More annual reports from Data I/O:
2023 ReportPeers and competitors of Data I/O:
Data I/OAnnual Report & Proxy Statement Letter to Shareholders | 2017 Annual Report on Form 10-K | Notice of 2018 Annual Meeting & Proxy Statement Enabling a Safe and Connected World April 4, 2018 Dear Data I/O Shareholder: 2017 was the best year in a generation for Data I/O. It was our fifth consecutive year of revenue growth and fourth consecutive year of profitability. The turnaround plan we introduced upon my joining the Company has resulted in a doubling of revenue, the development of great new award winning products, increased global competitiveness, and major wins in targeted growth markets. New products continue to drive market share gains and growth. We continue to see strong secular growth in Automotive Electronics markets driven by new applications, significant code growth in existing applications, and the transition from manual to automated programming globally. Automotive Electronics was our largest end market in 2017, with orders growing 46% over 2016 and now representing 54% of sales. In 2017, we benefited from robust demand for infotainment systems, Advanced Driver Assist Systems (ADAS) and general electronic subsystems in support of autonomous driving and connected car initiatives from leading automotive and technology companies. We saw the benefits of our selection by Bosch as their Car Multimedia device programming supplier. 8 of the top 9 automotive electronics original equipment manufacturers and the top 5 automotive programming centers use Data I/O programming equipment. Data I/O’s growth strategy also is centered on the burgeoning Internet-of-Things (“IoT”) market. IoT is a broad term that addresses the interconnectivity of devices and other electronic or smart products. Growth is being driven by new applications and the ‘digitization’ of existing products and applications. We believe that security of IoT devices is critical, and simple, effective solutions to secure the supply chain and maintain firmware integrity over the product lifecycle are needed in today’s market. In 2017, Data I/O introduced the SentriX® security provisioning platform which was bolstered by major partnerships with leading semiconductor companies and security industry leaders. We continue to add new semiconductor customers and partners as we develop the market for long term revenue growth. In our mission to deliver long term value to shareholders, we are pleased that the Company’s success has resulted in total shareholder return of over 400% over the past 5 years. We remain focused on the continued execution of our strategic plan. Please carefully review the enclosed proxy materials, and vote your shares on the important measures requiring your approval. We appreciate your continued support of Data I/O. Sincerely, Anthony Ambrose, CEO Alan Howe, Chairman (This page intentionally left blank) SECURIT UNIT TIES AND E Washi S TED STATES E COMMISS EXCHANGE 9 ngton, D.C. 20549 SION (Ma ark One) FORM 1 10‐K ANNUA SECURIT r the fiscal yea L REPORT PU TIES EXCHAN ar ended Dec URSUANT TO GE ACT OF 19 cember 31, 20 SECTION 13 O 934 017 For OR 15(d) OF T THE or TRANSIT SECURIT r the transitio Commissio TION REPORT TIES EXCHAN on period from on file number For 13 OR 15(d) OF THE T PURSUANT GE ACT OF 19 m __________ : DA TO SECTION 934 ____ to ____ 0‐ ATA I/O __________ 10394 CORPOR (E xact name of regis strant as specified RATION d in its charter) Wa (State or other jur ashington risdiction of incorp poration) 91‐0864123 mployer Identificati (I.R.S. Em ion No.) 6645 185th A Ave NE, Suite 1 (42 egistrant’s principle 100, Redmond 25) 881‐6444 e executive offices d, Washington , 98052 (Address, includ ing zip code, of re s and telephone n number, including area code) Securities s registered pu rsuant to Sect ion 12(b) of th he Act Title o Common St of each class tock (No Par Va Securities alue) s registered pu N nown seasoned iss rsuant to Sect one suer, as defined in Na ame of each ex Nasd ion 12(g) of th xchange on wh aq Capital Mar e Act d hich registered rket Indic cate by check mar k whether the reg gistrant is a well‐kn n Rule 405 of the S Securities Act. Indic cate by check mar k whether the reg gistrant is not requ uired to file report s pursuant to Sect tion 13 or Section 15(d) of the Act. Yes No Yes No Indic cate by check mar k whether the reg gistrant (1) has file ed all reports requ ired to be filed by Section 13 or 15( d) of the Securitie es Exchange Act of f 1934 during the prec ceding 12 months (or for such shorte er period that the registrant was req quired to file such h reports), and (2) has been subject to such filing requ uirements for the past 90 days. Indic cate by check mar k whether the reg gistrant has submit tted electronically y and posted on its s corporate Web s site, if any, every I Yes No nteractive Data Fi le required to be subm mitted and posted d pursuant to Rule e 405 of Regulatio on S‐T (§232.405 regis strant was require ed to submit and p post such files). of this chapter) d during the preced ing 12 months (o r for such shorter r period that the Yes No Indic cate by check mar rk if disclosure of d delinquent filers p pursuant to Item 4 405 of Regulation S S‐K (§229.405 of t this chapter) is no ot contained herei n and will not be cont tained, to the bes st of registrant’s k knowledge, in def initive proxy or in nformation statem ments incorporate ed by reference in n Part III of this F orm 10‐K or any ame ndment to this Fo orm 10‐K. Indic cate by check ma ark whether the r registrant is a larg ge accelerated file er, an accelerated d filer, a non‐acc elerated filer, a s smaller reporting company, or an eme erging growth com mpany. See the de efinitions of “large accelerated filer,” ” ”accelerated file er”, “smaller repor rting company” an nd “emerging grow wth company” in Rule e 12b‐2 of the Exch hange Act. arge accelerated f La iler N on‐accelerated fil er Accelerated filer Small ler reporting comp pany Emerg ging growth comp pany If an n emerging growth h company, indica ate by check mark k if the registrant has elected not to o use the extende ed transition perio od for complying revis sed financial accou unting standards p provided pursuant to Section 13(a) o of the Exchange Ac ct. Indic cate by check mar k whether the reg gistrant is a shell co ompany (as define ed in Rule 12b‐2 of f the Exchange Ac t). Yes No Aggregate ma by non ting and non‐vot rket value of vot he registrant as o n‐affiliates on th $61,047,382 $ ting common eq quity held 7: of June 30, 2017 Shares of Comm S mon Stock, no pa ar value, outstan nding as of Marc ch 23, 2018: 8,293,267 D OCUMENTS INC CORPORATED BY Y REFERENCE Po ortions of the reg gistrant’s Proxy S Statement relat ing to its May 21 Annual Re 1, 2018 Annual M eport on Form 1 Meeting of Shar 10‐K. reholders are inc corporated into with any new or Part III of this 1 DATA I/O C FOR e Fiscal Year En N CORPORATION RM 10‐K nded Decembe For the er 31, 2017 Part t I Page NDEX IN Item 1. Business Item 1A A. Risk Facto ors Item 1B B. Unresolve ed Staff Comm ments Item 2. Propertie s Item 3. Legal Proc ceedings Item 4. Mine Safe s ety Disclosures Part t II Item 5. Market fo Equity Sec or Registrant’s curities Common Equi ity, Related Sto ockholder Mat tters and Issue r Purchases of Item 6. Selected F Financial Data Item 7. Managem ment’s Discussi on and Analys is of Financial Condition and Results of Ope erations Item 7A A. Quantitat tive and Qualit ative Disclosur res About Mar rket Risk Item 8. Item 9. Item 9A A. Financial Statements an nd Supplement tary Data Changes i in and Disagree ements with A Accountants on n Accounting an nd Financial Di isclosure Controls a and Procedure es Item 9B B. Other Info ormation Part t III Item 10 0. Directors, , Executive Off ficers and Corp porate Governa ance Item 11 1. Item 12 2. Item 13 3. Item 14 4. Executive e Compensatio n Ownership of C Certain Benefic cial Owners an Security O Matters d Managemen nt and Related Stockholder Certain Re elationships an nd Related Tra nsactions and Director Indep pendence Principal A Accounting Fe es and Service s Part t IV Item 15 5. Exhibits, F Financial State ment Schedule es 6. Item 16 Form 10‐K K Summary Sign natures 2 3 10 17 17 18 18 18 18 19 26 26 45 45 46 46 46 47 47 47 48 52 53 Item m 1. Business PART I This on assu Ope s Annual Repor current expec umptions mad erations – Forw rt on Form 10‐ tations, estima de by manage ward Looking S ‐K and the docu ates and proje ement. See Statements.” uments incorp ections about “Management orated herein Data I/O Corp t’s Discussion by reference c poration’s ind and Analysis contain forward ustry, manage s of Financial d‐looking state ement’s beliefs Condition an ements based fs and certain nd Results of Gen neral Dat and mic and high num the ta I/O Corporat d associated I crocontrollers, d sells program h‐volume user mber of progra proper operat tion (“Data I/O ntellectual Pr and flash mem mming systems rs of flash mem ammable semi tion of the pro O”, “We”, “Our operty (“IP”) mory‐based int and services f mory and flash conductor dev duct. r”, “Us”) is a gl management elligent device for electronic d h memory bas vices that cont lobal market le solutions use es as well as se device manufac sed microcont tain data, oper eader for adva ed in electron ecure element cturers, specif rollers. Most rating instructi anced program nics manufact devices. Data fically targeting electronic pro ions and secur mming, security turing with fla I/O® designs, m g high‐growth oducts today i rity credentials y provisioning ash memory, manufactures areas such as incorporate a s essential for Our elec term incl req larg (“O elec r mission is to ctronics, smart m that addres ude IP manag uirements of t gest customers EMs”) in auto ctronic manufa bring the wo tphones, HDTV sses the interc gement, secure the electronic d s are heavy u motive electro acturing servic rld’s electronic V, tablets, gam connectivity of e content man device market, users of progr onics, consum e (“EMS”) cont c devices to lif ming systems a f devices and nagement and , where applic rammable sem er electronics tract manufact fe. Programm nd a broad ca other electron d process cont ations and IP p miconductor de and IoT mark turers. mable devices a ategory called nic or smart p trol capabilitie protection are evices and inc kets as well as are used in pr Internet of Th products. Our es, enable us essential to o clude original s their program roducts such a ings (“IoT”). I r solutions, so to address th ur customer’s equipment m mming center s automobile oT is a broad ome of which e demanding success. Our manufacturers partners and Dat ta I/O was inco orporated in th e State of Was shington in 196 69 and its busin ness was found ded in 1972. Ind ustry Backgrou und We pro pro har utili Tre soft app enable comp gramming and gram it into m dware support izing programm nds of increasi tware content plications, are d panies to imp d security prov memory, micro t, system insta mable electron ing device den file sizes, com driving demand rove producti isioning solutio ocontroller an allation and re nic devices, ra nsities, shrinkin mbined with th d for our solut vity, increase ons that allow d logic device pair, and devi nging from au ng device pack e increasing n ions. supply‐chain our customers es quickly and ce programmi utomobiles to ages, increase umbers of inte security and s to take IP (lar cost‐effective ng. Companie cell phones, p d demands fo elligent device reduce costs rge design and ely. We also p es that design purchase progr r security, and es such as auto by providing d data files) and provide servic and manufact ramming solut d customers inc omotive electr g device data d protect and ces related to ture products ions from us. creasing their onics and IoT Trad bec man grow ditionally, our cause of the ra ny cases from wth in IoT app programming pid increase in the number a lications, the b g market oppo n the density of nd type of dev business oppor rtunity focuse f devices, and vices to the nu rtunity for this d on the num increasing dem umber and type market differe mber of semico mands for supp e of bits per d entiates on qu onductor devic ply‐chain secur evice to be pr ality, security a ces to be prog rity, the focus ogrammed. W and automatio grammed, but has shifted in With expected on. Som pro and bus me of our aut visioning into d security‐cons siness. tomated prog a single produ scious custome ramming syste ct solution. D ers, particularl ems integrate uring 2017, we y those in high e data program e integrated se h‐volume man mming, autom ecurity provisio nufacturing and mated handlin oning into som d programmin g functions a me of our solut ng, drive this p nd/or secure tions. Quality portion of our Pro oducts To a solu app req pro accommodate utions for the plications. We uirements of gramming equ the expandin numerous ty e work closely a particular d uipment and as g variety and pes of device y with leading device. Our n ssociated IP ma quantities of p mix and volu g manufacture newer produc anagement so programmable ume usage by rs of program cts are positio lutions. e devices being y our custome mmable device oned and reco g manufacture ers in the vari es to develop ognized as som ed today, we o ious market s our products me of the mo offer multiple egments and to meet the ost advanced 3 Our cate pro pro ado com for mu Ass Awa Glo sho r programming egories: autom gramming sys gramming cap opted in the m mbines mid‐ran the Asian auto ltiple industry embly NPI Aw ard, the EM A bal Technolog ow in February g solutions inc mated program stems: off‐line pacity and cap arketplace, in nge capacity an omation mark awards for tec ward for Unive Asia Innovation y Award at Pro 2018. clude a broad mming system and in‐line. pability to the particular for nd flexibility w et, is a lower chnical excelle rsal Flash Stor n Award and t oductronica in range of prod s and manual Our PSV fam e marketplace automotive el with competitiv cost platform nce and innov rage (“UFS) su the SMT China November 20 ducts, systems programming mily of automa . Our PSV700 lectronics cust ve pricing. Our for basic prog ation. In Febr upport. Our C a Vision Award 017 and the Em s, modules an g systems. W ated programm 00 Automated tomers. Our P r PSV3000 Aut gramming nee ruary 2018, ou onneX® softw d. Our SentriX mbedded Awar d accessories, We provide two ming systems d Programmin PSV5000 autom omated Progra eds. Our PSV f r LumenX™ pr ware won the 2 X® security pr rd for Innovati grouped into o categories o delivers a bro ng System con mated program amming System family of hand ogrammer wo 2017 Circuits A ovisioning syst on at the Emb o two general of automated oad range of ntinues to be mming system m, developed dlers has won on the Circuits Assembly NPI tem won the bedded World Our rang r automated sy ging from $9,9 st selling price ystems have lis . 900 to $52,000 s ranging from m $68,000 to $6 677,000 and o our manual sys tems have list selling prices Dat out eM resu stan fam add to s ("IC sup to h use ta I/O program standing perfo MC and UFS p ulting in an ex ndalone manu mily of our auto ds security prov securely add k Cs”), secure ele pport is a critica hold and conne basis. mming techno ormance with l programming o xpected transi al programme omated progra visioning capab keys, certificat ements and se al aspect of ou ect to the devi ology may be low total cost of large NAND ition to the us er. FlashCORE™ mming system bility to our da tes, and other ecure microco r business and ce for program integrated w of ownership. D FLASH. Incre se of UFS dev ™, and our un ms and in Flash ata programmi r security info ntrollers. We d consists of wr mming. Our se with the PSV The LumenX p easing memory vices. LumenX iversal job set PAK™, our ma ng system. Se rmation to sp provide devic riting software ecurity provisio family to cre programming e y densities and X is available up tool, Taskli nual programm ntriX® allows c pecialized regio ce support and e algorithms fo oning system, S eate highly‐fle engine is the fa d the need fo on our PSV70 ink™ for Wind ming system. T customers of a ons of authen d service on a or devices and SentriX®, is cur xible systems astest solution r faster data i 000 and PSV50 ows®, are ava The SentriX se any size and de ntication integ all of our prod developing soc rrently offered that deliver n available for nterfaces are 000 and as a ilable in each ecurity system emand‐profile rated circuits ducts. Device cket adapters d on a pay per Our and r products hav d maintenance e both an upfr are typically re ront solution sa ecurring under ale and recurri r annual subsc ing revenue ele ription contrac ements. Adap cts. pters are a con sumable item and software down by Type e Drivers Capacity, Capacity u Installed b Process impro utilization, New base, Added ca vement, Techn w customer pro apabilities nology oducts Sale Eq Ad So Tot es Type s quipment Sales dapter Sales oftware and Ma al aintenance Sal es centage of Tot Sales Perc 2017 2 71% 22% 7% 100% 1 al Sales Break 2016 66% 25% 9% 100% 4 The e table below p presents our m ain products a and the key fea atures that ben nefit our custo mers: Cus Manage program High th density High fle I/O opt marking coplana ts stomer Benefit ed and secure mming high roughput for h mming y Flash program espect to exibility with re e, tube), ions (tray, tape g/labeling and vision for n arity inspection Create S across a Maintai lifecycle Secure IoT dev a global netwo in IP control ov e of their produ vices rk ver the ucts n tic reduction in ory carrying an d rework Dramat invento costs “Zero” f footprint Rapid re eturn on inves typically realiz (“ROI”) of months matter Integrat tion with facto s systems Manage ed and secure mming program tup and job ch Fast set Highest t yield and low ramming of prog High pe erformance stment zed in a ory angeover w total cost Validate down th chain Unmatc manual Univers e designs befo he firmware su ore moving upply ched ease of u l production sy sal programme se in ystems er Produ PSV Handlers (Automa cts s: Off‐line ated) entriX Security Se Syste Provisioning m Ro oadRunner & R Series Han In‐lin (Automa RoadRunner3 ndlers: e, ated) LumenX Prog grammer FlashPAK III pr F (Non‐Auto ogrammer: mated) Unifamily prog Off‐line, Low V O Enginee (Non‐Auto (Legacy Equ grammers: Volume and ering mated) uipment) Fast pro Up to 1 Up to 2 UFS Sup Support program Support Support 3D copl ConneX Unique certifica Key Fe ogram and ver 12 programmi 000 devices pe pport ts LumenX and mmers ts multiple me ts quality optio lanarity X Factory Integ Ability to secu ates one device eatures ify speeds ng sites er hour throug ghput d FlashCORE III edia types ons – fiber lase er marking, ration & other urely provision e at a time r Software keys and Just‐in‐t Direct i support Univers Factory Support time in‐line pr ntegration wit ting SIPLACE, F sal/Genesis and y Integration So ts FlashCORE I ogramming h placement m Fuji NXT, Panas d Assembleon oftware II programmer rs machine sonic, Extensi and dow Support Large fi Secure 8 socke socket a Scalabil Networ Stand‐a Parallel ble architectur re for fast prog s wnload speeds ts UFS t le size support Job creation ets with tool‐le adapters lity rk control via E Ethernet n or PC compa alone operation g programming ss changeover gram, verify r with single atible Breadth h of device cov verage 5 Cus stomers/Marke ets We bro sell our soluti ad range of ind ons to custom dustries, as de ers worldwide scribed in the , many of who following table om are world‐c e: class manufact urers of electr ronic devices u sed in a OEM Ms EMS Pr ogramming Centers No otable end ustomers cu Bu dr usiness rivers Pr eq dr rogramming quipment rivers Bu uying criteria e Automotive Electronics Delphi, Bos Visteon, Ko Harman Be Denso, Con Panasonic, Magnetti M ch, Alpine, stal, cker, tinental, Magna, Marelli Safety, navi and infotain devices, inc electronic c support aut driving, sec Process improveme simplificatio product rol growing file quality cont traceability Quality, reli configuratio control, tra global supp protection igation nment creased content to tonomous urity ent and on, new louts, e sizes, trol and , security iability, on ceability, port, IP er, Pilz, Io oT, Industrial, tronics, Consumer Elect C less in ncluding Wirel LG,TCL Siemens s, L s, D Danfoss, Philips Schneider, S E Endress+Hause In nsta, Carrier, y, Microsoft, Sony M Amazon, UTC A nality H Higher function asing d driven by increa e electronic cont ent. og to Shift from analo S connected inte c lligent ty d devices, securit vement P Process improv and simplificati a on as oduct well as new pro w ory and r ollouts, memo y, new technology n ecurity s ity, ontrol, curity, Q Quality, reliabil c configuration c raceability, sec t and security a p provisioning. T Throughput, te capability to su c evolving techno e g global support, p protection, rob algorithms, low a chnical pport ology, IP ust w cost Co Ma ontract anufacturers Pe Fle Wi SC Ca gatron, , extronics, Jabil, istron, Sanmin a esys, I, Foxconn, Lee lcomp Ac fac con quisition of OE ctories, produc ntract wins EM ction Ne OE sol OE ew contracts fr EMs, programm lutions specifie EMs rom ming ed by Low pro glo west equipme ocurement cos obal support nt st, Arrow CPS, E Noa (T , Avnet, BTV, PS, Elmitech, Toshiba) Value‐ service securit ‐added es, logistics, ty of of Capac their in equipm parts h securit ity utilization o nstalled base o ment, small handling, ty Flexibi cycle c progra low ch use of vendo negoti device availab e‐ ility, lowest life cost‐per ammed‐part, hangeover time e; multiple rs provides e, iating leverage e support bility Our dev sale sem equ r solutions ad vices. Semicon es are driven b miconductors. uipment to ma dress the dat nductor devices by many of th When their b intain product ta programmin s are a large, g e same forces business grows ion speeds or p ng of devices rowing market s that propel t s, they buy m program new d and security t, both in term he semicondu ore semicond device technol provisioning ms of devices an uctor industry. uctors which, logies. needs of pro nd bits program We sell to th in turn, requi ogrammable se mmed. We be he same firms ire additional emiconductor elieve that our s that buy the programming Our incl r device progra uding Industria amming soluti al and Consum mer devices. ons currently target two hig gh volume, gro owing markets s: automotive e electronics and d IoT systems electronics ed car feature navigation, AD Gro owth drivers fo Consumers d radio, dashbo engine functi Increasing nu Proliferation Increasing us or automotive e desire advance oard displays, onality umbers and size of programma e of high‐dens s requiring hig DAS and wirel gher levels of ess connectivi sophistication ity) as well as n, including in increased saf fotainment op fety features a ptions (audio, and optimized e of microcont able microcont ity flash to pro trollers per veh rollers to supp ovide memory hicle port the next‐g for advanced a generation elec applications th ctronic car syst hat require pro tems ogramming 6 Increasing co Increasing ne mplexity to su eed for security pport autonom y solutions for mous vehicles a secure suppl ly chain and lif fecycle firmwa re integrity Gro owth drivers fo Securely cont Adding intelli Connecting p Emergence o or IoT: including trolling groups gence and pro reviously unco f new devices g industrial, co of connected ocessing into de onnected devic and applicatio onsumer electr devices throug evices ces to network ns (such as we ks and the inter earables) onics and wire gh a secure sup eless pply chain and d lifecycle firmw ware integrity management rnet (such as in ntelligent ther mostats and lig ghting) Dur 10% ring 2017, we s % of sales in th sold products e applicable ye to over 200 cu ear: ustomers throu ughout the wo orld. The follow wing customer rs represented d greater than 2017 2016 2015 One customer Four custome 10% of net sal OEM. One customer r, Data Copy Lim rs, Data Copy es respectively mited, a distrib Limited, Arrow y. Arrow and B butor in China, w, Bosch and BTV are Progra , accounted fo BTV, accounte amming Cente r approximate ed for approxim rs and Bosch is ly 15% of net s mately 16%, 1 s an Automotiv sales. 