, when the nominations are properly submitted, under the criteria summarized above in “Consideration of Director Nominees” and in accordance with the procedures described below in “Shareholder Nominations and Proposals for the 2017 Annual Meeting of Shareholders.” Following verification of the shareholder status of persons proposing candidates, the CGNC makes an initial analysis of the qualifications of any candidate recommended by shareholders or others pursuant to the criteria summarized above to determine if the candidate is qualified for service on the Data I/O Board of Directors before deciding to undertake a complete evaluation of the candidate. If any materials are provided by a shareholder or professional search firm in connection with the nomination of a director candidate, such materials are forwarded to the CGNC as part of its review. Other than the verification of compliance with procedures and shareholder status, and the initial analysis performed by the CGNC, a potential candidate nominated by a shareholder is treated like any other potential candidate during the review process by the CGNC. For eligible shareholder nominees to be placed on the 7 Proxy ballot for the 2016 Annual Meeting of Shareholders, shareholders were required to deliver nominations for proposed director nominees to Data I/O by February 18, 2016. While no formal candidate nominations were made by shareholders for election at the 2016 Annual Meeting, Mr. Howe and Mr. Gallenberger were initially identified by discussions with significant shareholders and the Board. Certain Relationships and Related Transactions Our Audit Committee is charged with monitoring and reviewing issues involving potential conflicts of interest, and reviewing and approving related party transactions as set forth in the Code of Ethics, which is posted on the corporate governance page of our website at www.dataio.com/company/investorrelations/corporategovernance.aspx. Under our Code of Ethics, our directors, officers and employees are expected to avoid conflicts of interest with Data I/O and are required to report any such conflicts of interest to our Chief Executive Officer or Chief Financial Officer, or to the Chair of our Audit Committee. Our Audit Committee reviews all such transactions and relationships by our directors and executive officers that come to its attention either through the director and officer questionnaires or otherwise, and considers whether to approve or take other appropriate action with respect to such transactions or relationships. During 2014 and 2015, no related party transactions that were significant or material occurred. BOARD COMPENSATION Employee directors (Anthony Ambrose) do not receive additional compensation for serving on the Board of Directors. During 2015, non-employee directors received a cash retainer of $7,750 for each quarter of service. Data I/O paid additional quarterly compensation to the non-employee directors who served as Chairman of the Board of Directors or as a Committee chair: $3,750 for Chairman of the Board of Directors; $2,500 for Chairman of the Audit Committee; $2,000 for Chairman of the Compensation Committee; and $2,000 for Chairman of the Corporate Governance and Nominating Committee. Fees are prorated based on time served for changes in directors and assignments. In addition, each non-employee Board of Directors member as of May 21, 2015, was granted a restricted stock award for 3,700 shares of Data I/O stock. New non-employee members who join the Board of Directors are granted 15,000 nonqualified stock options as an initial grant. The stock options are granted under the provisions and terms of the Amended and Restated 2000 Stock Compensation Incentive Plan (“2000 Plan”). Data I/O also reimburses non-employee directors for actual travel and out-of-pocket expenses incurred in connection with service to Data I/O. Each Data I/O non-employee member of the Board of Directors is required to achieve ownership of Data I/O stock at least equal to three times the annual director cash retainer fee based on Data I/O’s then current share price. Non-employee directors have five years from their initial election or appointment to meet the ownership target requirement. Amounts that count toward meeting the target requirement include: shares owned; shared ownership (shares owned or held in trust by immediate family); and the gain amount from in-the-money vested options. If the stock ownership target requirement has not been met by any non-employee director, until such time as such director reaches the target requirement, he or she will be required to retain any Data I/O shares issued by Data I/O to such director (other than those disposed of to pay for the exercise and associated taxes on those shares). As of the Record Date, none of the current non-employee directors have yet met the stock ownership target requirement, but they have from the current year up to two remaining years to meet the stock ownership target requirement. The Chief Executive Officer (“CEO”) is required to achieve ownership of Data I/O stock of at least two times the base pay of the CEO based on Data I/O’s then current share price. The CEO has five years from appointment to meet the ownership target requirement. Amounts that count toward meeting the target requirement are the same as for the Board of Directors. If the stock ownership target requirement has not been met by the CEO, until such time as the CEO reaches the requirement amount, he or she will be required to retain any Data I/O shares issued by Data I/O (other than those disposed of to pay for the exercise and associated taxes on those shares). As of the Record Date the CEO has not yet met the stock ownership target requirement and has approximately one and a half years to meet the target requirement. 8 Proxy DIRECTOR COMPENSATION The following table shows compensation paid by Data I/O to non-employee directors during 2015. Name (a) Fees Earned or Paid in Cash ($) (b) Stock Awards ($) (c) Option Awards ($) (d) Non-Equity Incentive Plan Compensation ($) (e) Nonqualified Deferred Compensation Earnings ($) (f) All Other Compensation ($) (g) Total ($) (h) Douglas W. Brown (1)(2) $42,950 $11,692 Brian T. Crowley (1)(2) $39,000 $11,692 Alan B. Howe (1)(2) $44,049 $11,692 Mark J. Gallenberger (1)(2) $39,000 $11,692 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $54,462 $0 $50,692 $0 $55,741 $0 $50,692 (1) Each outside director elected at the annual meeting in 2015 was awarded 3,700 shares of restricted stock with a fair value of $11,692 on May 21, 2015 vesting in one year or the next annual meeting, if earlier. (2) Each outside director had the following aggregate number of option awards outstanding at December 31, 2015: Brown, 27,500; Crowley, 15,000, Gallenberger 15,000 and Howe 15,000. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires Data I/O’s directors, certain officers and persons who own more than ten percent (10%) of Data I/O’s Common Stock (“Reporting Persons”) to file with the SEC initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of Data I/O. Reporting Persons are required by SEC regulations to furnish Data I/O with copies of all Section 16(a) reports. To Data I/O’s knowledge, based solely on its review of copies of such reports furnished to Data I/O and representations that no other reports were required, all Section 16(a) filing requirements applicable to its Reporting Persons were complied with during 2015. REPORT OF THE AUDIT COMMITTEE The Audit Committee oversees Data I/O’s financial reporting process on behalf of the Board of Directors. Management has the primary responsibility for the consolidated financial statements and the reporting process, including the systems of internal controls. Audit Committee members are not professional accountants, or auditors and their functions are not intended to duplicate or to certify the activities of management or the independent auditors. In fulfilling its oversight responsibilities, the Committee reviewed the audited consolidated financial statements in the Annual Report (Form 10-K) with management, including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the financial statements. The Committee reviewed with the independent auditors, who are responsible for expressing an opinion on the conformity of those audited consolidated financial statements with generally accepted accounting principles in the United States, their judgments as to the quality, not just the acceptability, of Data I/O’s accounting principles and such other matters as are required to be discussed by PCAOB AU Section 380 with the Committee under generally accepted auditing standards. In addition, the Committee has discussed with the independent auditors the auditors’ independence from management and Data I/O including the matters in the written disclosures and the letter provided by the independent auditors, as required by the applicable requirements of the Public Company Oversight Board for independent auditor communications with Audit Committees concerning independence, and considered the compatibility of non-audit services with the auditors’ independence. The Committee selects and engages Data I/O’s independent auditors and discusses the overall scope and plans for their audits. The Committee meets with the independent auditors, with and without management present, to discuss the results of their examinations, their evaluations of Data I/O’s internal controls, and the overall quality of Data I/O’s financial reporting. The Committee held five meetings during 2015, of which four were attended by Data I/O’s independent auditors. 9 Proxy In reliance on the reviews and discussions referred to above, the Committee recommended to the Board of Directors (and the Board has approved) that the audited consolidated financial statements be included in Data I/O’s Annual Report (Form 10-K) for the year ended December 31, 2015 for filing with the Securities and Exchange Commission. The Committee has selected Grant Thornton LLP as Data I/O’s auditors for the current year. Respectfully submitted, AUDIT COMMITTEE Douglas W. Brown (Chair) Mark Gallenberger Alan B. Howe April 4, 2016 PRINCIPAL ACCOUNTANT’S FEES AND SERVICES Audit Fees: Aggregate fees billed by Grant Thornton LLP for professional services rendered for the audit of Data I/O’s financial statements for each of the years ended December 31, 2015 and 2014 and for review of the financial statements included in each of Data I/O’s quarterly reports on Form 10-Q during each of the years ended December 31, 2015 and 2014, were approximately $181,178 and $176,979, respectively. Audit Related Fees: No aggregate fees were billed for the years ended December 31, 2015 and 2014 for assurance and subsidiary related services by Grant Thornton LLP that are reasonably related to the performance of the audit or review of Data I/O’s financial statements that are not reported under the caption “Audit Fees” above, including accounting treatment consultations. Tax Fees: No aggregate fees were billed for the years ended December 31, 2015 and 2014 for professional services rendered by Grant Thornton LLP for tax compliance, tax advice, tax examination support, and tax planning. All Other Fees: No aggregate fees were billed for the years ended December 31, 2015 and 2014 for all other products and services provided by Grant Thornton LLP that are not otherwise disclosed above. Policy on Pre-Approval by Audit Committee of Services Performed by Independent Auditors The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by the independent auditors. These services may include audit services, non-audit services, tax services and other services. Pre-approval is detailed as to the particular service or category of service and is subject to a specific engagement authorization. During the year, circumstances may arise when it may become necessary to engage the independent auditors for additional services not contemplated in the original pre-approval. In those circumstances, the Audit Committee has delegated pre-approval authority to the Chair of the Audit Committee for those instances when pre-approval is needed prior to a scheduled Audit Committee meeting. These additional approvals should be reported at the next scheduled Audit Committee meeting. For 2015, all services provided by the independent auditors were pre-approved. Shareholder Vote EXECUTIVE COMPENSATION At our 2015 Annual Meeting of Shareholders, our shareholders approved, in an advisory vote, the compensation of our Named Executive Officers, as disclosed in the Executive Compensation discussion and analysis, the compensation tables and the related disclosures in our proxy statement. The proposal was approved by our shareholders with 99.21 percent of the votes cast voting “for” approval and 0.79 percent voting “against” approval. In light of the level of approval by our stockholders, the Compensation Committee considered the result of the vote and did not make changes to our compensation policies or practices specifically in response to the stockholder vote. 10 Proxy Elements of Our Company’s Compensation Plan Annual executive officer compensation consists of the following elements which are described in more detail below:  Annual base salary;  Management Incentive Compensation Plan or “MICP”;  Long-term equity incentives;  Benefits; and  Perquisites and other perceived benefits. It is the Compensation Committee’s policy to set total executive officer compensation at competitive levels based on compensation surveys with similar positions in similar sized company revenue ranges and at levels sufficient to attract and retain a strong motivated leadership team. Our philosophy for compensation of executive officers is based on the following two principles: i. Executive base compensation levels should be established by comparison of job responsibility to similar positions in comparable companies and be adequate to retain highly-qualified personnel; and ii Variable compensation should be established to be comparably competitive and to provide incentive to improve performance and shareholder value.  