13%, 11% and ve Electronics r, Data Copy Lim mited account ted for approxi imately 15% of f net sales. The the e following cus applicable yea stomers repres ar: sented greater r than 10% of our consolidat ted accounts r receivable bala ance as of Dec cember 31 of 2017 2016 2015 One custome December 31, Three custom 31, 2016: Bos that balance, r Four custome 31, 2015: Data customers, re r, Data Copy 2017. ers accounted ch and Arrow respectively. rs accounted f a Copy Limited presented 24% Limited, accou unted for 25% % of our cons solidated acco unts receivabl le balance at for greater th our direct cus an 10% of our stomers, and D consolidated a Data Copy Lim accounts recei mited, represen ivable balance nted 30%, 16% at December % and 14% of for greater tha d, LeChamp, ou %, 13%, 12% an an 10% of our ur distributor in nd 11% of that consolidated a n south‐east A balance, respe accounts recei Asia, and Flextr ectively. vable balance ronics and Arro at December ow, our direct Geo ographic Mark kets and Distrib bution We dist mar effe market and s tributors, as w rkets and custo ective and effic sell our produ ell as services omers and rea cient manner p cts through a through progr align them as n possible. combination ramming cente necessary to en of direct sales ers. We conti nsure that we s, internal tele nually evaluat reach our exis esales, indirect e our sales ch sting and pote t sales represe annels against ntial customer entatives and t our evolving rs in the most U.S . Sales We per an a wer influ market our p sonnel, indepe agency basis, w re (in millions uenced by U.S products throu endent sales re with shipment s) $2.9, $2.9, . sales based e ughout the U. epresentatives ts made direct and $2.2, res efforts. .S. using a va s and direct tel ly to the custo pectively. So riety of sales lesales. Our U omer by us. N ome of our cu channels, incl U.S. independe Net sales in the ustomers’ orde luding our ow nt sales repres e United State ers delivered wn field sales sentatives obt s for 2017, 20 internationally management ain orders on 016, and 2015 y are heavily Inte ernational Sale es Inte fore sale we inte ernational sale eign sales thro es representati generally reco ernational sale s represented ough our who ives operating ognize the sale s representativ approximately lly‐owned sub in 46 other co e at the time o ves are on an a y 92%, 88%, an sidiaries in Ge ountries. Our i of shipment to agency basis, w nd 90% of net ermany and Ch ndependent fo o the distribut with sales made sales in 2017, hina, as well a oreign distribu tor. As with U e directly to th , 2016, and 20 as through ind tors purchase U.S. sales repr he customer by 015, respective dependent dis our products f resentatives, sa y us. ely. We make tributors and for resale and ales made by Net inte sale Inte Dep We t international ernational sale es by foreign su ernational sale partment of Co have not mad l sales for 201 es by the inter ubsidiaries but es do not inclu ommerce regu de sales to Iran 17, 2016, and rnational geog t also export sa ude transfers lations. We ha or any Iranian d 2015 were ( raphic area in ales from the U between Data ave not, howev n governmenta (in millions) $ to which the U.S. to our fore a I/O and our ver, experience al entities or an $31.2, $20.5, a products are s eign distributo foreign subsid ed difficulties t ny other blackl and $19.8, res sold and deliv ors and to our r diaries. Expor to date as a re isted compani We determine spectively. W lude not only vered, and incl es’ customers. representative ubject to U.S. rt sales are su requirements. esult of these r s. es or countries 7 Fluc poli pre the ctuating excha icies and U.S. a dict the effect majority of ou ange rates and and foreign ta of such factor ur costs are U.S d other factor x and econom rs on our busin S. based while rs beyond our mic policies, ma ness, but we tr the vast major r control, such ay affect the le ry to consider a rity of our sale h as internatio evel and profit and respond t es are internati onal monetary tability of inter o changes in t onal. y stability, tar rnational sales hese factors, p riff and trade s. We cannot particularly as Com mpetition The com auto the suc e competition mpetitive solut omated soluti ir equipment m h as factory int in the program tions and a la ons have gain meets a “good tegration softw mming systems rge number o ed market sha d enough” stan ware. Many of s market is hig of smaller orga are in recent y ndard, but wit f these compet ghly fragmente anizations offe years, where t th reduced qua titors compete ed with a smal ering less expe the competitio ality, traceabil e on a regional ll number of o ensive solutio on is primarily lity, security a basis, with loc organizations se ns. In particu based on pric nd other softw cal language an elling directly ular, low cost ce. Typically, ware features nd support. In a afte ove be p addition, we co er device place er the air (“OTA programmed u ompete with m ement may be A”). IoT device using device‐sp multiple substit done with In S es may also be pecific program ute forms of d System Progra programmed w evice program mming (“ISP”) with ISP or OTA ped by the sem mming includin . Some autom A. In addition, miconductor ma g “home grow motive product , new security anufacturer. mmers develop wn” solutions. ts may also be devices may b Programming programmed be required to Wh our equ ile we are not r internal analy uipment marke t aware of any ysis of competi et and have bee published ind tors’ revenues en gaining mar ustry market i s, we believe w rket share, esp information co we continue to pecially with ou overing the pro be the largest ur new produc ogramming sys t competitor in cts. stems market, n the program , according to ming systems Ma nufacturing, R Raw Materials and Backlog We pro cert com diff sub add that com ord or s strive to man ducts at our p tified in 2017 mponents and erent supplier bassemblies, cu ditional source t single‐source mponents, or i er quantities, shipments, whi nufacture and rincipal facilitie 7. We outsou fabricated par rs and subcon ustom integrat s can be deve e components f we experien costs associate ich may mater provide the es in Redmond urce our circu rts manufactu ntractors but c ted circuits, hy loped for pres will always co nce deteriorati ed with integra ially adversely best solutions d, Washington uit board man red to our spe certain items, ybrid circuits a sent single‐sou ontinue to be r on in relation ating alternativ affect our ope d programmin s for advanced , China. Both and Shanghai, nd fabrication nufacturing an Most compone ecifications. M e handler and such as some s, are purchas and connectors nts without sig urce compone ble. If we cann readily availab ese suppliers, ships with the vely sourced p parts, and dela . erating results. g. We prima of these locati n. We use a nts used are a d programmer ed from single gnificant diffic not develop al there may be ays or reductio rily assemble ions became IS combination available from r and security e sources. We culties. We ca ternative sour e price increas ons in product and test our SO 9001:2015 of standard a number of y provisioning e believe that annot be sure rces for these ses, minimum introductions In a for mee ord app at a accordance wit contracts callin et customers’ ers. Most ord proximately $4 any particular d th industry pra ng for custom delivery requir ers are schedu ,000,000, $3,2 date is not nec actices, genera configuration. rements, we m uled for deliver 00,000, and $7 essarily a mea ally all orders a To date, such manufacture ce ry within 1 to 9 700,000 as of D ningful indicat are subject to h cancellations ertain products 90 days after r December 31, tor of the trend cancellation p have not had s based upon a eceipt of the o 2017, 2016, an d of our busine prior to shipme a material effe a combination order. Our bac nd 2015, respe ess. ent without pe ect on our sale n of backlog an cklog of pendin ectively. The si enalty, except es volume. To nd anticipated ng orders was ize of backlog 8 Res search and Dev velopment We new dev pro cap on s pro plan man req and enh believe that c w technologies velopment and grammable de abilities and s strategic grow gram new cat n to deliver ne nufacturing en uests from cus d tools. Our hancements ov continued inve s and products d introduction evices. Where ervices, partic th markets, in egories of sem ew programm nvironment. W stomers and p research and ver the past sev estment in res s and enhance of new produc e possible, we ularly in secur cluding autom miconductors, i ing technology We also contin programmable development search and dev existing produ cts, as well as may pursue p rity provisionin motive electron including Secu y and automa ue to focus on integrated cir t efforts have velopment is c ucts. Future g the developm partnerships a ng. We are cu nics and the IoT ure Elements, A ated handling s n increasing ou cuit manufact resulted in t critical to our rowth is, to a ment of techno and other strat urrently focusin T. We are cont Authentication systems for m ur capacity and urers by revisi the release of future success large extent, d logy and algor tegic relations ng our researc tinuing to deve n Chips, and Se managed and s d responsiven ing and enhan f significant n s. We continu dependent upo rithms to supp ships to add n ch and develop elop technolog ecure Microco secure program ess for new de ncing our inter new products ue to develop on the timely port the latest ew products, pment efforts gy to securely ontrollers. We mming in the evice support nal processes and product veral years. Dur resp exp ring 2017, 201 pectively, repr pensed as incur 16, and 2015, resenting 20.3% rred. we made ex %, 21.6%, and xpenditures fo d 21.4% of net r research an t sales, respect nd developmen tively. Resear nt of (in milli rch and develo ons) $6.9, $5 opment costs .1, and $4.7, are generally Pat ents, Copyrigh hts, Trademark ks and License s We and por rely on a com d marketing sk rtfolio as we de bination of pa ill to establish evelop strategi tents, copyrigh and protect o c new technol hts, trade secre our market pos ogies. ets and tradem sition. We con marks to prote ntinue to appl ct our IP, as w y for and add ell as product new patents t development to our patent We Con doc emp pro agre attempt to pr nneX® smart p cumentation, b ployees to ex gramming sys eement exists, rotect our righ rogramming so by including a xecute non‐dis tems. Howev , delivery has o ts in proprieta oftware and o ppropriate con sclosure agree ver, on those o occurred, the fe ary software, in ther software ntractual restr ements. Our occasions whe ee is fixed or d ncluding Lume products, by r rictions on use software prod ere software is determinable, a enX software, F retaining the t e and disclosu ducts are not s sold separat and collectabil FlashCORE™ so title to and cop ure in our lice typically sold tely, revenue i ity is reasonab oftware, TaskL pyright of the nses, and by d separately f is recognized bly assured. Link software, software and requiring our from sales of when a sales Bec pro the bus clai det liab cause of the ra ducts might in infringing tec siness risk simi m of infringem ermination co bility. As of Dec pidly changing nfringe upon ex hnology. We ilar to that ass ment, with or uld adversely cember 31, 20 g technology in xisting patents believe that a sumed by othe r without mer affect our rep 17, there were n the semicond s or copyrights, any exposure w er companies rit, could be c putation, precl e no pending a ductor, electro , and we may we may have in the electron costly and a d ude us from o ctions regardin onic equipment be required to regarding poss nic equipment diversion of m offering certain ng infringemen t and software o obtain license sible infringem t and software management’s n products, an nt claims. e industries, po es or discontin ment claims is e industries. H attention, and nd subject us t ortions of our nue the use of a reasonable However, any d an adverse to substantial Emp ployees As o tim wor con indu are (“FS of December 3 e. We also ut rkers to adjust ntinued success ustry. None o favorable. In SCO”) labor ag 31, 2017, we ha ilize independ t capacity to f s will depend of our employe n foreign coun reement. ad a total of 10 ent contractor luctuating dem in part upon o ees are represe ntries we have 03 employees, rs for specialty mand and for our ability to a ented by a col e employment of which 48 w y work, primar special project ttract and reta llective bargain t agreements were located o ily in research ts. Many of o ain employees ning unit and or, in China, utside the U.S and developm our employees s who can be i we believe rel the Shanghai . and 12 of wh ment, and utili s are highly sk in great deman lations with ou Foreign Serv ich were part ze temporary killed and our nd within the ur employees ices Co., Ltd. Env vironmental Co ompliance Our env exp r facilities are vironment. Co penditures, fina subject to num ompliance with ancial position, merous laws a h environment , results of ope and regulation tal laws has n erations or com s concerning t ot had, nor is mpetitive posit the discharge s it expected t tion. of materials o to have, a ma or otherwise re terial effect o elating to the on our capital 9 Exe ecutive Officers s of the Regist trant Set forth below is certain inform mation concern ning the execut tive officers of f Data I/O as of f March 23, 20 18: Name Age Position Anthon y Ambrose Joel S. H Hatlen Rajeev Gulati 56 59 54 Presiden t and Chief Exe r ecutive Officer Vice Pres Secretary sident, Chief O y and Treasure Operating and F er Financial Office er Chief Tec chnology Office er, Vice Presid ent of Enginee ering Ant Boa stra emb was and reve Eng thony Ambrose ard of Directors ategy consultin bedded wirele s general mana d marketing of enues. He is a gineering from e joined Data s of Data I/O in ng firm. Until ess infrastructu ager and held standards bas a member of t Princeton Univ I/O in October n October 2012 2011, he was ure solutions, several other p sed telecommu the EvergreenH versity. r 2012 and is 2. Prior to Dat Vice President where he led progressively r unications plat Health Founda our President ta I/O, Anthony t and General three product responsible po forms, and gre ation Board of and Chief Exe y was Owner a Manager at R t divisions and ositions at Inte ew the industr Trustees. Mr ecutive Officer and Principal o adiSys Corpora d worldwide e l Corporation, ry standard ser r. Ambrose has . He was app f Cedar Mill Pa ation, a leadin ngineering. U where he led rver business t s a Bachelor’s ointed to the artners, LLC, a ng provider of Until 2007, he development to over $1B in of Science in Joe our Feb Sen Pub Uni l S. Hatlen join r Vice Presiden bruary 1997 an nior Tax Accou blic Accountan versity and a B ned Data I/O in nt, Chief Finan d served as Co ntant. From S t, where his m Bachelor’s in Bu n September 1 cial Officer, Se orporate Contr September 19 most recent po usiness Admin 1991 and in Ju ecretary and T oller from Dec 981 until joinin osition was Se istration in Acc ly 2017 becam Treasurer since cember 1993 to ng Data I/O, Jo enior Manager counting from me our Chief O e January 1998 o December 19 oel was emplo r. Joel holds a Pacific Luther Operating Offic 8. He was Chi 997. Previousl oyed by Ernst a Masters in T an University. cer in addition ef Accounting ly, he was Tax & Young LLP a Taxation from to serving as Officer since Manager and as a Certified Golden Gate Raje I/O, to 2 serv (acq eng Elec Eng eev Gulati join , Rajeev served 2013. He has a ved as Directo quired by Mot gineering and p ctrical & Comp gineering, New ned Data I/O in d as Director o an extensive ba or of Strategy a torola) from 2 programmer po puter Engineer Delhi. n July 2013 an of Software Eng ackground in s and Planning a 000 to 2004 a ositions at App ring from the U d is our Chief gineering for A software, syste at Freescale fro and Director o ple Computer, University of T Technology O AMD responsib ems and applyi om 2004 to 20 f Compilers, L IBM and Pacif Texas, Austin a Officer and Vice ble for tools, co ing technology 006; as Directo Libraries & Per fic‐Sierra Resea and a BE in Ele e President of ompiler strateg y to develop n or of Embedde rformance Too arch. Rajeev h ectrical Engine Engineering. gy and executio ew markets. P ed Products at ols from 1997 holds a Master ering from De Prior to Data on from 2006 Previously, he t Metrowerks to 2000; and r of Science in elhi College of Item m 1A. Risk Fac ctors Cau utionary Factor rs That May Af ffect Future Re esults Our our rela exp and resu r disclosure and r current expec ate strictly to h pected market d anticipated p ults. d analysis in th ctations or for historical or cur growth, new t products, sales his Annual Repo recasts of futu rrent facts. In technologies, i s efforts, expe ort contains so re events. Th particular, the industry partn enses, outcome ome forward‐lo e reader can i ese include sta erships, foreig e of contingen ooking stateme identify these tements relati gn operations, ncies, impact o ents. Forward statements by ing to future ac future perform of regulatory d‐looking statem y the fact that ction, prospect mance or resu requirements ments include t they do not tive products, ults of current and financial Any wro thes imp com y or all of the f ong. They can se forward‐loo portant in dete mpleteness of t forward‐lookin be affected by oking stateme ermining future these forward‐l ng statements y inaccurate as ents. Many fa e results. More looking statem s in this Annua ssumptions we factors ‐‐ for e eover, neither ments. Actual f al Report or in e might make, o example, prod Data I/O nor a future results m any other pu or known or un duct competiti anyone else as may materially ublic statement nknown risks a ion and produ ssumes respons y vary. t made may tu and uncertaint uct developme sibility for the urn out to be ties can affect ent ‐‐ will be accuracy and We resu read SEC undertake no ult of new info der is advised, C and press re obligation to p rmation, futur however, to c eleases. Also, publicly update re events or oth onsult any futu note that we e any forward‐ herwise. The r ure disclosures e provide the ‐looking statem reader should n s we make on r following cau ments after the not unduly rely related subject utionary discus e date of this A y on our forwa ts in our 10‐Q, ssion of risks, Annual Report, rd‐looking stat 8‐K and 10‐K r uncertainties whether as a tements. The reports to the and possible 10 inac mat disc ccurate assum terially from e cussion is perm mptions relevan expected and mitted by the Pr nt to our bus historical resu rivate Securitie iness. These ults. Other fac es Litigation Re are factors th ctors besides eform Act of 19 hat we think those listed h 995. RISK K FACTORS: could cause o ere could also our actual res o adversely aff sults to differ ffect us. This NEW W PRODUCTS O OR SERVICES We may pursue n ew product or r service initiat ives that devel lop more slow ly and/or to a lesser extent t than expected In o dev the tech order to lead i vices, circuit bo se markets de hnologies and in new and po oards and elec evelop more this may affec otentially lucra tronic systems slowly than p t the results of ative market o s, we must inv planned, then f our existing b business. opportunities, est ahead of o we may not for example in others while th achieve our n security pro he market is de expected retu ovisioning of p eveloping and urn on investm rogrammable uncertain. If ment in new We may pursue b usiness acquis sitions that cou uld impair our f financial positi ion and profita ability. We suc may pursue a h as: acquisitions of complementa ry technologie es, product line es or businesse es. Future acq quisitions may include risks, burdening ma anagement an d our operatin ng teams durin g the integrati on of the acqu uisition diverting man nagement’s att tention from o other business concerns failing to succ cessfully integr rate or moneti ze the acquire d products or t technologies lack of accept tance of the ac cquired produc cts by our sales s channels or c customers entering mar kets where we e have no or lim mited prior exp perience potential loss s of key employ yees of the acq quired compan ny additional bu rden of suppo rt for an acqui red programm mer architectur re Fut wea and that ure acquisition aken our balan d intangible ass t future acquis ns may also im nce sheet, or is sets acquired, sitions will imp mpact our finan ssue additiona the amortizat rove our busin ncial position. l shares, poten tion or impairm ness or operati For example, w ntially diluting ment of which ng results. we may use sig existing share would reduce gnificant cash holders. We m e our profitabi or incur debt, may also capita ility. We cann which would alize goodwill not guarantee Dela ays in develop ment, introduc ction and shipm ment of new p products or ser rvices may resu ult in a decline in sales or inc reased costs. We man develop new e nufacturing or engineering an other problem nd automated ms may delay t programming he developme systems and se nt, introductio ervices. Signif on or productio ficant technolo on of these pro , ogical, supplier oducts or servi ces. For example, we m may encounter r these problem ms: technical pro systems blems in the d development o of a new progra amming system m platform or the robotics f for new autom mated handing inability to hi re qualified pe ersonnel or tur nover in existi ng personnel delays or fai development ilures to perf t projects orm by us or r third parties s, including so ome smaller e early stage co ompanies, inv volved in our dependence companies m customers an on large sem must enable u nd channel part iconductor co us with specifi tners. mpanies for c ic technical in cooperation an nformation, an nd support to nd support Da o securely pro ata I/O as a vision their de qualified solu evices. These ution to their development t of new produ cts or services s that are not a accepted by the e market The ese problems m may result in a delay or declin ne in sales or in ncreased costs s. 11 Fail ure to adapt to o technology t rends in our in ndustry may im mpact our comp petitiveness an nd financial res sults. Pro mar obs duct and serv rketplace. Int solete and unm vice technology troducing prod marketable. Te y in our indus ducts and serv chnological ad stry evolves ra vices with imp dvances and tre apidly, making proved techno ends that may timely produ ologies or fea negatively imp ct innovation tures may ren pact our busin essential to s nder our exist ess include: uccess in the ting products new device p be programm placement pr package types, med by our pr rogramming is densities, chip roducts, partic recommended p interfaces an cularly certain d by the semic nd technologie segments of onductor man es requiring ha the high den ufacturers rdware and so nsity flash me oftware change mory markets es in order to s where after reduction in eMMC FLASH inspection. I prior to plac programming manufacture loss. semiconducto H memories im mproper SMT cement in ma g to post pla rs to develop b or process geo mpact the pro process contro anufacturing. cement progr best practices ometries for ce oduct data re ol can negative This can cau ramming tech to minimize th ertain Multi L tention throug ely impact the use them to hniques, includ he impact of re Level Cell (MLC gh Surface M e end customer change their ding ISP. Da eflow and pot C) and Triple Mount Technolo r’s ability to su programing ata I/O is wo ential concern Level Cell (TLC ogy (SMT) ref uccessfully pro methods awa orking with se ns about X‐ray C) NAND and flow or X‐ray ogram devices ay from pre‐ emiconductor induced data electronics eq quipment man nufacturing pra actices, such as s widespread u use of in‐circuit t programming g or downloadi ing adoption of p proprietary sec curity and prog gramming prot ocols and addi itional security y capabilities a nd requiremen nts customer sof tware platform m preferences different from those on whic ch our product ts operate customer ado PCI, particula option of newe rly if these tec er semiconduc chnologies are ctor device tec adopted by au chnologies suc utomotive elec ch as UFS mem ctronics, IoT or mory or device wireless custo interface met omers thods such as more rigid ind dustry standar rds, which wou uld decrease th he value‐added d element of ou ur products an nd support serv vices If w not con acce reta we cannot deve perform well ntain defects o eptance. Our aining key tech elop products , our business or errors that future succes hnical personne or services in s and financia give rise to ss depends on el. a timely mann l condition m product liabili our ability to ner in response ay be adverse ty claims aga successfully c e to industry c ely affected. A inst us or cau compete with changes, or if o Also, our new use our produ other technol our products o w products or ucts to fail to ogy firms in a or services do services may gain market attracting and Fail ure to adapt to o increasing au utomotive elec ctronics custom mer requireme nts Qua man For cust and indu ality standards nufacturer cus example, alth tomers with ev d costs and we ustry requirem s and busines stomers, may d hough we cur ven more rigor e may be requ ments or manag s requirement demand proces rrently meet t rous requireme uired to provid ge these contr ts by our auto sses, and certif the ISO 9001: ents. In additi de higher serv actual provisio omotive elect fications at a h :2015 standar on, contractua vice levels tha ons, our busine ronics custom higher level tha rd, new qualit al provisions m an we currentl ess may be adv n turn by thei mers, driven in y are structure an we currently may be dema ty standards m to greater pot may expose us we cannot ad ly provide. If d. versely affected r automotive ed to provide. anded by our ential liability dapt to these If w we are unable t o protect our I IP, we may not t be able to co mpete effectiv vely or operate e profitably. We skill our cop lice rely on paten l to establish a r user interfac pyright of the nses, and by re nts, copyrights, and protect ou ce, product fir software and equiring our em , trade secrets ur market posit rmware, softw documentatio mployees to ex and trademar tion. We atte ware module o on, by includin xecute non‐dis rks to protect mpt to protec options and o ng appropriate sclosure agreem our IP, as wel ct our rights in other software e contractual r ments. l as product d proprietary so e products by restrictions on evelopment a oftware produ retaining the n use and disc nd marketing ucts, including e title to and closure in our Bec pro the reas How adv sub cause of the ra ducts might p use of the inf sonable busin wever, any cla verse determin bstantial liabilit pidly changing ossibly infringe fringing techn ess risk simila im of infringem nation could a ty. g technology in e upon existin ology. We be ar to that assu ment, with or adversely affec n the semicond g patents or c elieve that any umed by othe without merit ct our reputat ductor, electro opyrights, and y exposure we er companies , could be cos tion, preclude onic equipment d we may be r e may have reg in the electro stly and a dive us from offe t and software equired to obt garding possib onic equipmen rsion of manag ring certain p e industries, po tain licenses o ble infringeme nt and softwa gement’s atte roducts, and s ortions of our or discontinue nt claims is a re industries. ntion, and an subject us to 12 We may face incre eased competi ition and may not be able to compete succ cessfully with c current and fut ture competito ors. Tec incr com hnological adv rease from bot mpetition, our vances have re th established profitability an educed the ba and emerging nd financial per arriers of entry companies. If rformance will y into the prog f we fail to com be adversely i gramming syst mpete successf impacted. tems market. fully against cu We expect co urrent and futu ompetition to ure sources of THI RD PARTY REL LATIONSHIPS If w not we do not deve be able to tim elop and enhan mely develop ne nce our relatio ew and cost ef onships with se ffective manag ecurity partner ed and secure rs, our busines programming ss may be adve g solutions. ersely affected d and we may As w exp man diff cap una pro we we enter new pertise in secu nagement exp icult in light of abilities in exc able to develo ducts might b would still be areas in man rity. Some of ertise than est f competing pr change for NR p and deliver e delayed, we responsible fo aged and secu these partner tablished firms riorities. For so E payments, p solutions that might have to r paying any re ure programm rs are early st s. Other partn ome of our ea pre‐paid royalt t we need to i o locate altern elated pre‐paid ing, we need age companie ners are very la rlier stage part ies, marketing integrate into ate partners a d royalties or N to complemen nt our skills an es that are ope erating with m arge companie es where priori tners, we have e demanded u g incentives an nd sales coope our managed d and secure p or develop the and suppliers o . NRE payments. nd expertise w more limited c itizing work wi nique product eration. If our programming s e technology o with partners’ capital and/or ith us may be t features and r partners are solutions, our ourselves, and If w we do not deve lop and enhan ce our relation nships with sem miconductor m manufacturers, our business m may be advers sely affected. We syst pro pro tech den reco sem pro will work closely tems comply w gramming sys gramming syst hnology chang nsity NAND, e ommending ou miconductor m visioning. Con need to partn with most se with their requ stems for use tems product l ges occur that ‐MMC and U ur programmin anufacturers d nsolidation wit ner more closel emiconductor irements. In a by users of th lines up to dat t could limit t FS devices, ce ng systems fo deteriorate or thin the semico ly with semico manufacturer addition, many heir programm te and provide he effectivene ertain semicon r these device if semiconduc onductor indu nductor manu rs to ensure t y semiconducto mable devices. end‐users wit ess of pre‐plac nductor manu es. Our busine ctor manufactu stry may also facturers. that our data or manufactur . These work th broad and c cement progra facturers may ess may be ad urers are not w impact us. As programming rers recommen king relationsh urrent program amming, parti y not recomm versely affecte willing to close s we develop m g and security nd our manage hips enable us mmable device icularly for ve mend or may ed if our relat ely work with u more security y provisioning ed and secure to keep our e support. As ry small high not continue ionships with us on security solutions, we Our bus r reliance on a siness, and our a small numb suppliers may er of supplier y experience fin rs may result nancial difficul in a shortage ties which cou of key comp uld impact thei onents, which r ability to serv ely affect our h may adverse s. vice our needs Cer sup dev det dela tain parts or s ppliers. Our sm velop alternativ erioration in o ays or reductio oftware used mall relative lev ve sources of t our relationship ons in product in our product vel of business these compone p with these su introductions ts are currentl means we freq ents, if sales of uppliers, or if t or shipments, y available fro quently lack in f parts or softw these suppliers which may ma om either a sin nfluence and si ware are disco s require finan aterially advers ngle supplier o ignificant purc ontinued by the cing, which is sely affect our or from a limite hasing power. e supplier, if w not available, operating resu ed number of If we cannot we experience there may be ults. Bec Also may effe req bec on a small num cause we rely o unable to accu o, we may be u meet our dem y be unable to siness. For su ect on our bus uirements. O Over estimation . come obsolete. mber of suppli urately forecast mand for comp ppliers who d n of demand ers for certain t our productio ponents. This d iscontinue par or excessive m n parts, we are on schedule. I delay in the su rts, we may be minimum orde e subject to po If we underest upply of key co e required to er quantities w ossible price in timate our pro omponents ma make lifetime will lead to ex ncreases by the oduction sched y have a mate purchases co xcess inventor ese suppliers. ule, suppliers erially adverse overing future ries that may Cer con a su whi tain of our soc ntract manufac ufficient quant ich may result ckets, parts, su cturers and we tity of these pr in lost sales. ubassemblies a are sourcing c roducts if and w and boards are certain parts o when needed e currently ma r options from or the quality anufactured to m foreign manu of these parts o our specifica ufacturers. We s or options m tions by third‐ e may not be a ay not meet o ‐party foreign able to obtain our standards, If w affe we are unable ected. to attract an d retain quali fied third‐part ty distributors s and represen ntatives, our b business may be adversely We the have an inter se distributors nal sales force s and represe e and also utili ntatives is im ze third‐party mportant. The distributors an eir ability to o nd representat operate, timely tives. Therefo y pay us, and ore, the financ d to acquire a ial stability of ny necessary 13 fina be and qua and ancing may be effective, third d sales resourc alities limit the d retain a suffic affected by th d‐party distrib es and must d number of po cient number o he current eco utors and rep evote their re otential third‐p of qualified thir nomic climate resentatives m sources to sale party distributo rd‐party distrib e. Highly skille must possess s es efforts, cust ors and repres butors and rep d professional significant tech tomer educati sentatives. Ou presentatives to l engineers use hnical, marketi on, training an ur business will o market our p e most of our ing, customer nd support. Th l suffer if we c products. products. To relationships hese required cannot attract MA ARKET CONDIT IONS A d pay decline in econ yments from ou nomic and ma ur customers. rket condition ns may result in delayed or decreased ca pital spending g and delayed or defaulted Our inte cycl yea patt spe cust wro r business is hi egrated circuit les and fluctua rs, our operati terns, general nding. In a d tomers’ busine ong. These fac ighly impacted s. These indu ations in manu ions may in the economic con difficult econo ess may fail, r tors could hav d by capital spe stries are high ufacturing cap e future reflec nditions affect mic climate it resulting in no ve a material ad ending plans a hly cyclical and pacity and pric ct substantial fl ing the timing may take us n‐payment. O dverse effect o nd other econ d are characte ing and gross luctuations fro of orders from longer to rec Our market gro on our business nomic cycles th erized by rapid margin pressu om period‐to‐p m major custo ceive payment owth forecast s and financial hat affect the u d technological ures. As we e period as a con omers, and oth ts from our cu ts and related condition. users and man l change, shor experienced in nsequence of t her factors aff ustomers and business deci nufacturers of rt product life n recent prior hese industry ecting capital some of our sions may be Our r international operations ma ay expose us to o additional ris sks that may ad dversely affect t our business. 2016, and 201 International 15, respectively sales may fluc y. We expect ctuate due to international markets, volat tile exchange Inte that vari ernational sale t internationa ious factors, in s represented l sales will con ncluding: approximately ntinue to be a y 92%, 88%, an a significant po nd 90% of net ortion of our n sales in 2017, net revenue. fluctuations i rates may als in foreign curr o impact our c rency exchang competiveness ge rates becau s and margins se 92% of our r sales are to economic unc certainty relate ed to the Euro pean sovereig n debt situatio on migration of manufacturing g to low cost ge eographies unexpected c changes in regu ulatory require ements tariffs and tax xes Bi‐lateral and d Multi‐lateral t trade agreeme ents difficulties in staffing and m managing foreig gn operations longer averag ge payment cy cles and difficu ulty in collectin ng accounts rec ceivable compliance w with applicable export licensi ng requiremen nts and the For reign Corrupt P Practices Act product safet ty and other ce ertification req uirements difficulties in integrating for reign and outs ourced operat tions civil unrest, p political and ec onomic instab ility Bec diff reg coll cause we have iculties in colle ulations in fore ection terms. e customers l ecting these am eign countries, ocated throug mounts as a re , the availabilit ghout the wo esult of payme ty and reliabilit rld, we have ent practices o ty of foreign c significant fo of certain forei redit informat oreign receivab ign customers, tion, and poten bles. We ma , economic un ntial difficulties ay experience certainty and s in enforcing The req cert con cate dire Eur e European Un uirements (“C tification or a ncerning the R egory list as I ectives. Failur ope or other te ion and Europ CE”). As applic waiver for an Reduction of H ndustrial Mon re to meet app erritories with ean Free Trad cable, our pro y product ma Hazardous Sub nitoring and Co plicable directi similar require e Association ( ducts currentl y prevent us f stances (“RoH ontrol Equipm ives or qualify ements. (“EU”) has esta ly meet these from marketin HS”) and we b ment (category ying exemption ablished certa requirements ng that produc elieve we are y 9). We belie ns may preven in electronic e s; however, fa ct in Europe. classified wit eve all curren nt us from ma emission and p ailure to obtain The EU also h thin the EU Ro t products me arketing certain product safety n either a CE has directives oHS Directive eet the RoHS n products in 14 We Our incl asse 201 sub have subsidia r business and uding restricti ets with relate 17 financial sta bsidiaries. ries in German d financial con ons on repatri ed tax valuation atements. Cu ny, China, Hong dition is sensi ations of cash n allowances. urrency excha g Kong, Brazil a tive to curren . Any repatria Tax reform an nge fluctuatio and Canada an cy exchange r ation of cash c nd the effect of ons in these c nd large balanc rates and any ould result in f the “Deemed countries may ces of cash are restrictions im tax costs and d Repatriation” adversely aff e in our foreign mposed on the corresponding ” have been in fect our invest n subsidiaries. eir currencies g deferred tax ncluded in our tment in our OPE ERATIONS Qua arterly fluctuat tions in our op erating results s may adversely y affect our sto ock price. Our rece may for per r operating res eived within th y, therefore, b that quarter w iods. sults tend to v hat quarter. Co e unable to qu will suffer. Ou vary from qua onversely, our uickly reduce o r results of op arter to quarte expenditures ur spending if erations for an er. Our reven are based on i our revenues d ny one quarter ue in each qu nvestment pla decline in a giv r are not nece uarter substant ans and estima ven quarter. A essarily indicati tially depends tes of future r As a result, ope ive of results f upon orders evenues. We erating results for any future Oth her factors, wh ich may cause our quarterly operating resu ults to fluctuat e, include: increased com mpetition timing of new w product anno ouncements an nd timing of de evelopment ex xpenditures product or se ervice releases and pricing ch hanges by us or r our competit ors market accep ptance or delay ys in the introd duction of new w products or se ervices production co onstraints s quality issues labor or mate erial constraint ts timing of sign nificant orders timing of inst tallation or cus tomer accepta ance requireme ents sales channel l mix of direct v vs. indirect dis tribution civil unrest, w m war or terrorism health issues (such as the o utbreak of a vi irus impacting workers or tra avel) customers’ b udgets changes in ac ccounting rules s, tax or other legislation adverse move ements in exch hange rates, in terest rates or r tax rates cyclical and s easonal nature e of demand fo or our custome ers’ products general econo omic condition ns in the count tries where we sell products expenses and d delays obtain ning authorizat ions in setting up new opera ations or locati ons facilities reloc cations Due ana e to any of the alysts and inves foregoing fact stors. tors, it is possib ble that in som me future quart ters, our opera ating results w ill be below ex xpectations of We have a history y of operating l losses and may y be unable to generate enou ugh revenue to o achieve and maintain profi tability. We We ope gen our have incurred will continue erating expens nerate greater r revenues will d operating los to examine o es may result revenues than continue to in ses in one of t our level of op in losses in fu n we have rece crease and ou the last five ye perating expen ture periods if ently in order t r business stra ars and three nse based upo f projected rev to maintain pro ategies may no of the last ten on our project venues are no ofitability. How ot be successfu n years. We op ted revenues. ot achieved. A wever, we can l, resulting in f perate in a cyc Any planned As a result, we nnot provide as future losses. clical industry. d increases in may need to ssurance that 15 The e loss of key em mployees may adversely affec ct our operatio ons. We prim emp can beli Chin affe have employ marily in resea ployees are hig be in great d ieve relations w na, our worke ected if we wer yees located in arch and devel ghly skilled and demand within with our emplo ers are “leased re unable to co n the U.S., Ge lopment, and d our continue n the industry. oyees are favo d” with the arr ontinue that ar ermany and C utilize tempor ed success will None of our orable, though rangements m rrangement. China. We als rary workers to depend in par r employees a no assurance made under the so utilize inde o adjust capac rt upon our ab re represente can be made t e “FSCO” labo ependent cont city to fluctuat bility to attract d by a collect that this will b or agreement a ractors for sp ting demand. t and retain em ive bargaining be the case in t and we could pecialty work, Many of our mployees who g unit and we the future. In be adversely We may need