Annual Base Salary. The Compensation Committee establishes a base salary structure for each executive officer position. This structure defines the salary levels and the relationship of base salary to total cash compensation. The Compensation Committee reviews the salary structure periodically.  MICP. The MICP offers each executive officer a performance-based opportunity to earn the variable component of annual cash compensation in an amount tied to a percentage of the executive officer’s base salary. The Compensation Committee’s philosophy in setting executive MICP percentages and the formulas for MICP payout is to pay above average total compensation for better than average historical or expected financial performance and below average compensation for lower than or average historical or expected financial performance. The percentages of base salary targeted for MICP payout (“the MICP Target”) for specific executive officers for a given year are generally the same as the previous year, but can be changed by the Compensation Committee on an annual basis. The 2014 and 2015 MICP Target percentages for our executive officers were as follows: Mr. Ambrose 60% of base salary; Mr. Hatlen 40% until June 30, 2014 (45% prorated effective July 1, 2014) of base salary; and Mr. Gulati 45% of base salary of base salary. The MICP payout can range from 0% to 200% of each executive’s MICP Target. If the maximum target measures in the 2016 MICP Variable Compensation Matrix were achieved under the MICP measures, the Chief Executive Officer, Mr. Ambrose, would earn a cash bonus of 120% of his base salary; Mr. Gulati would earn 90% of his base salary; and Mr. Hatlen would earn 90% of his base salary. The Compensation Committee determined that for 2014, 2015 and 2016 it was and will be critical to emphasize growth, profitability and cash preservation, as well as completion of key development and operational projects and corporate cost and spending objectives to deliver future new revenue and profitability. They have established two measures; one for Financial Performance (“FP”) is based on achievement of various levels of operating income as percentage of revenue. See below for the Financial Performance Matrix. The second measure for Product and Spending Performance (“PSP”) is based on the completion of key development and operational projects including product cost reductions, new customer targets and spending reduction objectives. The PSP is based upon an incentive compensation pool allocated among project development and operational goals typically related to delivery, cost, milestones, pilot customers, and releases, as well as spending goals related to certain product cost reduction targets and spending reduction targets. The achieved PSP result is prorated among participants based on their at target percentage incentive compensation. The PSP pool for 2015 was set, such that up to approximately 30% of target percentage incentive compensation could be achieved by this measure. For 2014, 2015 and 2016, the payout is a combination of the two (FP & PSP) measures. The Compensation Committee believes that for 2014, 2015 and 2016, the applicable measures of key results for Data I/O have affected or will affect near-term and long-term shareholder value. A greater or lesser percentage of MICP Target is to be paid based on Data I/O’s actual achievement of these measures with the payout target typically based on company financial plans as the Board determines appropriate. For 2014 the MICP payout was approximately 92% of target with payout achieved under the combined FP and PSP measure. For 2015 the MICP payout was approximately 88% of target with payout achieved under the combined FP and PSP measures. The Compensation Committee retains discretion to adjust the calculation of the two measures for changes outside normal business operations such as acquisitions or asset sales. 11 Proxy Data I/O Corporation 2014 & 2015 MICP Variable Compensation Matrix Range of Payouts (actual results interpolated) The 2014 and 2015 MICP Variable Compensation Matrix consists of two possible alternative measures. Project and Spending Performance (PSP) and Financial Performance (FP) with the payout based upon the combination of the two measures achieved. Project and Spending Performance (PSP) An incentive compensation pool set to allow achievement of up to approximately the first 30% of target payout with points allocated among project development goals related to delivery, cost, milestones, pilot or new customers, and releases, as well as spending goals related to certain product cost reduction targets and spending reduction targets. Financial Performance Matrix (FP) Operating Profit as a % of Revenue FP matrix payout as a % of Target 0.0% 0% 2.5% 50% Target Payout 5.0% 100% Target 200% Payout 10.0% 200% 7.5% 150%  Long-Term Equity Incentives. The Compensation Committee approves grants under the Data I/O Corporation 2000 Plan (“the Plan”). This is Data I/O’s only long-term incentive plan. The primary purpose of the Plan is to make a significant element of executive pay a reward for taking actions which maximize shareholder value over time. Generally, new options or stock awards are granted under the 2000 Plan, except the inducement grant of options and restricted stock to Mr. Ambrose and the inducement grant of options to Mr. Gulati, which were awarded on their employment under the terms of the 2000 Plan, but consisted of unregistered Data I/O shares as permitted for inducement grants. Award Criteria The Compensation Committee grants options or restricted stock unit awards based primarily on its perception of the executive’s ability to affect future shareholder value and secondarily on the competitive conditions in the market for highly- qualified executives who typically command compensation packages which include a significant equity incentive. All restricted stock unit awards granted to our executive officers in 2014 and 2015 were based on these criteria. Exercise Price Historically, all options granted by Data I/O have been granted with an exercise price equal to the fair market value (an average of the day’s high and low selling price) of Data I/O’s Common Stock on the date of grant and, accordingly, will only have value if Data I/O’s stock price increases. Options granted to employees are non-qualified. Vesting and Exercise Options granted to employees vest at a rate of 6.25% per quarter and have a six year term. Options granted to non-employee Directors are also non-qualified options and vest quarterly over a three year period. Restricted stock grants to employees vest annually over a 4 year period. Restricted stock grants to non-employee Directors vest in one year or on the next annual meeting date, if earlier. All grants are subject to acceleration of vesting in connection with certain events leading to a change in control of Data I/O or in the advent in a change in control or at any other time at the discretion of the Compensation Committee. All options granted to executive officers are issued in tandem with limited stock appreciation rights (“SARs”), which become exercisable only in the event of a change in control of Data I/O. See “Change in Control and other Termination Arrangements.” 