to r raise additiona al capital and o our future acce ss to capital is uncertain. Our ope ope or e exp r past revenue erations and a erations. If we equity financin pansion of our es have somet any expansion e are unable to ng, we may h business. times been, an of our busin o generate suff ave to reduce nd our future ness. We may ficient cash flo e some or all revenues may y therefore n ws from opera of our develo y again be, ins eed additiona ations or to ob opment and sa sufficient to s al equity or d btain funds thr ales and mark upport the ex ebt capital to rough addition keting efforts xpense of our o finance our al debt, lease and limit the We req nee curr be incl sub or r believe that w uirements thro eds, we may c rent repatriati used to fund uding acquisit bstantial inabili results of opera we have suffici ough at least choose to repa on plans, ther possible losse tions, which co ty to achieve o ations and may ent cash or wo the next one‐y atriate some, o e may be tax, es, business gr ould reduce ou our current bu y require us to orking capital a year period. I or all, of the $ legal and othe rowth, project ur liquidity and siness plan cou o reduce expen available unde In the event w $6.2 million h er impediment initiatives, sh d result in a r uld have a mat nditures and/or er our operatin we require add eld in our for ts to any repat hare repurchas equirement fo terial adverse i r seek addition ng plan to fund ditional cash fo eign subsidiar triation actions ses and busine or additional c impact on our nal financing. d our operation or U.S. operat ries. Although s. Our workin ess developme cash before th financial posit ns and capital ions or other h we have no g capital may ent initiatives at time. Any tion, liquidity, The com may rest sen erefore, we ma mmitments for y experience d trict our freed ior to our Com ay seek additio r additional fin difficulty in obt dom to operat mmon Stock an nal funding th ancing, and gi taining funding e our business d may dilute y rough public o iven a potentia g on favorable s or may requ our ownership or private debt al future unfav terms, if at al uire us to issue p interest. or equity fina vorable econo l. Any financin e securities th ncing or from omic climate an ng we obtain m hat have rights other sources. nd our financi may contain co s, preferences . We have no al results, we ovenants that or privileges Our r stock price m ay be volatile a and, as a resul t, our shareho lders may lose e some or all of f their investm ment. The pro of o com futu e stock prices ducts or servic our Common S mpany sector, ure, they may a of technology ces by us or ou Stock to fluctua is often unrel adversely affec companies te r competitors ate substantia ated to the op ct the price of end to fluctuat and quarterly lly. In addition perating perfo our Common S te significantly variations in fi n, overall volat ormance of com Stock. y. We believe inancial results tility in the sto mpanies. If th e factors such s and outlook m ock market, pa hese market f as announcem may cause the articularly in th luctuations co ments of new e market price he technology ntinue in the Cyb to o info and ber security bre our website an ormation, if ac d evolving view eaches or terro nd information cessed improp ws of personal p orism could res n systems. Th perly, could giv privacy rights. sult in liabilitie he collection, s ve rise to liabil es or costs as w storage, transm ities or additio well as damage mission, use a onal costs as a e to or loss of o and disclosure result of laws our data or cus of user data s, governmenta stomer access and personal al regulations Cyb inte case incr priv info cou vary serv the we new ber security br errupt our bus es store, end‐u reasingly subje vacy and data ormation in so untry to count ying internatio vices are acces ir laws, even w were required w or expanded reaches or ter iness, includin user data, inclu ect to legislatio protection law me jurisdiction ry and in a m onal requireme ssible in many where we have d to modify ou regulations. rrorism could ng denying cus uding persona on and regula ws and regula ns is unclear a anner that is ents could cau foreign jurisd e no local entit ur products, ou result in the tomer access l information. tions intended ations regardin and evolving. not consistent use us to incu ictions, some o ty, employees ur services or o exposure or t to our website In jurisdiction d to protect co ng the collecti These laws ma t with our cur ur additional co of these jurisd or infrastructu our existing se theft of privat e and informa ns around the onsumers’ priv ion, storage, t ay be interpre rrent data prot osts and chan dictions may cl ure. We could ecurity and pri e or confiden tion systems. world, person vacy and secu transmission, u eted and applie tection practic nge our busine aim that we a be forced to i ivacy procedur tial informatio We transmit, nal information urity. The inte use and disclo ed in conflictin ces. Complyin ess practices. re required to incur significan res in order to on as well as and in some n is becoming erpretation of osure of such ng ways from ng with these Because our o comply with nt expenses if o comply with 16 REG GULATORY REQ QUIREMENTS Fail ure to comply with increasin ng regulatory re equirements m may adversely a affect our stoc ck price and bu usiness. As a in c deli a public compa compliance. O isting of our st any, we are sub Our failure to m ock, impacting bject to numer meet regulator g our stock’s liq rous governme ry requiremen quidity; SEC en ental and stock nts and exchan forcement act k exchange req nge listing stan tions; and secu quirements, wi ndards may re urities claims a ith which we b esult in actions nd litigation. believe we are s such as: the The or w Sarb assu voti as s con the nec relia our e Sarbanes‐Oxl we may fall o banes‐Oxley A ume that we w ing and non‐vo such standard nclude on an o Sarbanes‐Oxle cessary for us t able financial r r reported finan ey Act of 2002 out of complia Act of 2002, wi will continue t oting shares he s are modified ngoing basis th ey Act of 2002 to produce re reports or prev ncial informati 2 and the Secu nce with, suc ith which we a to have the st eld as of June d, supplement hat we have ef 2. Moreover, liable financia vent fraud, our on, and the tra rities and Exch h as the inter are not curren atus of a sma 30, 2017. If w ted or amend ffective intern effective inte l reports and a r business and ading price of o hange Commis rnal controls a ntly required to ller reporting we fail to achie ed from time al controls ove ernal controls, are important operating resu our stock could ssion (SEC) hav auditor attesta o comply as w company base eve and mainta to time, we er financial rep particularly th to help preve ults could be h d drop significa ve requiremen ation required we are a smalle ed on the aggr ain the adequa may not be a porting in acco hose related t ent financial fr armed, investo antly. ts that we may d under Sectio er reporting co regate market acy of our inte ble to ensure ordance with S o revenue rec raud. If we ca ors could lose y fail to meet on 404 of the ompany. We t value of the ernal controls, that we can Section 404 of cognition, are annot provide confidence in Wh inte the ile we have po ernational, viol disruption and olicies and proc ations of the F d distraction o cedures in plac Foreign Corrup f an investigat ce designed to pt Practices Act ion, financial p o prevent corru t (FCPA) could penalties and c uption and brib have a signific criminal penalt bery, because cant adverse ef ties. our business i ffect on our bu s significantly usiness due to Gov vernment regu ulations regard ing the use of "conflict" mine erals could adv versely affect o our prospects a and results of o operations. Reg and Alth com be c you resp the stak una from initi man gulatory requir d adjoining co hough we do n mponents prov conflict free. A u that we will pond or respo m. Also, bec keholders if we able to comply m the activities iate legal pro nagement’s tim rements regard untries could not buy raw ma vided by our su As a result, the be able to ob nd negatively cause our sup e are unable to y with the new s intended by oceedings agai me, in order to ding disclosure affect the sou aterials, manu uppliers and co ere may only be tain products regarding con pply chain is o sufficiently v w laws or regu regulatory or g nst us. We o comply with t e of our use o urcing and av facture, or pro ontained in ou e a limited poo in sufficient q flict mineral so complex, we verify the origi lations or if ou governing bod may need to the new regula of “conflict” m ailability of m oduce any elec ur products con ol of suppliers quantities or a ourcing and w may face rep ns for all meta ur efforts to co ies due to amb o incur additio ations and anti inerals mined minerals used i ctronic equipm ntain conflict m who provide c at competitive we may be una putational cha als used in the omply with ne biguities relate onal costs and cipated additio from the Dem in the manufa ment using conf minerals. Our conflict free me prices. Single ble to find alt allenges with products that ew laws, regul ed to practice, d invest addit onal reporting mocratic Repu acture of certa flict minerals d r goal is for ou etals, and we c e source supp ernative sourc our custome t we sell. Furt ations and sta regulatory au tional resourc and disclosure blic of Congo ain products. directly, some r products to cannot assure liers may not ces to replace rs and other her, if we are andards differ thorities may ces, including e obligations. Item m 1B. Unresol ved Staff Com mments Non ne. Item m 2. Propertie es Dur Sep indu buil wer ring the third q ptember 12, 20 ucement incen lding and lowe re approximate quarter of 2017 017, extending ntives. Previo er the square f ely $303,000 a 7, we amended g the lease to ously on June footage to app nd $200,000, r d our lease agr July 31, 2022 8, 2015, the l proximately 20 respectively. reement for th 2, waiving a po ease had bee 0,460. The lea he Redmond, W otential space n amended to ase base annua Washington he e give back pro o relocate our al rental paym adquarters fac ovision and re r headquarters ents during 20 cility effective eceiving lease s to a nearby 017 and 2016 In a serv loca addition to the vice, operation ated near Mun e Redmond fa ns and engine nich, Germany. cility, approxim eering office lo mately 24,000 ocated in Shan 0 square feet i nghai, China, a is leased at tw and our Germ wo foreign loc man sales, serv cations, includi vice and engin ing our sales, neering office We Sha signed a lease anghai, China w e agreement e which we mov effective Nove ved into durin mber 1, 2015 ng the first qu that extends arter of 2016. through Octob . The new lea ber 31, 2021 f ase approxima for a new facil ately doubled ity located in our space to 17 19,4 201 400 square fee 16 were approx et at approxim ximately $276, mately 54% of t 000 and $233, he prior lease ,000, respectiv vely. rental rate. T The lease base annual rental payments dur ring 2017 and Dur effe at a wer ring the fourth ective March 1 approximately re approximate h quarter of 20 , 2017, and ext the same cost ely $64,000 an 016, we signe tends through per square fo d $61,000, res d a lease agre February 28, 2 ot as the prior spectively. eement for a n 2022. The new r lease. The lea new facility lo w lease slightly ase base annu cated near Mu y increased our ual rental paym unich, German r space to 4,89 ments during 20 ny which was 95 square feet 017 and 2016 Item m 3. Legal Pro oceedings Fro bus clai effe m time to tim siness. As of D ms, the advers ect on our resu me, we may be December 31, se outcome of ults of operatio e involved in l 2017, we were f which in man ons or financial litigation relat e not a party t agement’s opi position. ing to claims to any legal pr inion, individu arising out of roceedings or ally or in the a our operation aware of any aggregate, wou ns in the norm indemnificatio uld have a mat mal course of on agreement terial adverse Item m 4. Mine Safe ety Disclosure s Not t Applicable. PART II Item m 5. Market fo or Registrant’s s Common Equ uity, Related St tockholder Ma atters and Issu uer Purchases of Equity Secu urities The the e following tab NASDAQ Capi ble shows, for t tal Market (NA the periods in ASDAQ symbol dicated, the h is DAIO). The igh and low pr closing price w rice informatio was $12.04 on on for our Com December 31, mmon Stock as , 2017. s reported by 20 017 20 016 Per riod Fou Thi Sec Firs urth Quarter ird Quarter cond Quarter st Quarter Fou Thi Sec Firs urth Quarter ird Quarter cond Quarter st Quarter High $16.49 10.19 9.37 5.30 $4.40 3.95 2.70 2.80 Low $8.53 7.03 4.56 4.01 $3.39 2.39 2.07 2.03 The e approximate number of sha areholders of r ecord as of Ma arch 23, 2018 w was 441. Exc Stoc ept for specia ck and do not l cash dividend anticipate pay d of $4.15 per ing regular cas r share paid o sh dividends in n March 8, 19 the foreseeab 989, we have n ble future. not paid cash dividends on our Common No sales of unreg istered securit ies were made e by us during t the periods en nded Decembe r 31, 2017, 201 16, or 2015. See e Item 12 for th he Equity Comp pensation Plan n Information. ISSU UER PURCHAS ES OF EQUITY SECURITIES On of o und 80,3 cha February 24, 2 our stock durin der the Exchan 345 shares of rges. There w 2016, our Boar ng the period f ge Act to prov stock were re ere no stock re rd of Directors from March 2, vide flexibility t purchased at epurchases ma approved a sh , 2016, throug to make purch an average pr ade under this hare repurchas gh March 31, 2 ases througho ice of $2.36 fo program durin se program wit 2017. The prog out the period. or a total of $ ng the twelve m th provisions t gram was esta . For the year 189,360 plus $ month period e to buy back up ablished with a ended Decem $1,649 in com ending Decem p to $1 million a 10b5‐1 plan ber 31, 2016, mmissions and mber 31, 2017. The ere were no ne ew stock repurc chase program ms in effect dur ring the twelve e month period d ending Decem mber 31, 2017 . Item m 6. Selected a Financial Data Not t applicable. 18 Item m 7. Managem ment’s Discuss ion and Analy sis of Financia l Condition an nd Results of O Operations FOR RWARD‐LOOKI ING STATEMEN NTS This Ref pro cau stat stat or f intr dev futu inhe we Dat are not Cau s Annual Repo orm Act of 19 spective inform tionary statem tements other tements herein financial posit roduced or up velopment, int ure periods are erently uncert cannot guaran ta I/O nor anyo under no duty place undue r utionary Factor ort on Form 10 995. This Act mation about t ments identify than stateme n regarding eco ion; future sp graded produc roduction and e forward‐look ain. Although ntee future re one else assum y to update an reliance on the rs That May Aff 0‐K includes fo provides a “s themselves as ing important nts of historica onomic outloo pending; break cts or services shipment of n king statement we believe th sults, levels of mes responsib ny of these for ese forward‐loo fect Future Re orward‐looking safe harbor” f long as they i factors that c al fact made in ok, industry pro keven revenue s; the sufficien new products ts. Forward‐lo hat the expecta f activity, perf ility for the ac rward‐looking oking statemen sults” describe g statements w for forward‐loo dentify these could cause a n this Annual R ospects and tre e point; expec ncy of our cash or services; ch oking stateme ations reflecte formance, achi ccuracy and co statements aft nts. The follow es some, but no within the me oking stateme statements as ctual results t Report on Form ends; industry cted market gr h to fund futu hanging foreig ents reflect ma ed in these for ievements, or ompleteness o fter the date o wing discussion ot all, of the fa eaning of the P ents to encour s forward‐looki to differ from m 10‐K are forw partnerships; rowth; market ure operations n operations; nagement’s cu rward‐looking s other future f these forwar of this Annual R ns and the sect actors that cou Private Securit rage companie ing and provid the projected ward‐looking. future results t acceptance s and capital r and any other urrent expecta statements are events. More rd‐looking stat Report. The R tion entitled “R uld cause these ties Litigation es to provide de meaningful d results. All In particular, of operations of our newly requirements; r guidance on ations and are e reasonable, eover, neither tements. We Reader should Risk Factors – e differences. OVE ERVIEW We enh rap bus dem continued ou hancing produc idly evolving siness geograp mand and mix o ur focus on m cts to drive fu industry envir hy shifts, exch of business we managing the uture revenue ronment. We hange rate vola e expect. We c core program and earnings e are continui atility, increas continue to ma mming busines growth. Our ng our efforts ing costs and anage our costs ss for growth challenge con s to balance i strategic inves s carefully and and profitabi ntinues to be industry chang stments in our d execute strat ility, while de operating in a ges, industry r business with egies for cost r veloping and a cyclical and partnerships, h the level of reduction. We new the grow sem pro env sem are focusing o w programmin manufacturin wth markets, i miconductors, gramming tec vironment. We miconductor de our research a g technologies ng environmen including auto including Sec chnology and e continue to evices, includin and developme s, secure supp nt and softwar motive electro ure Elements, automated h focus on exte ng NAND Flash, ent efforts in o ply chain solut re. We are cu onics and IoT. W , Authenticati handling syste nding the cap , e‐MMC, UFS our strategic g ions, automat rrently focusin We are develo on Chips, and ms for mana abilities and s and microcont rowth markets ted programm ng our researc oping technolog d Secure Mic ged and secu upport for ou trollers on our s, namely auto ing systems a ch and develo gy to securely crocontrollers. ure programm r product lines newer produc omotive electr nd their enha opment efforts program new We plan to ming in the m s and support cts. onics and IoT ncements for s on strategic categories of deliver new manufacturing ing the latest Our indu r customer foc ustrial controls cus has been o s, consumer el on strategic hig ectronics and w gh volume ma wireless as we nufacturers in ll as programm key market se ming centers. egments like a automotive ele ectronics, IoT, CRIT TICAL ACCOUN NTING POLICY JUDGMENTS A AND ESTIMAT ES The Am exp tho cha cap reas e preparation erica requires penses, and rel se related to rges, continge ital equipmen sonable under of financial st that we make ated disclosur sales returns encies such as nt industry. W r the circumsta atements in a e estimates and es of continge s, bad debts, litigation and We base our nces. Actual r accordance wit d judgments, w nt assets and l inventories, in contract term estimates on results may diff th accounting which affect th liabilities. On a ntangible asse ms that have m historical exp fer from these principles gen he reported am an on‐going ba ets, income ta multiple eleme perience and e estimates und nerally accept mounts of asse asis, we evalua axes, warranty nts and other other assump der different a ted in the Uni ets, liabilities, r ate our estima y obligations, complexities ptions that we ssumptions or ted States of revenues and tes, including restructuring typical in the e believe are r conditions. We of o believe the fo our financial st ollowing critica atements: l accounting p olicies affect t he more signif ficant judgmen nts and estima ates used in the e preparation Rev det assu elem opt venue Recogni ermined that o ured by testin ment. These ions. The evid ition: We rec our programm ng at the facto systems are dence that thes cognize revenu ing equipment ory prior to sh standard prod se systems cou ue at the time t has reached hipment and t ducts with pu uld be deemed the product i a point of mat that the instal blished produ d as accepted w is shipped or w turity and stab lation meets t uct specificatio was based upo when the serv bility such that the criteria to ons and are c on having stand vice is delivere product accep o be considere configurable w dardized factor ed. We have ptance can be ed a separate with standard ry production 19 of t inst inst the units, resu tallation stand talled base of p ults from batt ardization, as products upon eries of tests well as past which the cur of product pe product opera rent versions w erformance to ation validation were based. o our publishe n with the cu ed specification stomer and th ns, quality ins he history pro spections and ovided by our The is co the rega e revenue relat onsidered perf customers th arding installat ted to product functory includ emselves. Thi tion. s requiring ins des any installa is takes into a tallation that i ation that can ccount the co is perfunctory be performed mplexity, skill is recognized a by other parti and training n at the time of es, such as dis needed as wel shipment. Ins tributors, othe ll as customer stallation that er vendors, or expectations We serv rela serv soft syst inst term enter into mu vice and supp ative selling pr vice and suppo tware mainten tem is sold. R tallation is per m of the agree ultiple delivera ort componen rices. Relative ort componen nance compone evenue is reco formed, and h ment, typically ble arrangeme nt and a softw e selling price ts, we use the ents, we use w ognized on the hardware servi y one year. ents that arise ware maintena is based on t e value of the what we charge e system sale b ice and suppo during the sale nce compone he selling pric discount given e for annual so based on shipp rt and softwar e of a system t nt. We alloca ce of the stan n to distributo oftware maint ping terms, ins re maintenanc that includes a ate the value dalone system ors who perfor enance renew stallation reve ce revenue is r n installation c of each eleme m. For the ins rm these comp wals after the in enue is recogni recognized rat component, a ent based on stallation and ponents. For nitial year the ized after the ably over the Wh obli en we sell so igations remai oftware separ n on our part a rately, we rec and substantiv cognize softw e acceptance c ware revenue conditions, if a upon shipme any, have been ent, provided n met. that only inc consequential We det any eve apa by t recognize re erminable, the y, have been m ent of theft, ph art from us and the buyer. We venue when e buyer has pa met, the obligat ysical destruct d we do not ha e establish a re persuasive ev id or is obligat tion is not cont tion or damage ave significant serve for sales idence of an ed to pay, coll tingent on resa e to the produc obligations for s returns based arrangement ectability is re ale of the prod ct, the buyer a r future perfor d on historical t exists, shipm asonably assu uct, the buyer cquiring the p rmance to dire trends in prod ment has occu red, substantiv r’s obligation w roduct for resa ctly bring abou uct returns an rred, the pric ve acceptance would not be ch ale has econom ut the resale o d estimates fo ce is fixed or conditions, if hanged in the mic substance of the product or new items. We are dem The ord as r transfer certa our standard monstration eq ese product un inary course o revenue and co ain products ou products in o quipment. Onc nits often invo of business. Th ost of goods so ut of service fr one of the foll ce transferred, olve refurbishi he transfer am old. rom their inter owing areas: s , the equipme ing and an eq mount is the pro rnal use and m service loaner nt is sold by o quipment warr oduct unit’s ne make them ava rs, rental or te ur regular sale ranty, and are et book value ailable for sale est units; engi es channels as e conducted a and the sale t e. The product neering test u used equipme as sales in our transaction is a ts transferred units; or sales ent inventory. r normal and accounted for Our reco con r basic revenu ognition stand ntracts in exces e recognition dard effective ss of one year. is expected to January 1, 20 o essentially r 018. However remain the sam r, we will star me as current rt to capture t under the ne and defer con ew accounting ntract acquisit g for revenue tion costs for Allo coll cred us c owance for D ectability of sp dit worthiness could be adver Doubtful Accou pecific custom or actual defa rsely affected. unts: We ba er accounts an aults are highe ase the allowa nd the aging of er than historic ance for doub f accounts rec cal experience, btful accounts eivable. If the , our estimate s receivable o ere is deteriora s of the recove on our assess ation of a majo erability of am sment of the or customer’s mounts due to Inve app non item unc and affe entory: Invent proximates act n‐salable inven m by item basi certainty durin d customer req ected. tories are state ual cost on a fi ntory by review s and record i g product line quirements, we ed at the lowe irst‐in, first‐ou wing current t nventory adju e transitions, o e may be requi er of cost or n t basis. We es ransactions an stments accor or a higher risk ired to increas net realizable v stimate reducti nd forecasted dingly. If ther k of inventory e our inventor value. Adjustm ions to invento product dema re is a significa obsolescence ry adjustments ments are ma ory for obsolet and. We eval ant decrease in e because of ra s and our gross de to standard te, slow‐movin uate our inven n demand for o apidly changin s margin could d cost, which ng, excess and ntories on an our products, ng technology d be adversely Wa obli cou rranty Accrua igations. If we uld be adversel als: We accru e experience a y affected. ue for warrant n increase in w ty costs based warranty claim d on the expe ms, which are h ected material higher than ou l and labor co ur historical ex osts to fulfill o xperience, our our warranty gross margin Tax out asse x Valuation All look for our in ets and accou owances: Giv ndustry and ca nting for unce en the uncerta pital and geog ertain tax posit ainty created b graphic spendin tions and main by our loss hist ng, we expect ntain the tax v tory, as well as to continue to valuation allow s the ongoing c o limit the reco wances. Tax r cyclical uncert ognition of net reform related ain economic t deferred tax d adjustments 20 wer the carr det re recorded in tax valuation ry forward. Th ermination of 2017, which im allowance will he transfer pric arms‐length ar mpacted the ta take place on cing and expen rrangements, c ax valuation al ly as we are a nse or cost sha can be subject lowance. At t ble to take adv aring arrangem to challenges he current tim vantage of the ments are com by different ta me, we expect, e underlying ta mplex areas wh ax jurisdictions therefore, tha x loss or other here judgments s. at reversals of r attributes in s, such as the Sha stoc opt inpu exp sub stoc on t as c that are‐based Com ck option awa ions, we estim ut of highly su pected stock pr bjective assump ck‐based comp the average of compensation t do not requir mpensation: W ards and restri mate the fair va bjective assum rice volatility a ptions require pensation expe f the high and expense on th re us to record We account fo icted stock un alue using the mptions, includ assumption wa d in the valuat ense and, cons low price on th e straight‐line any equity co or share‐based nit awards, usi Black‐Scholes ding the option as determined tion model ma sequently, our he date of the basis. Employ mpensation ex awards made ng the estima valuation mod n’s expected li using the hist ay significantly results of ope grant. For bot yee Stock Purc xpense. e to our empl ated grant dat del and an esti fe and the pri torical volatilit y affect the es erations. Restr th options and chase Plan (“ES oyees and dir te fair value m mated forfeitu ce volatility of ty of our comm timated value ricted stock un d restricted aw SPP”) shares w ectors, includi method of acc ure rate, which f the underlyin mon stock. Ch of the awards nit awards are wards, expense ere issued und ing employee ounting. For h requires the ng stock. The hanges in the s, the related valued based is recognized der provisions 21 RES SULTS OF OPER RATIONS: NET T SALES et sales by pro Ne n thousands) (in utomated prog Au No on‐automated otal programm To duct line gramming syste programming ing systems ems systems ation Ne (in Un % Int % et sales by loca n thousands) nited States of total ternational of total 2017 Cha ange 2016 $27,85 6,19 $34,05 54 97 51 52 20 45 2.4% 0.6% 5.4% $18,274 5,139 $23,413 2017 Cha ange 2016 $2,87 8.4 $31,17 91.6 74 4% 77 6% (2. .1%) 52 2.3% $2,936 12.5% $20,477 87.5% Net bas con and line t sales for the is, net sales in ntinues to be a d Roadrunner p es compared to year ended D ncreased appr trend in the in product familie o 2016. Sales i ecember 31, 2 roximately 73% ndustry and in es, offset in pa ncreases were 2017, grew ap % in the Amer our business. art, by declines e driven by dem proximately 4 ricas, 71% in E On a product s in the PS, FLX mand from OEM 5% to $34.1 m Europe and 8% t basis, sales in X, FlashPAK™ a Ms and Progra million compar % in Asia. Inc ncreased prima and legacy (Un mming Center red to 2016. O creased use o arily due to sal nifamily and Sp rs. On a regional f automation es of our PSV print) product Ord 201 com der bookings w 17, and 2016 w mpared to $1.9 were $34.3 mill was $4.0 milli 9 million Decem ion for 2017, u on and $3.2 m mber 31, 2016. up approximat million, respec ely 28% compa ctively. Deferr ared to $26.9 red revenue w million in 2016 was $1.8 millio 6. Backlog at D on on Decemb December 31, ber 31, 2017, GRO OSS MARGIN (in Gr Pe n thousands) ross margin ercentage of ne et sales 2017 Chan nge 2016 $20,05 59 % 58.9% 55. .9% $12,868 55.0% Gro imp pro oss margin as a provement was duct mix, a fav a percentage s primarily du vorable sales c of sales for th e to sales volu hannel mix and he year ended ume, which re d reduced unfa December 31 sulted in bette avorable facto 1, 2017, was 5 er fixed factor ry variances. 58.9%, compar ry cost utilizat red to 55.0% i ion, along wit in 2016. The h a favorable RES SEARCH AND D T DEVELOPMENT (in Re Pe n thousands) esearch and de ercentage of ne evelopment et sales 2017 Chan nge 2016 96 $6,89 % 20.3% 36. .2% $5,065 21.6% Res The com search and dev e increase was mpensation, of velopment (“R& s primarily rela fset in part by &D”) expense ated to higher lower recruitin increased $1.8 employee rel ng. 8 million for th ated costs, co he year ended ontract labor, R d December 31 R&D material, 1, 2017, compa incentive and ared to 2016. d stock based We dev soft dev secu Mic pro Our believe it is e velop and tech tware and sup velopment effo urely program crocontrollers. gramming in t r R&D spending ssential to inv hnologies chan port for new d orts on strateg m new categ We delivered the manufactu g fluctuates ba est in R&D to nge. In addit devices introdu gic growth mar gories of sem d new progra uring environm ased on the nu significantly en tion to produc uced by the sem rkets, including miconductors, amming techn ment and exten mber, type, an nhance our ex ct developmen miconductor c g automotive including Se ology and au nding the capa nd the develop xisting product nt, a significan companies. W electronics an ecure Elemen utomated hand abilities and su pment stage of ts and to creat nt part of R& e are currently nd IoT. We are nts, Authentic dling systems upport for our f our product in te new produc &D spending is y focusing our e developing t cation Chips, for managed r programmer nitiatives and p ts as markets s on creating research and technology to and Secure d and secure architecture. projects. 22 SEL LING, GENERA AL AND ADMIN NISTRATIVE (in n thousands) elling, general & Se ercentage of ne Pe & administrativ et sales ve 2017 Cha ange 2016 $8,1 23.8 16 8% 27 7.3% $6,376 27.2% Sell to 2 high ing, General a 2016. The incr her trade show nd Administra rease was prim w and marketin tive (“SG&A”) marily related t ng costs, offset expenses incre to higher emp t in part by low eased $1.7 mi ployee compen wer rent, consu llion for the ye nsation, incent ulting and acco ear ended Dec tives commissi unts receivabl cember 31, 201 ons and benef e reserve. 17, compared fits as well as INT TEREST (in Int n thousands) terest income 2017 Cha ange 2016 $2 29 (34 .1%) $44 Inte bala erest income w ances. was lower for the year ende ed December 31, 2017, com mpared to 201 16, primarily d due to lower i nvested cash INC COME TAXES (in Inc n thousands) come tax (expe ense) benefit 2017 Cha ange 2016 $28 88 * * ($36) * n not meaningful Inco prim qua fore Min tax ome tax (expe marily a result arter of 2017. eign subsidiary nimum Tax Cre and minimal U ense) decrease of the Tax Cu This was mad y “post 1986 E edits” in carryf US state incom ed by $324,000 uts and Jobs A de up of $67,0 Earnings & Pro forward. This e tax. 0 for the year Act of 2017, an 000 of addition ofits”, and reco benefit was of ended Decem nd we recorde nal tax relating ognizing a tax ffset in part by mber 31, 2017, ed the impact g to the “deem benefit of $59 y approximate , compared to as a $531,00 med repatriati 98,000 related ely $200,000 o o 2016. The d 0 net benefit ion” of previo to refundable f foreign subsi decrease was in the fourth usly deferred e “Alternative idiary income The wel resp asso Give cap acco e effective tax l as foreign ta pectively. Ou ociated with t en the uncerta ital and geog ounting for un rate differed f axes. We hav r deferred tax he requiremen ainty created b raphic spendi certain tax pos rom the statut e a valuation x assets and va nts of account by our loss hist ng, we curren sitions and ma tory tax rate p allowance of aluation allow ting for uncert tory, as well as ntly expect to intain the tax v rimarily due to $6.1 million a wance have be tain tax positio s the ongoing continue to valuation allow o tax reform a nd $11.2 milli en reduced by ons as of Dec uncertain eco limit the reco wances. nd its impact o ion as of Dece y approximate ember 31, 20 nomic outlook ognition of ne on valuation a ember 31, 201 ely $272,000 a 17, and 2016, k for our indus et deferred ta llowances, as 17, and 2016, and $226,000 respectively. stry as well as ax assets and GAI IN ON SALE OF F ASSETS Dur $36 dom ring the years 66,000 net of c main addresses 2017 and 201 commissions a s have been so 16, we sold no and $140,000 n old. on‐core exces net of commis s internet dom ssions, respect main addresse tively. Substan es and recorde ntially all of ou ed a non‐oper ur non‐core ex rating gain of xcess internet INF LATION AND C CHANGES IN FO OREIGN CURR ENCY EXCHAN NGE RATES Sale Dol ($28 adju sub mar es and expens lar amounts at 81,000) and $ ustments to fo bsidiary to certa rkets, volatile e es incurred by t average rate $81,000 in 201 oreign inter‐co ain customers, exchange rates y foreign subsi s of exchange 17 and 2016, ompany accoun , which were in s may also imp diaries are den during the ye respectively. nts and U.S. D nvoiced in U.S. pact our compe nominated in ar. We recogn The transactio Dollar accounts Dollars. Beca etiveness and m the subsidiary nized foreign c on gains or lo s held by forei ause approxima margins. y’s local curren currency trans osses resulted ign subsidiarie ately 92% of o ncy and transla action gains a primarily from s and sales by ur sales are to ated into U.S. nd (losses) of m translation y our German international 23 FIN ANCIAL COND DITION: LIQ QUIDITY AND CA APITAL RESOU URCES (in n thousands) Working capital W 2017 Cha ange 2016 $19,4 486 $4 ,913 $14,573 At D incr Our Our December 31, reased by $4.9 r working capit r current ratio 2017, our pri 9 million for th tal composition was 3.5 and 3. ncipal sources e year ended n shifted as a r .3 for Decembe s of liquidity co December 31, result of higher er 31, 2017, an onsisted of ex 2017, to $19. r cash collectio nd 2016, respe xisting cash an .5 million prim ons of accounts ectively. nd cash equiva marily due to th s receivable an alents. Our wo he net income nd higher accru orking capital for the year. ued liabilities. For the year ende ed December 3 1, 2017, our ca ash position in creased $7.0 m million general ly resulting fro om the same fa actors above. Alth exp rent be f hough we have penditures to s tals, sales dem funded by exis e no significan upport our bu monstration an ting and intern nt external cap siness. We pla d test equipme nally generated pital expenditu an to increase ent as we deve d funds or leas ure plans curre our investmen elop and relea se financing. ently, we expe nt on internally se new produc ect that we wi y developed eq cts. Capital ex ll continue to quipment used xpenditures are make capital d for services, e expected to As a wor add esta a result of our rking capital t dressing rising ate usage strat significant pro o fund our op costs and fore tegies and diffe oduct developm perations. In eign exchange erentiated pro ment, custome 2017 and rece rate challenge duct developm er support, sell ent years, we es. This includ ment and cost s ing and marke have manage ded geographi strategies. eting efforts, w ed balancing p c shifts in our we have require profitable oper operations, o ed substantial rations, while optimized real We req grow our bus us t believe that w uirements thr wth, project in r liquidity and siness plan cou to reduce expe we have suffici ough at least nitiatives, shar result in a req uld have a mat enditures and/o ent cash or wo the next one re repurchases quirement for terial adverse i or seek additio orking capital a year period. s and business additional cas impact on our onal financing. available unde Our working s development sh before that financial posit er our operatin capital may b t initiatives in time. Any su tion, liquidity, ng plan to fund be used to fun cluding acquis ubstantial inab or results of o d our operation nd possible los sitions, which ility to achieve operations and ns and capital sses, business could reduce e our current d may require OFF F‐BALANCE SH EET ARRANGE EMENTS Exc “Ot ept as noted in ther Commitme n the accompa ents”, we had anying consolid no off‐balance dated financia e sheet arrange l statements in ements. n Note 7, “Ope erating Lease C Commitments” ” and Note 8, SHA ARE REPURCHA ASE PROGRAM MS On of o und 80,3 cha February 24, 2 our stock durin der the Exchan 345 shares of rges. There w 2016, our Boar ng the period f ge Act to prov stock were re ere no stock re rd of Directors from March 2, vide flexibility t purchased at epurchases ma approved a sh , 2016, throug to make purch an average pr ade under this hare repurchas gh March 31, 2 ases througho ice of $2.36 fo program durin se program wit 2017. The prog out the period. or a total of $ ng the twelve m th provisions t gram was esta . For the year 189,360 plus $ month period e to buy back up ablished with a ended Decem $1,649 in com ending Decem p to $1 million a 10b5‐1 plan ber 31, 2016, mmissions and mber 31, 2017. The ere were no ne ew stock repurc chase program ms in effect dur ring the twelve e month period d ending Decem mber 31, 2017 . 24 The e following is a summary of th he stock repur chase program m from March 2 2, 2016 throug gh December 3 31, 2016: Re epurchases by Month Total f Number of Shares Purchased Average Paid pe e Price r Share otal Number To of Shares Purchased as P Part of Publicly A Announced Repurchase R Program Approxim Dollar Val Shares t May Yet Purchas under t Progra mate lue of that t Be sed the am arch 2016 M pril 2016 Ap ay 2016 M ne 2016 Ju ly 2016 Ju otal To NO N‐GENERALLY 5 42,515 0 8,480 7,650 0 15,200 0 0 6,500 5 80,345 $2. $2. $2. $2. $2. $2. 26 35 52 45 61 36 42,515 8,480 7,650 15,200 6,500 80,345 $90 $88 $86 $82 $80 03,161 83,064 63,602 26,078 08,991 ACCEPTED AC CCOUNTING PR RINCIPLES (GA AP) FINANCIA AL MEASURES Ear (a n mea pro net nings Before In non‐cash item) asures of fina vide meaningf income to EBI nterest, Taxes, ) are set forth ncial performa ful supplement TDA and adjus , Depreciation, below. Non‐G ance prepared tal information sted EBITDA fo , and Amortiza GAAP financial d in accordanc n regarding ou llows: ation (“EBITDA” l measures sho e with GAAP. ur results and f ”) and Adjuste ould not be co We believe t facilitate the c ed EBITDA excl onsidered a su that these no comparison of uding equity c bstitute for, o n‐GAAP financ results. A rec compensation r superior to, cial measures conciliation of (in n thousands) me) et Income Ne Interest (incom I T Taxes Depreciation & & amortization D s BITDA earnings EB E Ad e Equity compen djusted EBITDA equity compen nsation A earnings excl nsation uding Year Ended D December 31, 2017 6 2016 $5,449 (29) (288) 822 $5,954 714 $6,668 $1,656 (44) 36 602 $2,250 520 $2,770 NEW W ACCOUNTIN NG PRONOUNC CEMENTS New w Accounting P Pronouncemen nts In M Sha an equ an esti full stan tax‐ stan March 2016, th are‐Based Paym income tax ex uity in the perio award by reco imate forfeitur valuation allo ndard requires ‐withholding p ndard was ado he FASB issued ment Accountin xpense and is od of adoption ognizing the e res, and excess owance. Adop s that amounts purposes are to opted effective d ASU 2016‐09 ng”. ASU 2016 applied prosp n. The standard effects of forfe s tax benefits h ption of the alt s paid to a taxi o be presented January 1, 201 9, Compensatio 6‐09 requires e pectively by m d establishes a eitures in com have not been ternative pract ng authority o d on a retrospe 17, and did not on‐Stock Comp excess tax bene eans of a cum an alternative p mpensation cos allocated to eq tical expedien on the employe ective basis as t have a mater pensation (ASU efits to be reco mulative‐effect practical exped st when the f quity, as they a t is applied pr ee’s behalf as a financing act rial impact on o U 2016‐09), “I ognized in the t adjustment o dient for estim forfeitures occ are all in net o rospectively on a result of dire tivity on the st our financial st mprovements statement of of excess tax b mating the expe cur. We have operating losse n an entity‐wi ectly withholdi tatement of ca tatements. to Employee operations as benefits from ected term of continued to s, that have a de basis. The ing shares for ash flows. The 25 In F leas or a The con February 2016, ses on the bala a finance type e standard bec nsolidated finan , the FASB issu ance sheet as a lease. The stan omes effective ncial statemen ued ASU 2016‐ a right‐of‐use ndard excludes e beginning Ja nts. ‐02, “Leases” ( asset and a lea s leases of inta nuary 1, 2019 ASU 2016‐02) ase liability an angible assets . We are in th . ASU 2016‐02 d requires leas or inventory. E he process of e 2 requires less ses to be class Early adoption evaluating the sees to recogn sified as either of the standa impact of ado ize almost all an operating rd is allowed. option on our In M com reve reve rew from yea stan con our to b May 2014, the mpanies with enue recognit enue when co wards transfer t m Contracts w r and now tak ndard as of Ja nsolidated finan r accounting po be material. e FASB issued A a single mode ion guidance, ntrol of the go to the custome with Customers es effect for p anuary 1, 2018 ncial statemen olicies, interna ASU 2014‐09, el for account including indu oods or service er under the e s” (ASU 2015‐1 ublic entities i 8 and do not nts including th l controls, and “Revenue from ting for reven ustry‐specific es transfers to existing revenu 14), deferring n fiscal years b anticipate tha he potential im disclosures to m Contracts w ue arising fro revenue guida the customer, e guidance. In the effective beginning after t the adoption mpact of the ad o support the n with Customers om contracts w ance. The core as opposed to n August 2015, date of the ne r December 15 n of this stand dditional disclo new standard, h s” (ASU 2014‐0 with custome e principle of o recognizing r , the FASB issu ew revenue re 5, 2017. We e dard will have osures. We ar however, thes 09). ASU 2014 rs and supers the model is revenue when ued ASU 2015‐ ecognition stan xpect to adopt e a material im re implementin e changes are 4‐09 provides sedes current to recognize the risks and 14, “Revenue ndard by one t the revenue mpact on our ng changes to not expected Item m 7A. Quantit tative and Qua alitative Disclo sures About M Market Risk Not t applicable. Item m 8. Financial Statements an nd Supplemen ntary Data See e pages 27 thro ough 45. 