12 Proxy Award Process The timing of our typical grant/award is typically determined well in advance, with approval at a scheduled meeting of our Board of Directors or its Compensation Committee with the grant date generally to be effective on the date of our next Annual Meeting of Shareholders. The Annual Meeting of Shareholders does not coincide with any of our scheduled earning releases. We do not anticipate option grants or restricted stock awards at other dates, except for grants/awards to new employees based on their first date of employment or in specific circumstances approved by the Compensation Committee. The grant/award date is established when the Compensation Committee approves the grant/award and all key terms have been determined. If at the time of any planned grant/award date any member of our Board of Directors or Executive Officers is aware of material non-public information, the Company would not generally make the planned grant/award. In such an event, as soon as practical after material information is made public, the Compensation Committee would authorize the delayed grant/award.  Benefits. Executive Officers of Data I/O are eligible for the same benefits as other Data I/O employees. Data I/O has no defined benefit pension programs. Data I/O has a 401(k) tax qualified retirement savings plan in which all U.S. based employees, including U.S. Executive Officers, are able to contribute the lesser of up to 100% of their annual salary or the limit prescribed by the IRS on a Roth or pre-tax basis. Data I/O will match up to 4% of pay contributed. Matching contributions in any year require employment on December 31, except in the case of retirement per the plan, and vest after three years of service credit.  Perquisites and Other Personal Benefits. We believe perquisites are not conditioned upon performance, create divisions among employees, undermine morale, and are inconsistent with our compensation philosophy and policy of equitable treatment of all employees based upon their contribution to our business. No executive officer received perquisites valued at $10,000 or more in 2014 or 2015, except in connection with Mr. Gulati’s hiring and relocation Mr. Gulati was provided temporary living and relocation expenses of $19,172 in 2014.  Individual Executive Officers’ Performance. The base salary of each executive officer is reviewed annually by the President and Chief Executive Officer. This is done on the basis of a review by the President and Chief Executive Officer, evaluating the executive’s prior year performance against their individual job responsibilities and attainment of corporate objectives and Data I/O’s financial performance. In developing executive compensation packages to recommend to the Compensation Committee, the President and Chief Executive Officer considers, in addition to each executive’s prior year performance, the executive’s long-term value to Data I/O, the executive’s pay relative to that for comparable surveyed jobs, the executive’s experience and ability relative to executives in similar positions, and the current year increases in executive compensation projected in industry surveys. The Compensation Committee then reviews the President and Chief Executive Officer’s recommendations for executive officers’ total compensation and approves final decisions on pay for each executive officer based on the President and Chief Executive Officer’s summary of the executive officers performance and on the other criteria and survey data described above. In this process, the Compensation Committee consults with Data I/O’s President and Chief Executive Officer. The base salary, total cash compensation, and long term equity incentive compensation for the President and CEO are reviewed annually by the Compensation Committee. This review includes a written evaluation of the CEO’s performance for the previous year. The Compensation Committee meets annually without the President and Chief Executive Officer to evaluate his performance and to develop a recommendation for his compensation for the coming year. In addition to reviewing Data I/O’s financial performance for the prior year, the Committee reviewed compensation surveys for chief executive officers and the President and Chief Executive Officer’s individual performance, including development and execution of short- and long-term strategic objectives, Data I/O revenue growth and profitability, the achievement of which is expected to increase shareholder value. The Compensation Committee determined the compensation package, including salary, bonus, MICP participation, stock option grants, restricted stock awards, and other benefits for Mr. Ambrose, President and Chief Executive Officer, based on the Committee’s perception of his qualifications for the position and his ability to affect future shareholder value, as well as during the hiring process in 2012 based on compensation surveys, advice from Korn Ferry, and the competitive conditions in the market. No base pay adjustment was made in 2014 or 2015 for Mr. Ambrose. Consideration of Risk in Compensation The Compensation Committee believes that promoting the creation of long-term value discourages behavior that leads to excessive risk. The Compensation Committee believes that the following features of our compensation programs provide incentives for the 13 Proxy creation of long-term shareholder value and encourage high achievement by our executive officers without encouraging inappropriate or unnecessary risks:  Our long-term incentives in the form of stock options or restricted stock are at the discretion of the Compensation Committee and not formulaic.  Stock options become exercisable over a four year period and remain exercisable for up to six years from the date of grant and restricted stock awards vest over a four year period, encouraging executives to look to long-term appreciation in equity values.  We balance short and long-term decision-making with the annual cash incentive program and stock options and restricted stock that vest over four years.  Because of the extent of the CEO and CFO’s direct stock ownership, they could lose significant wealth if Data I/O were exposed to inappropriate or unnecessary risks which in turn affected our stock price.  