26 REP ORT OF INDEP PENDENT REG ISTERED PUBL LIC ACCOUNTIN NG FIRM Board of Data I/O Directors and Corporation Stockholders Opi nion on the fin nancial statem ents We sub com 201 stat the and in c have audited bsidiaries (the mprehensive in 17, and the rela tements includ financial state d 2016, and the onformity with d the accompa “Company”) ncome (loss), s ated notes (co ded the financ ements presen e results of its h accounting p anying consoli as of Decem tockholders’ e ollectively refer ial statement nt fairly, in all operations an principles gene idated balance mber 31, 2017 equity, and cas rred to as the “ schedule listed material respe nd its cash flow rally accepted e sheets of D 7, and 2016, sh flows for ea “financial state d in the index ects, the financ ws for each of t in the United Data I/O Corpo the related c ach of the two ements”). Our appearing und cial position of the two years States of Ame oration (a Wa consolidated years in the p audits of the der Item 15 (S f the Company in the period rica. ashington corp statements of period ended D basic consolida Schedule II). In y as of Decem ended Decem poration) and f operations, December 31, ated financial n our opinion, ber 31, 2017, ber 31, 2017, Bas is for opinion The the Acc acco Com ese financial st Company’s fin counting Overs ordance with mmission and t atements are nancial statem sight Board (U the U.S. fede the PCAOB. the responsib ments based on United States) eral securities ility of the Com n our audits. W (“PCAOB”) an laws and the mpany’s mana We are a publi d are required e applicable r agement. Our ic accounting d to be indep rules and regu responsibility firm registered pendent with r ulations of th is to express a d with the Pub respect to the e Securities a an opinion on blic Company e Company in and Exchange We aud erro fina but Acc conducted ou dit to obtain re or or fraud. Th ancial reporting not for the pu cordingly, we e ur audits in acc easonable assu he Company is g. As part of o urpose of expr xpress no such ordance with t rance about w s not required our audits we a essing an opin h opinion. the standards whether the fin d to have, nor are required to nion on the effe of the PCAOB. nancial stateme were we eng o obtain an un ectiveness of t . Those standa ents are free o gaged to perfo nderstanding o the Company’s rds require tha of material mis orm, an audit of internal cont s internal cont at we plan and sstatement, wh of its internal trol over finan rol over financ d perform the hether due to control over cial reporting cial reporting. Our to e evid prin stat r audits include error or fraud, dence support nciples used an tements. We b ed performing and performi ing the amoun nd significant believe that ou procedures to ng procedures nts and disclos estimates mad r audits provid o assess the ris s that respond ures in the fina de by manage de a reasonable ks of material to those risks ancial stateme ment, as well e basis for our misstatement s. Such proced ents. Our audit as evaluating opinion. t of the financia dures included ts also included the overall pr al statements, examining, on d evaluating th resentation of whether due n a test basis, he accounting f the financial /s/ GRANT THORN NTON LLP We have served a as the Company y’s auditor sinc ce 2001. Sea Ma ttle, Washingt rch 28, 2018 ton 27 DATA I/O CO ONSOLIDATED CO thousands, ex (in ORPORATION BALANCE SHEE xcept share da ETS ata) mber 31, Decem 017 20 December 3 2016 1, $18,541 $11,5 571 AS CU SSETS URRENT ASSET Cash and cash Trade account doubtful Inventories Other current TOTAL CU TS: h equivalents ts receivable, n accounts of $7 assets URRENT ASSET TS net of allowanc 73 and $96, re ce for spectively Pr Inc Ot roperty, plant a come tax recei ther assets and equipment ivable t – net TOTAL AS SSETS ERS’ EQUITY LIA CU D STOCKHOLDE ABILITIES AND URRENT LIABIL Accounts paya Accrued comp Deferred reve Other accrued Income taxes TOTAL CU ITIES: able pensation enue d liabilities payable URRENT LIABIL LITIES ong‐term other Lo r payables CO OMMITMENTS TOCKHOLDERS’ ’ EQUITY ST ‐ referred stock ‐ Pr ed, 5,000,000 s Authorize shares of Serie 200,000 s nd outstanding Issued an at stated value ommon stock, ed, 30,000,000 Authorize Co shares, includi es A Junior Part g, none e ‐ 0 shares ng ticipating Issued an 2017 and ccumulated ea ccumulated oth g, 8,276,813 sh nd outstanding d 8,015,746 sha ares as of Dece ) rnings (deficit) nsive income her comprehen Ac Ac ares as of Dec ember 31, 201 ember 31, 6 TOTAL ST TOTAL LIA TOCKHOLDERS ABILITIES AND ’ EQUITY STOCKHOLDE RS’ EQUITY 28 3,769 4,168 708 27,186 2,458 598 45 $30,287 $1,301 3,536 1,787 858 218 7,700 527 ‐ 725 4,7 059 4,0 483 4 838 20,8 1,8 875 ‐ 63 776 $22,7 428 $1,4 208 2,2 926 1,9 667 6 36 265 6,2 479 4 ‐ ‐ ‐ 18,989 2,089 982 22,060 $30,287 204 19,2 60) (3,36 188 1 16,0 $22,7 032 776 D DATA I/O CORP TED STATEME CONSOLIDAT ands, except p (in thousa PORATION NTS OF OPERA er share amou ATIONS unts) the Years Ende For t December 31, D ed 2017 2016 $34,0 13,9 20,0 051 992 059 6,8 8, 15,0 5,0 896 116 012 047 29 3 366 281) (2 114 161 2 288 449 $5,4 5, $0 $0 8, 8,4 0.67 0.65 149 436 $23,413 10,545 12,868 5,065 6,376 11,441 1,427 44 140 81 265 1,692 (36) $1,656 $0.21 $0.20 7,968 8,132 Ne Co Op et Sales ost of goods so Gross marg perating expen Research an Selling, gen Total ope Operatin on‐operating in Interest inc Gain on sale Foreign cur Total non‐o come before in come tax (expe et income old gin nses: nd developme eral and admin erating expens g income ncome (expens ome e of assets rency transact operating incom ncome taxes ense) benefit Inc Inc Ne No nt nistrative es se): tion gain (loss) me (expense) Basic earnin Diluted ear Weighted‐a Weighted‐a ngs per share e nings per share shares average basic s d shares average diluted 29 CONSOLI D DATA I/O CORP EMENTS OF CO IDATED STATE (in thousa PORATION OMPREHENSIV ands) VE INCOME (LO OSS) Ne et Income ther comprehe Ot oreign currency Fo omprehensive Co ensive income: y translation ga income ain (loss) the Years End For December 31, D ded 2017 2016 $5, ,449 794 ,243 $6, $1,656 (471) $1,185 30 CONSOLID DATA I/ DATED STATEM (in thousands /O CORPORAT MENT OF STOC s, except share TION CKHOLDERS' E e amounts) EQUITY ensive income gain (loss) mber 31, 2016 6 5 mber 31, 2015 xercised ares x ued, net of tax k through: ck Purchase Pla mpensation an xercised ares x ued, net of tax k through: ck Purchase Pla mpensation an Ba Sto Re Sto w Iss alance at Dece ock options ex epurchased sha ock awards iss withholding suance of stock Employee Stoc Sh hare‐based com et income Ne ther comprehe Ot alance at Dece Ba Sto Re Sto w Iss ock options ex epurchased sha ock awards iss withholding suance of stock Employee Stoc hare‐based com Sh et income Ne ther comprehe Ot alance at Dece Ba ensive income gain (loss) 7 mber 31, 2017 Common n Stock Shares Amount Retained Earnings (Deficit) Accum and O Compre Income ulated Other hensive e (Loss) Total Stockholders' Equity 7,943,720 30,948 (80,345) $19,051 (81) (191) ($5,016) ) ‐ ‐ ‐ ‐ 118,737 (87) ‐ ‐ 2,686 ‐ ‐ ‐ 8,015,746 6 506 ‐ ‐ $19,204 ‐ ‐ ‐ ‐ 1,656 6 ‐ ‐ ) ($3,360) 131,065 ‐ (549) ‐ 128,262 (401) ‐ ‐ 1,740 ‐ ‐ ‐ 8,276,813 12 723 ‐ ‐ $18,989 ‐ ‐ ‐ ‐ 5,449 9 ‐ ‐ 9 $2,089 $659 ‐ ‐ ‐ ‐ ‐ ‐ (471) $188 ‐ ‐ ‐ ‐ 794 $982 $14,694 (81) (191) (87) 6 506 1,656 (471) $16,032 (549) ‐ (401) 12 723 5,449 794 $22,060 31 DAT CONSOLIDATED C TA I/O CORPOR D STATEMENT (in thousand RATION TS OF CASH FLO ds) OWS : NG ACTIVITIES et income ed in) operatin ation g activities: CA ROM OPERATIN ASH FLOWS FR Net income Adjustments t to net cash pr Depreciatio Gain on sale Equipment Share‐based Net change Trade acc Inventori Other cu Accounts Deferred Other lon Deposits to reconcile ne rovided by (use on and amortiz e of assets transferred to d compensatio e in: counts receiva ies rrent assets s payable and a revenue ng‐term liabilit and other long o cost of goods on sold ble accrued liabilit ies ties g‐term assets Net cash prov vided by (used in) operating a activities CA ASH FLOWS FR Purchases o Net procee Cash provided ROM INVESTIN of property, pla ds from sale of d by (used in) in G ACTIVITIES: ant and equipm f assets nvesting activit ties ment CA ASH FLOWS FR Net Proceed for share Repurchase Cash provided ROM FINANCIN ds from issuan es withheld to e of common st d by (used in) f : NG ACTIVITIES: n stock, less pa nce of common cover tax tock inancing activi ties yments For t the Years Ende December 31, D 2017 20 ed 016 $5,44 49 $1,656 $ 82 22 66) (36 49 74 71 14 1,21 15 59 5 98) (19 20 1,52 47) (24 11) (1 80) (58 9,12 26 54) (2,15 36 66 88) (1,78 (93 39) ‐ 39) (93 602 (140) 882 520 2,051) (2 (452) 73 869 951 48 ‐ 2,958 2,122) (2 140 1,982) (1 (163) (191) (354) Inc crease in cash and cash equiv valents Eff Ca Ca fects of exchan ash and cash eq ash and cash eq nge rate chang quivalents at b quivalents at e ges on cash beginning of pe end of period eriod upplemental d Su ash paid during Ca Income Taxes isclosure of ca g the period fo ash flow inform r: mation: 6,39 99 622 57 11,57 $18,54 71 71 41 (319) 1 11,268 11,571 $1 $12 27 $7 32 DATA I/ /O CORPORATI ION NOTES TO CONSOLID ATED FINANCI IAL STATEMEN NTS NOT TE 1 – SUMMA ARY OF SIGNIF FICANT ACCOU UNTING POLICI ES Nat ture of Operati ions Dat and “de imp syst ope ta I/O Corporat d manufacture evices” or “sem portant tool fo tem products erations are cu tion (“Data I/O rs of electroni miconductors”) or the electron are located a rrently located O”, “We”, “Ou c products. O ) with the spe nics industry e around the w d in Redmond, r”, “Us”) desig ur programmi ecific unique d experiencing g world, primarily Washington, U gns, manufactu ng system pro ata necessary rowing use of y in the Far United States a ures and sells oducts are used for the ICs co f programmab East, Europe and Shanghai, programming d to program ontained in va ble ICs. Custo and the Ame China. systems used integrated circ rious products mers for our ericas. Our m by designers cuits (“ICs” or s, and are an programming manufacturing Prin nciples of Cons solidation The Inte e consolidated ercompany acc d financial sta counts and tran atements inclu nsactions have ude the accou e been eliminat unts of Data ted in consolid I/O Corporatio dation. on and our w wholly‐owned subsidiaries. Use e of Estimates The Am liab reve e preparation erica (“U.S. GA bilities and disc enues and exp of financial st AAP”) requires closure of cont penses during t tatements in c management tingent assets the reporting p conformity wit to make estim and liabilities a period. Actual th accounting mates and assu at the date of results could d principles gen mptions that a the financial s differ from tho nerally accept affect the repo statements, an ose estimates. ed in the Unit orted amounts nd the reporte ted States of of assets and d amounts of Sign tes include: nificant estima Revenue Recognition Allowanc ce for Doubtfu y Inventory Warranty y Accruals ation Allowanc Tax Valua ased Compensa Share‐ba ces ation l Accounts Fore eign Currency Translation Ass exp resu gain curr ets and liabilit penses of foreig ulting from th ns and losses rencies are inc ies of foreign gn subsidiaries is process are resulting from cluded in non‐o subsidiaries ar s are translated charged or cr m the effects operating expe re translated a d at average ra redited to stoc of changes in ense as foreign at the exchang ates of exchan ckholders’ equ n exchange ra currency tran e rate on the nge prevailing d uity, net of tax ates on assets saction gains a balance sheet during the yea xes recognized s and liabilitie and losses. date. Revenu ar. Translation d. Realized an es denominate ues, costs and n adjustments nd unrealized ed in foreign Cas h and Cash Eq uivalents All h our Dep not Chin highly liquid in r cash and cash posit Insurance experienced a na, Germany a vestments pur h equivalents w e Corporation ( any losses on o and Canada, to rchased with a with major fina (FDIC), and for our cash and ca taled (in millio n original mat ancial institutio reign jurisdictio ash equivalent ons) $6.2 at De urity of 90 day ons in the Unit ons. Deposits ts. Cash and ca cember 31, 20 ys or less are co ted States of A in U.S. banks e ash equivalent 017, and $5.6 a onsidered cash America, which exceed the FDI ts held in foreig at December 31 h equivalents. h are insured b IC insurance lim gn bank accou 1, 2016. We maintain by the Federal mit. We have unts, primarily Fair r Value of Finan ncial Instrume nts Cer sho and tain financial i ort‐term, highly d accrued expe nstruments ar y liquid nature nses, and othe re carried at co e. These instr er short‐term l ost on the con uments includ iabilities. solidated bala de cash and ca ance sheets, w ash equivalent which approxim ts, accounts re mates fair value eceivable, acco e due to their ounts payable 33 Acc counts Receiva ble The bas typi Acc allo and obli they acco the the man e majority of o ed on an eval ically due with counts receiva owance by con d geographic p igation to us, a y become unc ounts. Interes day after the extent cash i nagement. ur accounts re uation of a cu hin 30 to 60 d ble outstandin sidering a num payment pract and the condit ollectible, and st may be accr due date of th is received, or eceivable are d ustomer’s fina ays and are st ng longer than mber of factors tices involved, ion of the gen payments sub rued, at the di he receivable. r when the fu ue from comp ncial condition tated at amou n the contrac s, including the , our previous eral economy bsequently rec iscretion of ma However, inte ture collection panies in the el n and, general unts due from tual payment e length of tim s bad debt ex and the indus ceived on such anagement an erest income i n of interest a lectronics man lly, collateral i customers ne terms are co me trade accou xperience, the stry as a whole h receivables a nd according to is subsequentl and the receiv nufacturing ind s not required et of an allowa onsidered past unts receivable e customer’s c e. We write of re credited to o our standard ly recognized o vable balance dustries. Credi d. Accounts re ance for doubt t due. We de e are past due, current ability ff accounts rec the allowance d sales terms, on these accou is considered it is extended eceivable are tful accounts. etermine the , the industry to pay their ceivable when e for doubtful beginning on unts either to probable by Inve entories Inve app sala item entories are st proximates cos able inventory m basis and rec tated at the lo st on a first‐in, by reviewing c cord an adjustm ower of cost o , first‐out basi current transac ment (lower of r net realizabl s. We estima ctions and fore f cost or marke le value with c te changes to ecasted produ et) accordingly cost being the inventory for ct demand. W y. e currently adj obsolete, slow We evaluate ou usted standard w‐moving, exc ur inventories o d cost, which cess and non‐ on an item by Pro perty, Plant an nd Equipment Pro esti man rem perty, plant a imated useful nufacturing an maining portion nd equipment lives of the nd office equip n of the lease o t, including lea related asset pment over pe or over the exp asehold impro ts or lease te eriods of three pected life of th vements, are erms on the e to seven yea he asset if less stated at cost straight‐line ars. We depr than the rema t and deprecia basis. We d eciate leaseho aining term of ation is calcula depreciate sub old improveme the lease. ated over the bstantially all ents over the We indi amo is r Dec regularly revi icate that the ount of these a recorded. Bas cember 31, 201 iew all of our carrying value assets, an imp sed on this ev 17, and 2016. property, pla may not be re airment loss, i valuation, no nt and equipm ecoverable. If f any, based o impairment w ment for impa f the total of fu on the excess o was noted for airment whene uture undiscou of the carrying property, pla ever events or unted cash flo amount over ant and equip r changes in c ws is less than the fair value ment for the circumstances n the carrying of the assets, years ended Pate ent Costs We pate pate expense exte ents obtained ents subseque ernal costs, su through acqu ent to their issu ch as filing fe uisition as inta uance. es and associa angible assets. ated attorney We also expe fees, incurred ense costs ass d to obtain in sociated with itial patents, b maintaining a but capitalize nd defending Inco ome Taxes Inco adju prev cha inco cau whe Rep ome taxes are usted both for viously used t nges in deferr ome and expen sed by a chan en necessary t patriation” hav computed at c r items that do to determine red tax assets nse are recogn nge in judgmen to reduce defe ve been include current enacte o not have tax deferred tax and liabilities nized for financ nt about the r erred tax asset ed in our 2017 ed tax rates, les consequences assets or liabi that arise bec cial reporting a reliability of th ts to amounts financial state ss tax credits u and for the cu ilities. Tax pr ause of tempo and income tax he related defe expected to b ements. using the asset umulative effe rovisions inclu orary differenc x purposes, an erred tax asse be realized. Ta t and liability m ect of any chan ude amounts t ces between th nd any changes ets. A valuatio ax reform and method. Defer nges in tax rate that are curre he timing of w s in the valuati on allowance i the effect of t rred taxes are es from those ently payable, when items of ion allowance is established the “Deemed Sha are‐Based Com pensation All com forf stock‐based c mpensation ex feitures at the ompensation pense on the time of grant a awards are m straight‐line and revised as measured based single‐option necessary in s d on estimate method. Our ubsequent per ed fair values r share‐based riods if actual f on the date o compensation forfeitures diff of grant and r n is reduced f fer from those recognized as for estimated estimates. 34 Rev venue Recognit tion We pro the stan syst batt wel whi recognize rev gramming equ factory prior t ndard product tems could be teries of tests l as past prod ich the current venue at the t uipment has re to shipment an s with publish e deemed as of product pe duct operation t versions were time the prod eached a point nd that the inst hed product sp accepted was rformance to o validation wit e based. duct is shipped of maturity an tallation meets pecifications an s based upon our published th the custom d or when the nd stability suc s the criteria to nd are configu having standa specifications, mer and the his e service is de ch that produc o be considere urable with sta ardized factor , quality inspec story provided elivered. We ct acceptance c ed a separate e andard options ry production ctions and inst d by our instal have determi can be assured element. These s. The eviden of the units, tallation stand lled base of p ned that our d by testing at e systems are ce that these results from ardization, as roducts upon The is co the rega e revenue relat onsidered perf customers th arding installat ted to product functory includ emselves. Thi tion. s requiring ins des any installa is takes into a tallation that i ation that can ccount the co is perfunctory be performed mplexity, skill is recognized a by other parti and training n at the time of es, such as dis needed as wel shipment. Ins tributors, othe ll as customer stallation that er vendors, or expectations We serv rela serv soft syst inst term enter into mu vice and supp ative selling pr vice and suppo tware mainten tem is sold. R tallation is per m of the agree ultiple delivera ort componen rices. Relative ort componen nance compone evenue is reco formed, and h ment, typically ble arrangeme nt and a softw e selling price ts, we use the ents, we use w ognized on the hardware servi y one year. ents that arise ware maintena is based on t e value of the what we charge e system sale b ice and suppo during the sale nce compone he selling pric discount given e for annual so based on shipp rt and softwar e of a system t nt. We alloca ce of the stan n to distributo oftware maint ping terms, ins re maintenanc that includes a ate the value dalone system ors who perfor enance renew stallation reve ce revenue is r n installation c of each eleme m. For the ins rm these comp wals after the in enue is recogni recognized rat component, a ent based on stallation and ponents. For nitial year the ized after the ably over the Wh obli en we sell so igations remai oftware separ n on our part a rately, we rec and substantiv cognize softw e acceptance c ware revenue conditions, if a upon shipme any, have been ent, provided n met. that only inc consequential We det any eve apa by t recognize re erminable, the y, have been m ent of theft, ph art from us and the buyer. We venue when e buyer has pa met, the obligat ysical destruct d we do not ha e establish a re persuasive ev id or is obligat tion is not cont tion or damage ave significant serve for sales idence of an ed to pay, coll tingent on resa e to the produc obligations for s returns based arrangement ectability is re ale of the prod ct, the buyer a r future perfor d on historical t exists, shipm asonably assu uct, the buyer cquiring the p rmance to dire trends in prod ment has occu red, substantiv r’s obligation w roduct for resa ctly bring abou uct returns an rred, the pric ve acceptance would not be ch ale has econom ut the resale o d estimates fo ce is fixed or conditions, if hanged in the mic substance of the product or new items. Sale $80 es were record 0,000 and $50,0 ded net of actu 000 at Decemb ual sales retur ber 31, 2017, a ns and change and 2016, resp es to the assoc ectively. ciated sales ret turn reserve. Sales return r reserves were We are dem The ord as r transfer certa our standard monstration eq ese product un inary course o revenue and co ain products ou products in o quipment. Onc nits often invo of business. Th ost of goods so ut of service fr one of the foll ce transferred, olve refurbishi he transfer am old. rom their inter owing areas: s , the equipme ing and an eq mount is the pro rnal use and m service loaner nt is sold by o quipment warr oduct unit’s ne make them ava rs, rental or te ur regular sale ranty, and are et book value ailable for sale est units; engi es channels as e conducted a and the sale t e. The product neering test u used equipme as sales in our transaction is a ts transferred units; or sales ent inventory. r normal and accounted for Res search and Dev velopment Res search and dev velopment cost ts are generally y expensed as incurred. Adv vertising Expen nse Adv 201 are expensed vertising costs y. 16, respectively as incurred. T Total advertisin ng expenses w were approxima ately $154,000 0 and $108,000 0 in 2017 and 35 Wa e rranty Expense We reco and one ade stra record a liabi ognized. Facto d costs per clai e year. We pr equacy of our aight‐line basis lity for an esti ors affecting ou im. We norma rovide for the warranty liabi over the term mate of costs ur warranty lia ally provide a estimated cos lity based on m of the related that we expec ability include t warranty for o st that may be changes in the d warranty con ct to incur und the number of our products a e incurred und e above facto ntracts. Service der our basic li f units sold and against defects der our produc rs. We record e costs are exp mited warrant d historical and s for periods r ct warranties d revenues on pensed as incur ty when produ d anticipated ra ranging from n and periodica n extended wa rred. uct revenue is ates of claims ninety days to lly assess the arranties on a Ear nings (Loss) Pe er Share Bas the the com the wer the ic earnings (lo weighted‐ave weighted‐ave mmon stock eq years ended D re outstanding period then e oss) per share e rage number o erage number quivalent share December 31, g as of Decemb nded because exclude any di of common sha of common s es from equity 2017, and 201 ber 31, 2017, a the options w lutive effects o ares outstandi shares and com awards used in 16, respectively and 2016, resp ere anti‐dilutiv of stock option ng during the mmon stock e n calculating d y. Options to pectively, but w ve. ns. Basic earn period. Dilute equivalent sha iluted earnings purchase 12,6 were excluded nings (loss) per ed earnings pe ares outstandin s per share we 603 and 117,35 from the com r share are com r share are com ng during the ere 287,000 an 52 shares of co mputation of di mputed using mputed using period. The d 164,000 for ommon stock iluted EPS for Dive ersification of Credit Risk Fina trad one rece incl $2,5 sign eva pre ancial instrum de receivables e customer, D eivable balanc udes foreign 554,000, respe nificantly redu luations of ou payment when ents, which po are geograph ata Copy Lim ce at Decembe accounts rece ectively. We g ced due to th ur customers’ never deemed otentially subje ically disperse ited, our distr er 31, 2017. O eivable in the generally do bu he diversity o financial con necessary. ect us to conc ed and include ributor in Chin Our consolidat e functional cu usiness with o of our end‐cus dition and req centrations of e customers in na, accounted ed accounts re urrency of ou ur foreign dist stomers and g quire collatera credit risk, co many differen d for greater t eceivable bala ur foreign sub tributors in U.S geographic sal al, such as let onsist primarily nt industries. than 10% of ance as of Dec bsidiaries amo S. Dollars. We les areas. W tters of credit y of trade rece As of Decemb our consolida cember 31, 20 ounting to $1, e believe that We perform on t and bank gu eivables. Our ber 31, 2017, ted accounts 17, and 2016 ,228,000 and risk of loss is n‐going credit uarantees, or New w Accounting P Pronouncemen nts In M Sha an equ an esti full stan tax‐ stan March 2016, th are‐Based Paym income tax ex uity in the perio award by reco imate forfeitur valuation allo ndard requires ‐withholding p ndard was ado he FASB issued ment Accountin xpense and is od of adoption ognizing the e res, and excess owance. Adop s that amounts purposes are to opted effective d ASU 2016‐09 ng”. ASU 2016 applied prosp n. The standard effects of forfe s tax benefits h ption of the alt s paid to a taxi o be presented beginning Jan 9, Compensatio 6‐09 requires e pectively by m d establishes a eitures in com have not been ternative pract ng authority o d on a retrospe uary 1, 2017, a on‐Stock Comp excess tax bene eans of a cum an alternative p mpensation cos allocated to eq tical expedien on the employe ective basis as and did not ha pensation (ASU efits to be reco mulative‐effect practical exped st when the f quity, as they a t is applied pr ee’s behalf as a financing act ve a material i U 2016‐09), “I ognized in the t adjustment o dient for estim forfeitures occ are all in net o rospectively on a result of dire tivity on the st mpact on our mprovements statement of of excess tax b mating the expe cur. We have operating losse n an entity‐wi ectly withholdi tatement of ca financial state to Employee operations as benefits from ected term of continued to s, that have a de basis. The ing shares for ash flows. The ments. In F leas or a The con February 2016, ses on the bala a finance type e standard bec nsolidated finan , the FASB issu ance sheet as a lease. The stan omes effective ncial statemen ued ASU 2016‐ a right‐of‐use ndard excludes e beginning Ja nts. ‐02, “Leases” ( asset and a lea s leases of inta nuary 1, 2019 ASU 2016‐02) ase liability an angible assets . We are in th . ASU 2016‐02 d requires leas or inventory. E he process of e 2 requires less ses to be class Early adoption evaluating the sees to recogn sified as either of the standa impact of ado ize almost all an operating rd is allowed. option on our In M com reve reve rew from yea stan con May 2014, the mpanies with enue recognit enue when co wards transfer t m Contracts w r and now tak ndard as of Ja nsolidated finan e FASB issued A a single mode ion guidance, ntrol of the go to the custome with Customers es effect for p anuary 1, 2018 ncial statemen ASU 2014‐09, el for account including indu oods or service er under the e s” (ASU 2015‐1 ublic entities i 8 and do not nts including th “Revenue from ting for reven ustry‐specific es transfers to existing revenu 14), deferring n fiscal years b anticipate tha he potential im m Contracts w ue arising fro revenue guida the customer, e guidance. In the effective beginning after t the adoption mpact of the ad with Customers om contracts w ance. The core as opposed to n August 2015, date of the ne r December 15 n of this stand dditional disclo s” (ASU 2014‐0 with custome e principle of o recognizing r , the FASB issu ew revenue re 5, 2017. We e dard will have osures. We ar 09). ASU 2014 rs and supers the model is revenue when ued ASU 2015‐ ecognition stan xpect to adopt e a material im re implementin 4‐09 provides sedes current to recognize the risks and 14, “Revenue ndard by one t the revenue mpact on our ng changes to 36 our to b r accounting po be material. olicies, interna l controls, and disclosures to o support the n new standard, h however, thes e changes are not expected NOT TE 2 – ACCOUN NTS RECEIVAB BLE, NET (in n thousands) ade accounts r Tr Le ess allowance f ade accounts r Tr receivable or doubtful rec ceivables t receivable, net December 31 2017 1, De ecember 31, 2016 42 $3,84 73 7 69 $3,76 $4,821 96 $4,725 Ch hanges in Data I/O’s allowanc ce for doubtful l accounts are as follow: n thousands) (in eginning balanc Be ad debt expens Ba ccounts written Ac ecoveries Re nding balance En ce se (reversal) n‐off NOT TE 3– INVENTO ORIES (in n thousands) aw material Ra s Work‐in‐process W nished goods Fin ventories Inv NOT TE 4 – PROPER RTY, PLANT AN ND EQUIPMEN T, NET (in n thousands) ovements Le Eq Sa easehold impro quipment ales demonstra ation equipme ent Le Pr ess accumulate roperty and eq ed depreciatio quipment, net n December 31 2017 1, De ecember 31, 2016 $9 96 24) (2 ‐ 1 73 $7 $43 55 (2) ‐ $96 December 3 2017 31, De ecember 31, 2016 392 $2,3 091 1,0 6 685 168 $4,1 $2,402 1,226 431 $4,059 December 31 2017 1, De ecember 31, 2016 $4 5,27 1,3 7,0 4,55 $2,45 16 79 15 10 52 58 $376 4,449 1,158 5,983 4,108 $1,875 Tot al depreciation n expense reco orded for 2017 and 2016 was s $822,000 and d $602,000, res spectively. NOT TE 5 – INCOME E TAX RECEIVA ABLE On Inte 31, seq December 22, ernal Revenue 2017. As a re uestration. 2017, the Tax Code. Change esult, we have x Cuts and Job es include the recorded a lo bs Act of 2017 repeal of corp ong‐term incom 7 (the “Act”) w porate Alterna me tax receiva was signed int ative Minimum able of $598,00 o law, making m Tax (AMT) fo 00 for the refu g significant ch or tax years aft undable AMT c hanges to the ter December credits net of 37 NOT TE 6 – OTHER A ACCRUED LIAB BILITIES Oth her accrued liab bilities consiste ed of the follow wing compone ents: ty erve (in n thousands) Pr Sa O O O roduct warran ales return res ther taxes ther ther accrued li iabilities December 31 2017 1, De ecember 31, 2016 30 $53 80 8 09 10 39 13 58 $85 $371 50 149 97 $667 The e changes in ou ur product war rranty liability f for the year en nding Decembe er 31, 2017 are e follows: ing balance n thousands) (in ability, beginn Li N et expenses W s Warranty claims ns ccrual revision A g balance ability, ending Li December 31 2017 1, 71 $37 94 41 41) (94 15 59 $53 30 NOT TE 7 –OPERAT TING LEASE CO MMITMENTS We initi have commitm ial or remainin ments under n ng terms of one on‐cancelable e year or more e as follows: operating leas ses and other a agreements, p primarily for fac ctory and offic ce space, with For the years end ing December 31: (in n thousands) 018 20 019 20 020 20 021 20 20 022 hereafter Th otal To Operatin ng s Leases $922 $ 946 933 759 232 ‐ 3,792 $3 Lea bas se and rental e is, over the ter expense was $ rm of the lease 862,000 and $ e, for leases th $927,000 in 201 at contain fixe 17 and 2016, r d escalation cl respectively. R auses. Rent expense is s recorded on a a straight line 38 Dur Sep indu buil wer ring the third q ptember 12, 20 ucement incen lding and lowe re approximate quarter of 2017 017, extending ntives. Previo er the square f ely $303,000 a 7, we amended g the lease to ously on June footage to app nd $200,000, r d our lease agr July 31, 2022 8, 2015 the le proximately 20 respectively. reement for th 2, waiving a po ease had been 0,460. The lea he Redmond, W otential space n amended to ase base annua Washington he e give back pro o relocate our al rental paym adquarters fac ovision and re headquarters ents during 20 cility effective eceiving lease s to a nearby 017 and 2016 In a serv loca addition to the vice, operation ated near Mun e Redmond fa ns and engine nich, Germany. cility, approxim eering office lo mately 24,000 ocated in Shan 0 square feet i nghai, China, a is leased at tw and our Germ wo foreign loc man sales, serv cations, includi vice and engin ing our sales, neering office We Sha 19,4 201 signed a lease anghai, China w 400 square fee 16 were approx e agreement e which we mov et at approxim ximately $276, effective Nove ved into durin mately 54% of t 000 and $233, mber 1, 2015 ng the first qu he prior lease ,000, respectiv vely. that extends arter of 2016. rental rate. T through Octob . The new lea The lease base ber 31, 2021 f ase approxima annual rental for a new facil ately doubled payments dur ity located in our space to ring 2017 and Dur effe at a wer ring the fourth ective March 1 approximately re approximate h quarter of 20 , 2017, and ext the same cost ely $64,000 an 016, we signe tends through per square fo d $61,000, res d a lease agre February 28, 2 ot as the prior spectively. eement for a n 2022. The new r lease. The lea new facility lo w lease slightly ase base annu cated near Mu y increased our ual rental paym unich, German r space to 4,89 ments during 20 ny which was 95 square feet 017 and 2016 NOT TE 8 –OTHER C COMMITMENT TS We serv spe of t day exp have purchas vice contracts, cifies all signif the transaction ys. At Decemb pected to be pa se obligations , marketing, a icant terms, in n. Most arrang ber 31, 2017, th aid over the ne for inventory nd developme ncluding fixed o gements are ca he purchase co ext twelve mon and producti ent agreement or minimum qu ancelable with ommitments a nths. on costs as w ts. Arrangeme uantities to be hout a significa and other oblig well as other o ents are consi e purchased, a ant penalty, an gations totaled obligations suc idered purchas pricing structu d with short n d $1,962,000 o ch as capital e se obligations ure and approx notice, typically of which all but expenditures, if a contract ximate timing y less than 90 t $12,000 are NOT TE 9 – CONTIN NGENCIES As o adv our of December 3 verse outcome r results of ope 31, 2017, we w of which in m erations or fina were not a par management’s ncial position. ty to any legal opinion, indiv l proceedings o idually or in th or aware of an he aggregate, ny indemnifica would have a ation agreemen material adve nt claims, the erse effect on NOT TE 10 – STOCK K AND RETIREM MENT PLANS Stoc ck Option Plan ns At Com con with Opt the December 31 mpensation Inc nsisting of 605, h exercise pric tions granted u 2000 Plan wh 1, 2017, there centive Plan (“ ,850 under the ces equal to th under the plan ich generally v e were 244,8 “2000 Plan”). e 2000 plan. P e fair market v s have a maxim vest over four y 61 shares ava At December Pursuant to th value of the Co mum term of s years. ailable for fu 31, 2017, ther his 2000 Plan, o ommon Stock six years from t ture grant un re were shares options are gr at the date of the date of gra nder Data I/O s of Common S ranted to our o grant and gen ant. Stock awa O Corporation Stock reserved officers and ke nerally vest ove ards are also g n 2000 Stock d for issuance ey employees er four years. granted under Emp ployee Stock P Purchase Plan Und inte valu and Dec der the Employ ervals at 95% o ue not exceedi d 2,686 shares, cember 31, 201 yee Stock Purc of the fair ma ing ten percen , respectively, 17, a total of 5 chase Plan (“ES rket value on nt of their gros were purchase 1,947 shares w SPP”), eligible the last day o ss compensatio ed under the p were reserved f employees ma of each six‐mo on during an o plan at averag for future issua ay purchase sh nth period. E offering period e prices of $5. ance. hares of our C Employees may . During 2017 .78 and $2.63 Common Stock y purchase sha 7 and 2016, a t per share, res at six‐month ares having a total of 1,740 spectively. At Stoc ck Appreciatio n Rights Plan We Com for have a Stock mmon Stock ha the difference Appreciation R as a SAR with r e between the Rights (“SAR”) respect to each e market value Plan under wh h exercisable s e of the stock hich each direc stock option. T and the exerc ctor, executive The SAR entitle ise price of th e officer or ho es the SAR hol he option in lie older of 10% or der to receive eu of exercisin r more of our cash from us ng the related 39 opt of D tha eve 40,0 ion. SARs are Data I/O of any n 50% of the c ent is deemed 000 SARs outst only exercisab y merger, cons common share probable, no tanding. ble following a solidation, reo es outstanding compensation tender offer o organization or g. As no event n expense has or exchange of r other transac t has occurred, been recorded ffer for our sto ction providing , which would d under this p ock, or followin g for the conve make the SAR plan. At Decem ng approval by ersion or excha Rs exercisable, mber 31, 2017 shareholders ange of more , and no such 7, there were Dire ector Fee Plan We sha 31, have a Direct res were issue 2017. or Fee Plan av ed from the pla ailable to com an for 2017 or mpensate direct 2016 board se tors who are n rvice and 151, not employees ,322 shares rem s of Data I/O C main available orporation wit in the plan as th equity. No of December Ret irement Saving gs Plan We Cod IRS max plan con have a saving de. Under the limitations. I ximum contrib n, net of forf ntributions owe gs plan that qu plan, participa n fiscal years bution of four feitures, was ed to the plan ualifies as a ca ating U.S. emp 2017 and 201 percent of a p approximately were $251,000 ash or deferre loyees may de 16, we contrib participant’s e y $232,000 an 0 and $181,000 ed salary arran efer their pre‐t uted one dolla ligible earning nd $129,000 i 0 at December ngement unde tax salary or po ar for each do gs. Our match n 2017 and 2 r 31, 2017, and r Section 401( ost‐tax salary i ollar contribut hing contributi 2016, respecti d 2016, respect (k) of the Inte f Roth is electe ed by a partic on expense fo ively. Employ tively. rnal Revenue ed, subject to cipant, with a or the savings yer matching NOT TE 11– SHARE‐ ‐BASED COMP PENSATION For met for Dec share‐based thod. For the estimated forf cember 31, 201 awards grante se awards we feitures. The 17, and 2016 w ed, we have r have recogniz impact on our was as follows: recognized com zed compensat r results of op mpensation ex tion expense u erations of re xpense based using a straigh cording share‐ on the estim ht‐line amortiz ‐based compe mated grant da zation method nsation for th ate fair value and reduced e year ended (in n thousands) Co ost of goods so esearch and de Re Se elling, general a otal share‐base To old evelopment and administra ed compensatio ative on Year E Ended Decemb ber 31, 2017 2016 $18 164 532 $714 3 $13 6 106 401 1 0 $520 An 31, immaterial am 2017, and 201 e‐based compe mount of share y. 16, respectively ensation was c capitalized into o inventory as overhead for the years ende ed December The Sch may wei e fair values of oles valuation y exclude certa ghted average f share‐based model. The v ain periods of h e assumptions awards for em volatility and e historical data were used to c mployee stock xpected life of that we consid calculate the fa option awards f the options u dered atypical air value of opt s were estima used in calcula and not likely tions granted d ted at the dat ting the fair va y to occur in fut during the yea te of grant usi alue of share‐b ture periods. T rs ended Dece ng the Black‐ based awards The following ember 31: sk‐free interes st rates Ris s Vo olatility factors the option in y Ex xpected life of t nd yield xpected dividen Ex years Employee Stock E k Options 2017 1.72% 0.62 4.0 None 2016 N/A N/A N/A N/A The e risk‐free inte rest rate used d in the Black‐S Scholes valuat tion method is s based on the e implied yield d currently ava ailable in U.S. 40 Trea curr exp hold awa hist asury securitie rently have pla pected to be o ding periods f ards, vesting s torical volatility es at maturity ans to do so in outstanding an for the remain chedules and y of our stock o y with an equi the future. Th nd has been d ning unexercise expectations o over a represe ivalent term. he expected te determined ba ed shares. Co of future emp ntative period We have not erm of options ased on histor onsideration w loyee behavio . t recently dec s represents th rical weighted was given to th or. Expected v clared or paid he period that o d average hold he contractua volatility is bas any dividends our stock‐base ding periods a l terms of our sed on the ann s and do not ed awards are and projected r stock‐based nualized daily The e following tab le summarizes stock option a activity under o our stock optio on plans for th e twelve mont ths ended Dece ember 31: 7 2017 ted‐ Weight ge Avera Exerci se e Price Weig Ave Rem Contr Life in ghted‐ erage aining ractual n Years 2016 Weighted‐ Average Exercise Price Weighted‐ Average Remaining Contractual Life in Years Options Options 376,00 25,00 (346,00 00 00 0) 2.95 $2 8 8.03 2.83 2 574,000 ‐ (130,000) ( $2.97 0.00 2.38 (15,00 0) 6.01 6 (68,000) 4.25 40,00 00 $6 6.10 3.60 376,000 $2.95 1.67 beginning of utstanding at Ou ear ye Gr ranted xercised Ex ancelled, Expire Ca orfeited Fo ed or Ou utstanding at e end of year ested or expec Ve th e end of the p Ex xercisable at en ted to vest at eriod nd of year 34,46 16,56 60 63 $5 $3 5.79 3.37 3.29 0.91 375,055 357,250 $2.96 $3.00 1.67 1.62 The clos exe the e aggregate int sing stock pric rcised their st twelve month trinsic value of e of $12.04 at ock options th h period ended f outstanding o t December 31 hat were in‐the d December 31 options is $24 1, 2017, which e‐money as of , 2017, was $1 2,553. This re h would have b f that date. Th 1,730,249. epresents the been received he aggregate i total pretax in by award hol ntrinsic value ntrinsic value, lders had all a of awards exe based on the ward holders ercised during Res follo stricted stock ows: award includin ng performanc ce‐based stock k award activi ity under our share‐based c compensation plan was as 201 17 20 016 Awards A 464,850 287,600 181,725) (1 (4,875) 565,850 Weighted ‐ Average Grant Date Fair Value $2.78 8 7.29 9 2 2.72 6 3.06 9 $5.09 Awards 389,100 227,100 (148,100) (3,250) 464,850 Weighted d ‐ e Average te Grant Dat Fair Valu e .86 $2. .61 2. .72 2. .73 2. .78 $2. beginning of ye ear Ou G V C Ou utstanding at b Granted Vested Cancelled utstanding at e end of year The opt e remaining un ion grants and amortized exp d restricted sto compensation e pected future c : ck awards are: expense and re emaining amo rtization perio od associated w with unvested Un namortized fut ture compensa ation expense Re emaining weigh hted average a amortization pe eriod in years December 31, D 2017 ember 31, Dece 2016 2 4 $2,560,844 $ 1,093,144 8 2.98 2.53 41 NOT TE 12 – SHARE E REPURCHASE E PROGRAMS On of o und 80,3 and 201 February 24, 2 our stock durin der the Exchan 345 shares of d charges. The 17. 