The metrics used in the MICP are measures the Committee believes drive shareholder value. Moreover, the Committee attempts to set ranges for these measures that encourage success without encouraging excessive risk taking to achieve short- term results.  In addition, the overall MICP incentive compensation cannot exceed two times the MICP Target amount, no matter how much performance exceeds the measures established for the year. Accounting and Tax Considerations of our Compensation Program Options granted to employees are non-qualified options because of the more favorable tax treatment for Data I/O. We are required to value granted stock options under the fair value method and expense those amounts in the income statement over the stock option’s remaining vesting period. Restricted stock is valued at its fair value on the award date and is expensed over its vesting period. We have structured our compensation program to comply with Internal Revenue Code Sections 162(m) and 409A. Under Section 162(m) of the Internal Revenue Code, a limitation was placed on tax deductions of any publicly-held corporation for individual compensation to covered employees (generally the chief executive officer and the three other most highly compensated executive officers, other than the chief financial officer, whose compensation must be disclosed pursuant to rules and regulations under the Securities Exchange Act of 1934) exceeding $1 million in any taxable year, unless the compensation is performance-based. The Compensation Committee is aware of this limitation and believes that no compensation to be paid by Data I/O in 2016 will exceed the $1 million limitation, except possibly related to a change of control example. Change in Control and other Termination Arrangements  Change in Control Arrangements. Data I/O has entered into agreements (the “Executive Agreements”) with Messrs. Ambrose, Gulati and Hatlen which entitle them to receive payments if they are terminated without cause or resign with good reason within specified periods before or after the occurrence of certain events deemed to involve a change in control of Data I/O. Effective July 30, 2014, the Executive Agreements of Messrs. Ambrose, Gulati and Hatlen were amended and restated and the term of their Executive Agreements was extended with automatic renewal provisions. The Executive Agreements ensure appropriate incentives are in place for Messrs. Ambrose, Gulati and Hatlen to complete any change in control related transaction and transition, as well as comply with the provisions of Section 409A of the Internal Revenue Code. The Executive Agreements state that the resulting additional severance will be calculated under the Executive Agreements based on Data I/O’s severance arrangements in place immediately preceding the date of a change in control (See: ”Other Termination Arrangements” below for current severance policy). The Executive Agreements provide for continuation and vesting in Data I/O’s matching 401(k) contributions through the date of termination after a change in control and include a reimbursement allowance of $20,000 for outplacement services. The Executive Agreements also have a transaction closing incentive of one half year’s annual salary for Messrs. Ambrose, Gulati and Hatlen to encourage the consideration of all forms of strategic alternatives. Data I/O’s option grants and stock awards have been granted pursuant to the provisions of the 2000 Plan. The Change in Control provision applicable to the 2000 Plan is as follows: 14 Proxy 2000 Plan The 2000 Plan allows for the granting of “Awards”, which include options, restricted stock and other awards made pursuant to the Plan. Subject to any different terms set forth in the award agreement, vesting of “qualifying” options and restricted stock awards may be affected by a Change in Control as described out in the table below. A “Change in Control” is defined to include (i) a merger or consolidation of the Company in which more than 50% of the voting power of the Company’s outstanding stock after the transaction is owned by persons who are not shareholders immediately prior to such transaction, and (ii) the sale or transfer of all or substantially all of the Company’s assets. A “Qualifying Award’ is defined as an option or other Award that has been held for at least 180 days as of the Change of Control. “Qualifying Shares” means common stock issued pursuant to a Qualifying Award which are subject to the right of Data I/O to repurchase some or all of such shares at the original purchase price (if any) upon the holder’s termination of services to Data I/O. Treatment of Awards on a Change in Control The outstanding Awards do not remain outstanding or are not assumed by the surviving entity or replaced with comparable Awards. The outstanding Awards remain outstanding after a Change of Control or are assumed by the surviving entity or replaced with comparable Awards. The outstanding Awards remain outstanding after a Change of Control or are assumed by the surviving entity or replaced with comparable Awards, but the holder of a Qualifying Award is terminated involuntarily within 180 days of the Change of Control. Acceleration of Vesting Subject to certain limitations, the vesting of Qualifying Awards are accelerated in full. Restricted stock will vest and options will be exercisable in full prior to the effective date of the Change of Control. Subject to certain limitations, the vesting of outstanding Qualifying Awards will be accelerated to the extent of 25% of the unvested portion thereof. The remaining 75% of the unvested portion will vest in accordance with the vesting schedule set forth in the applicable Award agreement. All Awards held by such person will be accelerated in full. Restricted stock will vest and options will be exercisable in full for a period of 90 days commencing on the effective date of the involuntary termination, or if shorter, the remaining term of the option. In 1983, Data I/O adopted a SAR Plan which allows the Board of Directors to grant to each director, executive officer or holder of 10% or more of the stock of Data I/O a SAR with respect to certain options granted to these parties. A SAR has been granted in tandem with each option granted to an executive officer of Data I/O. SARs granted which have been held for at least six months are exercisable for a period of 20 days following the occurrence of either of the following events: (i) the close of business on the day that a tender or exchange offer by any person (with certain exceptions) is first published or sent or given if, upon consummation thereof, such person would be the beneficial owner of 30% or more of the shares of Common Stock then outstanding; or (ii) approval by the shareholders of Data I/O (or, if later, approval by the shareholders of a third party) of any merger, consolidation, reorganization or other transaction providing for the conversion or exchange of more than 50% of the outstanding shares of Data I/O’s Common Stock into securities of a third party, or cash, or property, or a combination of any of the foregoing.  Other Termination Arrangements. Data I/O has a severance policy for U.S. employees that provides for severance payouts for terminations without cause based upon years of service. The current formula, effective March 1, 2014, is 1 week pay for each year of service with a limit of six months’ pay. For Mr. Hatlen, the prior standard formula applies, with pay and service years frozen at March 1, 2014, providing 1.5 weeks of pay for each year of service for those with 10 or more years of service. Mr. Ambrose, Mr. Hatlen and Mr. Gulati had at March 25, 2016 approximately 3, 24 and 3 years of service, respectively. Mr. Ambrose is entitled to a one year of base salary severance, except in the case of a change in control, as part of his employment arrangement. Mr. Gulati is entitled to a one-half year of base salary severance, except in the case of a change in control, as part of his employment arrangement. Data I/O does not have a formal policy regarding executive severance but has generally provided an amount it believes is consistent with severance typically provided for executives in similar positions and with similar periods of service. 15 Proxy Change in Control and Other Termination Arrangements Termination without cause and Change in Control not applicable Termination without cause and Change in Control applicable Change in Control applicable without termination Name Compensation (3) Compensation (2) Option/SAR/RSA Vesting (1) Compensation (4) Option/SAR/RSA Vesting (1) Anthony Ambrose (5) $310,000 $628,677 131,250 $155,000 131,250 Joel S. Hatlen (3) $134,351 $554,930 66,250 $112,500 66,250 Rajeev Gulati (6) $112,500 $434,497 63,125 $112,500 63,125 (1) Maximum vesting on Change in Control as of March 25, 2016. (2) Represents the Data I/O standard employee severance, alternative Executive/Employment Agreement severance, change in control transition/closing incentive, and outplacement expense reimbursement, as applicable as of March 25, 2016. (3) Minimum amount per Data I/O standard employee severance plan; no formal executive severance plan is in place as of March 25, 2016. A letter agreement provides that Mr. Hatlen’s severance shall be equal to the DIO standard severance in effect at March 1, 2014. (See (5) below for Mr. Ambrose and (6) below for Mr. Gulati.) (4) Represents change in control transition/closing incentive as of March 25, 2016. (5) Mr. Ambrose entitled to a one year of base salary severance, except in the case of a change in control, as part of his employment arrangement. (6) Mr. Gulati is entitled to a one-half year of base salary severance, except in the case of a change in control, as part of his employment arrangement. 16 Proxy SUMMARY COMPENSATION TABLE The following table shows compensation paid by Data I/O for services rendered during 2014 and 2015 to each of our named executive officers. Year (b) Salary2 (c) Bonus3 (d) Stock Awards4 (e) Option Awards4,5 (f) Non- Equity Incentive Plan Compen- sation6 (g) Non- Qualified Deferred Compen- sation Earnings7 (h) All Other Compen- sation8 (i) Total (j) 2015 2014 $310,000 $310,000 $0 $158,000 $0 $101,150 $0 $163,143 $0 $170,376 $0 $0 $11,661 $16,900 $642,804 $598,426 2015 2014 $225,000 $216,000 $0 $0 $79,000 $72,250 $0 $0 $88,808 $84,089 $0 $0 $12,077 $13,270 $404,885 $385,610 2015 2014 $225,000 $225,000 $5,063 $0 $63,200 $57,800 $0 $0 $88,808 $92,745 $0 $0 $11,008 $32,290 $393,079 $407,835 (a) Anthony Ambrose Chief Executive Officer & President Joel Hatlen Vice President Chief Financial Officer, Secretary Treasurer Rajeev Gulati Vice President Chief Technical Officer (1) Data I/O currently has three named executive officers. (2) No pay adjustments were made for officers in 2015. Only Mr. Hatlen received a pay adjustment in July 2014. (3) Part of incentive plan for development project team. (4) Amount represents the fair value of restricted stock or the fair value of stock options granted during the year. (5) All options granted to executive officers are granted in tandem with an equal number of SARs. SARs are only exercisable upon the occurrence of certain events leading to a change in the control of Data I/O. See “Change in Control and Other Termination Arrangements.” (6) Amounts earned under the MICP variable compensation arrangement in place for the year. (7) Not applicable for Data I/O. (8) These amounts represent for Mr. Ambrose, Mr. Hatlen, and Mr. Gulati Data I/O’s matching contributions to Data I/O’s 401(k) Plan, and the value of group term life insurance in excess of premiums paid by each of the executive officers. For Mr. Gulati it includes temporary living and relocation expenses of $19,172 for 2014. 17 Proxy OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END Option Awards Stock Awards Number of Securities Underlying Unexer- cised Options Exercisable (#) (b) Number of Securities Underlying Unexer-cised Options Unexer- cisable (#) (c) Equity Incentive Plan Awards: Number of Securities Underlying Unexer-cised Unearned Options (#) (d) Option Exer- cise Price ($) (e) Option Expiration Date (f) Number of Shares or Units of Stock Held That Have Not Vested (#) (#) (g) Market Value of Shares or Units of Stock That Have Not Vested ($) (h) Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) (i) 150,000 50,000 1.87 10/25/2018 112,500 $283,500 0 25,000 25,000 35,000 0 0 5,000 4.30 6.02 2.82 5/11/2016 5/17/2017 5/10/2018 56,250 $141, 750 0 Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) (j) $0 $0 56,250 43,750 2.09 7/26/2019 35,000 $88,200 0 $0 Name (a) Anthony Ambrose Joel Hatlen Rajeev Gulati 18 Proxy EQUITY COMPENSATION PLAN INFORMATION The following table gives information about Data I/O’s Common Stock that may be issued upon the exercise of options and rights under all of Data I/O’s existing equity compensation plans as of December 31, 2015. (a) Number of securities to be issued upon the exercise of outstanding options, warrants and rights (b) Weighted– average exercise price of outstanding options, warrants and rights (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) 276,028 $4.10 747,781 300,000 576,028 $1.94 $2.97 0 747,781 Equity compensation plans approved by the security holders (1) (2) Equity compensation plans not approved by the security holders (3) Total (1) Represents shares of Data I/O’s Common Stock issuable pursuant to our 2000 Plan, 1992 Employee Stock Purchase Plan, and Director Fee Plan (not currently in use). Table excludes unvested restricted stock awards of 389,100 from the 2000 Plan. (2) Stock Appreciation Rights (“SAR”) Plan provides that directors, executive officers or holders of 10% or more of Data I/O’s Common Stock have a 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. (3) Inducement grants to Anthony Ambrose consisting of 200,000 non-qualified stock options and to Rajeev Gulati consisting of 100,000 non-qualified stock options. Table excludes unvested 2012 restricted stock award inducement grants of 18,750 to Anthony Ambrose. PROPOSAL 2: RATIFICATION OF INDEPENDENT AUDITORS The Board of Directors requests that the shareholders ratify the continued appointment of Grant Thornton LLP to serve as Data I/O’s independent auditors for calendar year 2016. Grant Thornton LLP examined the consolidated financial statements of Data I/O for the year ended December 31, 2015. Representatives of Grant Thornton LLP are invited to be present at the Annual Meeting to make a statement if they desire to do so and to respond to questions by shareholders. The Board recommends a vote “FOR” the continued appointment of Grant Thornton LLP to serve as Data I/O’s independent auditors for calendar year 2016. PROPOSAL 3: SAY ON PAY - ADVISORY VOTE ON EXECUTIVE COMPENSATION The Board of Directors requests that the shareholders approve, on an advisory basis, the compensation paid to Data I/O’s Named Executive Officers, as described in “Executive Compensation”, pursuant to the following Advisory Resolution: “RESOLVED, that Data I/O’s shareholders approve, on an advisory basis, the compensation of Data I/O’s named executive officers, as disclosed in Data I/O’s Proxy Statement for the 2016 Annual Meeting of Shareholders pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the 2015 Summary Compensation Table and the other related tables and disclosure.” Our executive compensation program contains elements of cash, incentive and equity-based compensation and is designed to align the interests of our executives with those of our shareholders. The “Executive Compensation” section of this proxy statement, describes in detail our executive compensation programs. The Board has implemented an executive compensation program that is intended to reward performance based on goals established by the Board. The Board fosters a performance-oriented culture by linking a significant portion of each executive officer’s compensation to overall Company performance, as measured in 2016 by operating income as a percentage of revenue and/or achievement of key 19 Proxy development projects and corporate cost and spending objectives, which the Company believes to be important metrics for Data I/O and its shareholders. We believe that equity awards align the interests of our executives with those of our long-term shareholders by encouraging long-term performance and incentivizing our executives to increase long-term shareholder value. Equity awards represent a key component, and are a significant portion, of our executive compensation. The Board has designed Data I/O’s executive compensation program to attract, motivate, reward and retain our executive officers to achieve Data I/O’s corporate objectives and increase shareholder value. The Say on Pay vote is advisory and not binding on Data I/O or the Board of Directors, however the Board will consider the outcome of the vote when making future compensation decisions for our executive officers. The Board recommends a vote “FOR” the Advisory Resolution (Say on Pay) approving the compensation of the Company’s named executive officers as described in this Proxy Statement. OTHER BUSINESS As of the date of this Proxy Statement, Data I/O is not aware of any other business to be acted upon at the Annual Meeting. If any other business calling for a vote of the shareholders is properly presented at the meeting, the holders of the proxies will vote or refrain from voting in accordance with their best judgment. SHAREHOLDER NOMINATIONS AND PROPOSALS FOR THE 2016 ANNUAL MEETING OF SHAREHOLDERS Data I/O’s Bylaws provide that advance notice of nominations for the election of directors at a meeting of shareholders must be delivered to or mailed and received by Data I/O at its principal offices on or before February 23, 2017 in the case of the 2017 annual meeting of shareholders, and in the case of a special meeting of shareholders to elect directors, the close of business on the 10th day following the date on which notice of such meeting is first given to shareholders. Data I/O’s Bylaws also provide that advance notice of business to be brought before the 2017 Annual Meeting of Shareholders by a shareholder must be submitted in writing and delivered to or mailed and received by Data I/O on or before February 23, 2017. Each notice of a nomination or proposal of business must contain, among other things: (i) the name and address of the shareholder who intends to make the nomination or proposal; (ii) a representation that the shareholder is a holder of record of stock of Data I/O entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice or to vote at the meeting for the proposal; (iii) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder and any material interest of such shareholder in any proposal to be submitted to the meeting; (iv) such other information regarding each nominee or proposal as would be required to be included in a proxy statement filed pursuant to the proxy rules of the SEC; and (v) with respect to the nominations, the consent of each nominee to serve as a director of Data I/O if elected. A copy of the full text of the provisions of Data I/O’s Bylaws dealing with shareholder nominations and proposals is available to shareholders from the Secretary of Data I/O upon written request. The Bylaws may also be accessed online, as a Form 10K exhibit as referenced in our Annual Report on Form 10K. SEC rules establish a deadline for submission of shareholder proposals that are not intended to be included in Data I/O’s proxy statement with respect to discretionary voting (the “Discretionary Vote Deadline”). The Discretionary Vote Deadline for the 2016 Annual Meeting was February 18, 2016. If a shareholder gives notice of such a proposal after the Discretionary Vote Deadline, Data I/O’s proxy holders will be allowed to use their discretionary voting authority to vote against the shareholder proposal when and if the proposal is raised at the 2016 Annual Meeting. Eligible shareholders who intend to have a proposal considered for inclusion in Data I/O’s proxy materials for presentation at the 2017 Annual Meeting must submit the proposal to Data I/O at its principal offices no later than December 13, 2016. Shareholders who intend to present a proposal at the 2017 Annual Meeting without inclusion of such proposal in Data I/O’s proxy materials are required to provide notice of such proposal to Data I/O no later than February 23, 2017, as further directed above. To qualify as an “eligible” shareholder, a shareholder must have been a record or beneficial owner of at least one percent (1%) of Data I/O’s outstanding Common Stock, or shares of Common Stock having a market value of at least $2,000, for a period of at least one (1) year prior to submitting the proposal, and the shareholder must continue to hold the shares through the date on which the meeting is held. Data I/O reserves the right to reject, rule out of order, or take appropriate action with respect to any proposal that does not comply with these and other applicable requirements, but only after Data I/O has notified the shareholder(s) who have submitted the proposal 20 Proxy of the problem and such shareholder(s) have failed to correct it. This obligation to notify the appropriate shareholder(s) does not apply to the failure to submit such proposal prior to the deadlines discussed above. STOCKHOLDERS SHARING THE SAME ADDRESS To reduce the expenses of delivering duplicate materials, we are taking advantage of the SEC’s “house holding” rules which permit us to deliver only one set of proxy materials (or one Notice of Internet Availability of Proxy Materials) to shareholders who share an address unless otherwise requested. If you share an address with another shareholder and have received only one set of these materials, you may Investor Relations by email at investorrelations@dataio.com, by phone at (425) 881-6444, by fax at (425) 881-2917 or by writing to Data I/O investor relations, attention Joel Hatlen, 6464 185th Avenue NE, Suite 101, Redmond WA 98052. For future annual meetings, you may request separate materials, or request that we send only one set of materials to you if you are receiving multiple copies, by contacting Investor Relations as noted above. request a separate copy at no cost to you by contacting SOLICITATION OF PROXIES The proxy accompanying this Proxy Statement is solicited by the Board of Directors. Proxies may be solicited by officers, directors and regular supervisory and executive employees of Data I/O, none of whom will receive any additional compensation for their services. In addition, Data I/O may engage an outside proxy solicitation firm to render proxy solicitation services and, if so, will pay a fee for such services. Solicitations of proxies may be made personally, or by mail, telephone, telegraph or messenger. Data I/O will pay persons holding shares of Common Stock in their names or in the names of nominees, but not owning such shares beneficially, such as brokerage houses, banks and other fiduciaries, for the expense of forwarding soliciting materials to their principals. All such costs of solicitation of proxies will be paid by Data I/O. Copies of our annual report on Form 10-K for the year ended December 31, 2015 are being mailed with this Proxy Statement to each shareholder of record. If you did not receive a copy of our annual report Form 10-K, you may obtain a copy (without exhibits) without charge by writing c/o Secretary, 6645 185th Avenue NE, Suite 100, Redmond, WA 98052 or by calling (425) 881-6444. Copies of the exhibits to our annual report on Form 10-K are available for a nominal fee or may be viewed at http://www.dataio.com/company/investorrelations/annualmeeting.aspx or www.sec.gov in the EDGAR filing of our report. Redmond, Washington April 4, 2016 By Order of the Board of Directors /s/ Anthony Ambrose Anthony Ambrose President and Chief Executive Officer 21 Proxy Board of Directors Corporate Offices: Form 10-K Anthony Ambrose (2012) President/CEO Douglas W. Brown (2011) Chairman All Star Directories, Inc. (Web Services Software) Brian T. Crowley (2012) COO Symbio (R&D Software Engineering) Mark J. Gallenberger (2013) Sr. Vice President/CFO/COO Xcerra Corporation (Semiconductor Test Equipment) Alan B. Howe (2013) Managing Partner Broadband Initiatives, LLC (Corporate Advisory & Consulting) The calendar year in ( ) indicates when the individuals became directors of Data I/O. Corporate Officers Anthony Ambrose President/CEO Joel S. Hatlen Vice President Chief Financial Officer Secretary/Treasurer Rajeev Gulati Vice President Chief Technology Officer Data I/O Corporation 6645 185th Ave NE Suite 100 Redmond, WA 98052 Sales and Service Offices: China Data I/O Electronics (Shanghai) Co. Ltd 6F, Building 3, JuXin Park 188 Ping Fu Road Shanghai, China PRC 200231 Germany Data I/O GmbH Lochhamer Schlag 5 82166 Graefelfing To obtain a copy of the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission, go to our website at http://www.dataio.com/company/investorrelatio ns/financialreports.aspx or contact Joel Hatlen, Vice President and Chief Financial Officer, 6645 185th Ave NE, Suite 100, Redmond, WA 98052. Shareholders Meeting: The 2016 Annual Meeting of Shareholders will be held on Tuesday, May 24, 2016 at 9:00 a.m. Pacific Time at the Company’s headquarters: Data I/O Corporation 6645 185th Ave NE, Suite 100 Redmond, Washington 98052 Legal Counsel: Shareholder Information: Dorsey & Whitney LLP Columbia Center 701 5th Ave #6100, Seattle, WA 98101 Auditors: Grant Thornton LLP 520 Pike Street Seattle, WA 98101-2310 Investor Relations: Shareholders of Data I/O Corporation who would like information about the Company are invited to contact: Darrow Associates, Inc. Jordan Darrow (512) 551-9296 jdarrow@darrowir.com Joel Hatlen Vice President & Chief Financial Officer 6645 185th Ave NE, Suite 100, Redmond, WA 98052 (425) 881-6444 investorrelations@dataio.com. Shareholders needing information relating to their shareholdings in Data I/O should contact the Company’s Transfer Agent and Registrar at the mailing address, telephone number or Web address below. Transfer Agent and Registrar: Computershare P.O. Box 30170 College Station, TX 77842-3170 (888) 540-9882 Overnight correspondence Computershare 211 Quality Circle, Suite 210 College Station, TX 77845 Shareholder website: www.computershare.com/investor Shareholder online inquiries: https://www- us.computershare.com/investor/Contact Exchange Listing: Stock Symbol: DAIO NASDAQ (This page intentionally left blank)  6645 185th Ave NE Suite 100 Redmond, WA 98052 Programming Matters Since 1972 Data I/O has developed innovative solutions to enable the design and manufacture of electronic products for automotive, consumer electronics, industrial controls, Internet-of-Things applications and programming centers. Today, our customers manufacture tens of millions of products each year using Data I/O programming solutions to reliably, securely, and cost-effectively deliver their Intellectual Property into programmable devices. Data I/O provides programming solutions for devices in any package, whether programmed in a socket or on a circuit board. Our expertise in programmable integrated circuits, global supply chain processes, and IP management and protection helps bring innovative new products to life. These solutions are backed by a global network of Data I/O support and service providers, assuring success for our customers. 

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