2016, our Boar ng the period f ge Act to prov stock have be ere were no sto rd of Directors from March 2, vide flexibility t en repurchase ock repurchase approved a sh , 2016, throug to make purch ed at an averag es made unde hare repurchas gh March 31, 2 ases througho ge price of $2 r this program se program wit 2017. The prog out the period. .36 for a total m during the tw th provisions t gram was esta . For the year of $189,360 p welve month p to buy back up ablished with a ended Decem plus $1,649 in eriod ending D p to $1 million a 10b5‐1 plan ber 31, 2016, commissions December 31, The ere were no ne ew stock repurc chase program ms in effect dur ring the twelve e month period d ending Decem mber 31, 2017 . The e following is a summary of th he stock repur chase program m from March 2 2, 2016 throug gh December 3 31, 2016: Repurchases b Month by Tota l Numbe r of es Share sed Purchas Aver Paid rage Price per Share er s Total Numbe of Shares Purchased a Part of Publicly d Announced e Repurchase Program arch 2016 M pril 2016 Ap ay 2016 M ne 2016 Ju ly 2016 Ju otal To ,515 42, 8, ,480 7, ,650 ,200 15, 6, ,500 ,345 80, $2.26 $2.35 $2.52 $2.45 $2.61 $2.36 42,515 8,480 7,650 15,200 6,500 80,345 NOT TE 13– INCOM ME TAXES Com mponents of in ncome (loss) be efore taxes: Appro Dollar Share May Purc unde Pro oximate Value of es that Yet Be chased er the gram $903,161 $ $ $883,064 $ $863,602 $826,078 $ $808,991 $ nded Decembe Year En 2017 r 31, 2016 $3,8 1,3 $5,1 817 344 161 $1,401 291 $1,692 thousands) (in S. operations U. Fo oreign operatio Total income ( T ons loss) before ta xes Inco ome tax expen nse (benefit) co onsists of: ense (benefit) (in Cu U S F thousands) urrent tax expe U.S. federal State Foreign De eferred tax exp pense (benefit) l ) – U.S. federal T Total income t ax expense (be enefit) Year Ende 31, ed December 2016 2 2017 ($494) 8 198 (288) ‐ ($288) $25 6 5 36 ‐ $36 42 A re econciliation o f our effective income tax an nd the U.S. fede eral tax rate is as follows: net of federal i red tax assets income tax ben nefit thousands) (in atutory tax Sta ate and foreign Sta Va aluation allowa Fe ederal rate cha oreign sourced Fo ock based com Sto MT credit refun AM ther Ot Total income n income tax, n ance for deferr nge deemed divid mpensation nd tax expense (b benefit) end income Year 2017 r Ended Decem mber 31, 2016 $1,755 $ 83 4,800) (4 2,979 1,145 (970) (494) 14 ($288) ( $57 25 (603 75 59 3) ‐ ‐ 4) ‐ 1) 36 (1 $3 (184 The e tax effects of temporary dif fferences that g gave rise to sig gnificant portio ons of the defe erred tax asset s are presente ed below: (in De thousands) eferred income Allowance for Inventory and Compensatio Accrued liabil Book‐over‐tax Foreign net o U.S. net opera U.S. credit car e tax assets: r doubtful acco d product retur n accruals ities x depreciation perating loss c ating loss carry rryforwards ounts rn reserves tion and amortizat carryforwards yforwards Va aluation Allowa Total Deferre ance d Income Tax A Assets Year En 2017 ded December r 31, 2016 $11 $ 4 406 233 1,2 236 2 33 1 133 761 2,7 017 2,0 830 6,8 (6,83 30) $ ‐ $17 632 1,726 524 93 550 6,419 1,287 11,248 (11,248) $ ‐ The and abil and and e valuation allo d 2016, respec lity to utilize s d the cyclical na d foreign tax cr owance for def tively. The ne uch assets in f ature of our in redits. ferred tax asse et deferred tax future years. T ndustry and cap ets decreased x assets have a This full valuat pital spending. $4,418,000 an a full valuation tion allowance . Credit carryf nd 421,000 dur n allowance pr e evaluation is forwards consi ring the years rovided due to based upon o st primarily of ended Decem o uncertainty r our volatile hist f research and ber 31, 2017, regarding our tory of losses experimental On Inte 201 tax Dec Ear the of 2 rep We carr December 22, ernal Revenue 17. The change years beginn cember 31, 20 nings & Profits date of this fi 2017, the peri atriation” and have estima ryforwards aga 2017, the Tax Code. We ha es that impact ing after Dece 17, and a one s”. We have c ling and as a r iod in which t recognizing a ted that the ainst which we x Cuts and Job ave completed our 2017 finan ember 31, 201 e‐time tax on t omputed our esult have rec the legislation tax benefit of deemed repa e maintain a co bs Act of 2017 our accountin ncial statemen 17, the repeal the mandatory provision for i orded a net ta n was enacted $598,000 relat atriation tax w orresponding va 7 (the “Act”) w ng for the effe nts include: a fe of corporate y deemed rep ncome taxes in x benefit of $5 d, made up o ted to refunda will result in aluation allowa was signed int ects of the Act ederal corpora Alternative M atriation of cu n accordance w 531,000 on ou of $67,000 of ble “Alternativ the utilization ance. to law making t during the pe ate tax rate dec Minimum Tax umulative fore with the Act a r income state additional tax ve Minimum T n of $3.4 mil g significant ch eriod ending D crease from 34 (AMT) for ta eign earnings o nd guidance a ement in the fo x relating to t ax Credits” in c lion of net o hanges to the December 31, 4% to 21% for x years after of “post 1986 available as of ourth quarter the “deemed carryforward. perating loss As a result of the e corporate in ncome tax rat e reduction fr rom 34% to 2 1%, we have revalued our net deferred tax assets at 43 Dec of $ cember 31, 20 $3.0 million. 17, which resu ulted in a decre ease of the ne t deferred tax x assets and co orresponding v valuation allow wance balance U.S Util Rev . net operatin ization of net venue Code of ng loss carryfo t operating los 1986, as amen orwards are $ ss and credit nded. $13,147,000 a carryforwards at December 3 is subject to 31, 2017, wit certain limita h expiration y ations under S years from 20 Section 382 of 022 to 2034. f the Internal The e gross changes s in uncertain t tax positions re esulting in unr ecognized tax benefits are p w: resented below Year En 2017 ded December r 31, 2016 (in Un thousands) nrecognized ta Prior period t Additions bas nrecognized ta Un x benefits, ope ax position inc sed on tax posi x benefits, end ening balance creases tions related t ding balance o current year $2 226 10 36 272 $2 $210 ‐ 16 $226 Hist whe incu torically, we ha ereby amount urred and amo ave incurred m s related to p ounts related to minimal interes enalties assoc o interest asso st expense and iated with tax ociated with tax d no penalties a x matters are c x matters are c associated wit classified as ge classified as int th tax matters. eneral and ad terest income We have ado ministrative ex or interest exp opted a policy xpense when pense. Tax vari cred years that re ious tax years dit carryforwar main open for from 2000 to rds from those r examination o 2013 may be e years in our c include 2014, e subject to ex current or futu 2015, 2016 a xamination in t re year tax ret nd 2017 in th the event that urns. e United State t we utilize th es of America. he net operatin . In addition, ng losses and NOT TE 14 – SEGME ENT AND GEOG GRAPHIC INFO ORMATION We syst consider our tems used by d operations to designers and m be a single op manufacturers perating segme s of electronic ent, focused o products. on the design, manufacturin g and sale of programming Maj whi jor operations ich also manuf s outside the U factures some U.S. include sa of our product ales, engineeri ts. ng and service e support subs sidiaries in Ge ermany as wel l as in China, 44 The e following tab les provide sum mmary operati ing informatio n by geograph ic area: thousands) (in et sales: Ne U U.S. E Europe Rest of World R Inc th cluded in Euro e following sig pe and Rest of gnificant balanc f World net sal ces: es are G Germany China C me: perating incom Op U.S. U E Europe Rest of World R ts: Ide entifiable asse U U.S. E Europe Rest of World R Year End 2017 ed December 31, 2016 $2,874 4 14,899 9 16,278 8 1 $34,051 $7,982 2 5 $5,865 9 $499 2,171 1 2,377 7 7 $5,047 $18,340 0 1 5,001 6 6,946 7 $30,287 $2,936 8,730 11,747 $23,413 $4,482 $3,824 $669 132 626 $1,427 $11,346 4,993 6,437 $22,776 Item m 9. Changes in and Disagre eements with A Accountants o on Accounting and Financial Disclosure Non ne. Item m 9A._ Contro ls and Procedu ures (a) Evaluation of d disclosure cont trols and proce edures. Und Offi 13a Bas disc pro Act con CEO der the superv icer, we evalua a‐15(e) and Rul ed upon that e closure contro cedures design is recorded, p ntrols are also d O and CFO, as a vision and with ated the effect le 15d‐15(e) un evaluation, the ols and proced ned to ensure processed, sum designed to en appropriate to h the participa tiveness of the nder the Excha e Chief Executi dures were ef that informat mmarized and r nsure that such allow timely d ation of our ma design and op ange Act) as of ve Officer and fective at the tion required t reported withi h information i decisions regar anagement, in peration of our f the end of the Chief Financia reasonable a to be disclosed n the time per is accumulated rding required ncluding our C r disclosure co e period cover al Officer conc assurance leve d in our report riods specified d and commun disclosure. hief Executive ontrols and pro red by this rep luded that, as el. Disclosure ts filed or subm d in the SEC’s r nicated to our Officer and C ocedures (as de ort (the “Evalu of the Evaluat controls are mitted under t rules and form management, hief Financial efined in Rule uation Date”). tion Date, our controls and the Exchange ms. Disclosure including the (b) Management’ ’s Report on In nternal Control Over Financia al Reporting. Our con relia acce Exc r management ntrol systems a ability of finan epted account hange Act and t is responsible are designed to ncial reporting ting principles includes those e for establishi o provide reas and the prepa . Internal con e policies and ng and mainta onable assuran aration of fina ntrol over fina procedures tha aining adequate nce to the Com ancial stateme ancial reportin at: e internal cont mpany’s mana nts for externa g is defined in trol over finan agement and b al purposes in n Rule 13a‐15 cial reporting. board of direct accordance w 5(f) promulgate Our internal ors regarding with generally ed under the (i) pertai dispositio (ii) provi in to the main ons of the asse ide reasonable ntenance of re ets of the comp e assurance t cords that, in pany; that transactio reasonable de etail, accurate ely and fairly r eflect the tran nsactions and ons are record ded as neces ssary to perm it preparation n of financial 45 statemen company (iii) prov dispositio nts in accorda y are being ma vide reasonab on of the comp ance with gene de only in acco le assurance pany’s assets t erally accepte ordance with a regarding pre hat could have d accounting authorizations evention or t e a material eff principles, an of manageme imely detectio fect on the fina d that receipt nt and directo on of unauth ancial stateme ts and expend rs of the comp orized acquis ents. ditures of the pany; and ition, use or All i effe internal contro ective can prov ols, no matter vide only reaso how well desi onable assuran igned, have in ce with respec herent limitati ct to financial s ions. Therefor statements pre re, even those eparation and e systems dete presentation. ermined to be Our In m Com and effe r management making this as mmission (“CO d Chief Financi ective. t assessed the ssessment, we SO”) in Intern ial Officer hav effectiveness o e used the cri al Control – In ve concluded t of the Compan iteria set forth ntegrated Fram that, as of De ny’s internal co h by the Com mework (2013) cember 31, 20 ontrol over fina mmittee of Spo . Based on th 017, our inter ancial reportin onsoring Orga is assessment rnal control ov g as of Decem anizations of t our Chief Exec ver financial r ber 31, 2017. the Treadway cutive Officer reporting was This con acco sma s annual repor ntrol over fina ounting firm p aller reporting rt does not inc ncial reportin pursuant to th companies fro clude an attest g. Managem he Dodd‐Frank om complying w tation report o ent’s report w k Wall Street R with Section 40 of the company was not subje Reform and C 04(b) of the Sa y’s registered ect to attestat Consumer Prot arbanes‐Oxley public accoun tion by the co tection Act, w Act of 2002. ting firm regar ompany’s regi hich permane rding internal stered public ently exempts (c) C Changes in inte ernal controls. The reas ere were no ch sonably likely t hanges made in to materially a n our internal ffect our inter controls durin nal control ove ng the period c er financial rep covered by this porting. s report that h has materially affected or is Item m 9B._Other In nformation Non ne. PART III P Item m 10. Director rs, Executive O Officers and Co orporate Gover rnance Info ann be f her ormation regar nual meeting o filed within 12 ein under the rding the Regis of shareholders 20 days of our caption “Execu strant’s directo s to be held on year‐end. Info utive Officers o ors is set forth n May 21, 2018 ormation regar of the Registran under “Electio 8 and is incorp rding the Regis nt.” on of Director porated herein strant’s execut rs” in our Proxy by reference. tive officers is y Statement re Such Proxy S set forth in Ite elating to our tatement will em 1 of Part I Cod de of Ethics have adopted We Offi icer and Chief I/O. ta Dat p://www.datai http ics on our web Eth exe cutive officers info ormation regar m 8‐K within f For or w waivers is perm d a Code of Eth Financial Offic The Code io.com/Compa bsite. In the un s or directors, rding amendm our business d mitted by Nasd hics that applie cer. The key p of Ethics any/InvestorRe nlikely event th information c ments and waiv days following aq’s rules. es to all directo principles of th is posted elations/Corpo hat the Board oncerning suc vers on our we the date of the ors, officers an he Code of Eth on the rateGovernanc of Directors ap h waiver will a ebsite, the sam e amendment of Data I/O, in nd employees t legally and w hics are to act governance g corporate will post any a ce.aspx. We w ort of waiver to pproves any so d on our webs also be posted n will be includ me information less website po or waiver, unl ncluding the Ch with integrity in page of o mendments to o the Code of site. In additio ded in a Curre osting of such hief Executive n all work for our website o our Code of Ethics for our on to posting ent Report on amendments Item m 11. Executiv ve Compensat ion Info held cap ormation called d on May 21, tion “Executiv d for by Part III 2018 and is i e Compensatio I, Item 11, is in ncorporated h on.” Such Prox ncluded in our herein by refe xy Statement w Proxy Stateme rence. The in will be filed wit ent relating to nformation ap thin 120 days o eeting of share our annual me Proxy Stateme pears in the P d. of our year‐end eholders to be ent under the 46 Item m 12. Security Ownership of f Certain Benef ficial Owners a and Managem ment and Relate ed Stockholde er Matters Info held cap ormation called d on May 21, tion “Voting Se d for by Part III 2018 and is i ecurities and P I, Item 12, is in ncorporated h Principal Holde ncluded in our herein by refe ers.” Such Prox Proxy Stateme rence. The in xy Statement w ent relating to nformation ap will be filed wit our annual me pears in the P thin 120 days o eholders to be eeting of share ent under the Proxy Stateme d. of our year end Equ uity Compensat tion Plan Infor mation The all o Stat e following tab of our existing tements.” le gives inform equity compen mation about ou nsation plans a ur Common St as of Decembe ock that may b er 31, 2017. Se be issued upon ee Notes 10 an n the exercise o d 11 of “Notes of options and s to Consolidat d rights under ted Financial (a) Number of sec urities to be issu ed upon the e xercise of , anding options, outsta ants and rights warra (b) Weighted– rage exercise aver g of outstanding price o ons, warrants optio and rights a umber of secu (c) Nu rities e for aining available rema nder re issuance un futu uity compensat tion equ g plans (excluding p urities reflecte secu d in column (a)) 40,630 $6.17 296,178 ‐ 40,630 $0.00 $6.17 ‐ 296,178 Eq quity compensa pproved by the ap olders (1) (2) ho ation plans e security quity compensa Eq ot approved by no olders ho ation plans y the security otal To (1) (2) Represents sh Plan, 1982 Em 565,850 from Stock Apprec Stock have an holders, no a ommon Stock hares of our C k Purchase Plan mployee Stock n. m the 2000 Plan Plan (“SAR”) pr ciation Rights P ng SAR with res n accompanyin cluded in colum mounts are inc issuable pursu n and 1996 Di uant to the Da rector Fee Pla ata I/O Corpora an. Table exclu ation 2000 Sto udes unvested ock Incentive C d restricted sto Compensation ock awards of rovides that di spect to each e mns (a), (b), or rectors, execut exercisable opt r (c) relating to tive officers or tion. While th o the SAR. r holders of 10 he plan has bee 0% or more of en approved by our Common y the security Item m 13. Certain Relationships and Related T Transactions, a and Director In ndependence The Ann e information r nual Meeting o required by thi of Shareholders s item is conta s under the ca ained in, and in ption “Certain ncorporated by Relationships y reference fro and Related T m, the Proxy S Transactions.” Statement for o our 2018 Item m 14._ Principa al Accounting Fees and Serv ices The sect sha e information r tion captioned reholders to b required by thi d “Principal A e held on May is Item with re Accountant’s F y 21, 2018. Suc espect to princ Fees and Serv ch Proxy Statem cipal accountan vices” in the ment will be fil nt fees and ser Proxy Statem led within 120 rvices is incorp ment relating t 0 days of our ye porated by refe to our annua ear‐end. erence to the l meeting of 47 Item m 15. Exhibits s, Financial Sta tement Sched ules PART IV Exe ecutive Compe nsation Plans and Arrangem ments The arra the e following list angements in w reunder is the t is a subset which any dire same for man of the list of ector or execut agement and n f exhibits desc tive officer of D non‐managem cribed below Data I/O is a pa ment participan and contains articipant, unle nts: all compensa ess the method atory plans, co d of allocation ontracts or of benefits (1) (2) (3) (4) (5) (6) (7) (8) (9) Amended a nd Restated 19 982 Employee Stock Purchas se Plan. See Ex xhibit 10.5. Data I/O Co Company). orporation Tax See Exhibits 1 Deferral Retire 10.15, 10.16, 10 ement Plan an 0.17, 10.30 and d Trust with G d 10.31. reat West Fina ancial (formerl y Orchard Trus st Summary o f Amended an d Restated Ma anagement Inc entive Compe nsation Plan. S See Exhibit 10 .2. Amended a nd Restated 19 983 Stock App reciation Right ts Plan. See Ex xhibit 10.1. Amended a nd Restated Ex xecutive Agree ements. See Ex xhibit 10.8, 10 .20, and 10.23 3. 1996 Direct tor Fee Plan. S 4. See Exhibit 10.4 Data I/O Co orporation 200 0 Stock Compe ensation Incen tive Plan. See Exhibit 10.6, 1 10.11, 10.22 an nd 10.26. Form of Op tion Agreemen nt. See Exhibit t 10.7. Form of Ind demnification A Agreement. Se ee Exhibit 10.1 8. (10) ) Letter Agre ement with An nthony Ambros se. See Exhibit t 10.21. (11) ) Letter Agre ement with Ra ajeev Gulati. Se ee Exhibit 10.2 24. (12) ) Form of Res stricted Stock A Agreement. Se ee Exhibit 10.1 12. (13) ) Letter Agre ement with Jo el S. Hatlen. S ee Exhibit 10.2 28. (14) ) Form of Exe ecutive Agreem ment. See Exhi ibit 10.27. (15) ) Form of Res stricted Stock U Unit Award Ag reement. See Exhibit 10.25. (a) (1) List of D Documents File ed as a Part of This Report: Index to o Financial Stat ements: Rep port of Indepen ndent Register red Public Acco ounting Firm Con nsolidated Bala ance Sheets as of December 3 31, 2017, and 2016 Con Dec nsolidated Stat cember 31, 201 tements of Ope 16 erations for ea ach of the two y years ended D December 31, 2 2017, and Con Dec nsolidated Stat cember 31, 201 tements of Com 17, and Decem mprehensive In mber 31, 2016 ncome (Loss) fo or each of the two years end ded Con and nsolidated Stat d December 31 tements of Sto 1, 2016 ckholders’ Equ uity for each of f the two years s ended Decem mber 31, 2017, 48 Page 27 28 29 30 31 32 33 54 Con Dec nsolidated Stat cember 31, 201 tements of Cas 16 sh Flows for ea ch of the two y years ended D December 31, 2 2017, and Not tes to Consolid dated Financial Statements (2) Index to o Financial Stat ement Schedu ules: Schedule I I – Consolidate ed Valuation an nd Qualifying A Accounts All other in the co r schedules no onsolidated fin t listed above ancial stateme have been om ents or the not itted because tes thereto, or the required in is not applicab included nformation is i d. ble or required (3) Index to o Exhibits: 3 Art icles of Incorp oration: 3.1 3.2 3.3 Data I/O’s reference and attach s restated Arti to Exhibit 3.1 o hed as a PDF to icles of Incorp of Data I/O’s 1 o Exhibit 3.1 in poration filed 1987 Annual Re our 2017 Annu November 2, eport on Form ual Report on 1987 (Incorpo m 10‐K (File No. Form 10‐K). orated by . 0‐10394) Data I/O’s to Data I/O Bylaws as ame O’s Current Rep ended and rest port on Form 8 tated as of July 8‐K filed July 26 y 20, 2011 (Inc 6, 2011). corporated by reference Certificatio Preferred Statement on of Designa Stock (Incorp t on Form 8‐A f ation, Preferen porated by re filed March 13 nces and Righ eference to E , 1998 (File No hts of Series Exhibit 1 of D o. 0‐10394)). A Junior Par Data I/O’s Re rticipating egistration 4 Inst truments Defin ning the Rights s of Security H Holders, Includ ding Indentures s: 4.1 4.2 4.3 4.4 4.5 Rights Ag ChaseMell thereto, th Purchase S I/O’s Curre reement date on Shareholde he Form of Rig Series A Junior ent Report on F ed as of Apr er Services, L. ht Certificate; r Participating Form 8‐K filed il 4, 1998, b L.C. as Rights and, as Exhibit Preferred Stoc on March 13, between Data s Agent, which t B thereto, th ck (Incorporate 1998). a I/O Corpora h includes: as he Summary of ed by referenc ation and Exhibit A f Rights to ce to Data Rights Agr Jersey Nat as of Ma (Incorpora reement, dated tional Bank, as y 28, 1992 a ted by referen d as of March s Rights Agent, and Amendme nce to Data I/O 31, 1988, bet , as amended ent No. 2 t O’s Report on F tween Data I/O by Amendmen thereto, dated orm 8‐K filed o O Corporation nt No. 1 there d as of July on March 13, 1 n and First eto, dated 16, 1997 1998). Amendme 4, 1998, b Rights Age February 1 nt No. 1, date etween Data I ent (Incorpora 10, 1999). ed as of Februa I/O Corporatio ted by referen ary 10, 1999, t on and ChaseM nce to Exhibit to Rights Agree Mellon Shareho 4.1 of Data I ement, dated a older Services, I/O’s Form 8‐A as of April , L.L.C. as A/A dated Amendme Corporatio ChaseMell Data I/O’s nt No. 2 to R on and Comp on Shareholde Form 8‐K date Rights Agreem putershare (fo er Services, L. ed April 3, 2008 ent, dated as ormerly BNY L.C.). (Incorpo 8). of April 3, 20 Mellon Inves orated by refe 008, between stor Services erence to Exhi Data I/O LLC, and ibit 4.3 of of July 13, 2 reference to E 016, between Exhibit 4.4 of D Data I/O Data I/O’s Amendme Corporatio Form 8‐A/A nt No. 3 to R on and Compu A dated July 14 Rights Agreem tershare. (Inc 4, 2016). ent, dated as corporated by 49 10 Ma terial Contract ts: 10. 1 Amended (Incorpora K (File No. Form 10‐K and Restated ted by referen 0‐10394) and ). d 1983 Stock nce to Exhibit 1 d attached as a Appreciation 10.23 of Data I a PDF to Exhib Rights Plan I/O’s 1992 Ann bit 10.1 in our dated Februa nual Report on 2017 Annual ry 3, 1993 n Form 10‐ Report on 10.2 2 Amended (Incorpora K (File No. and Restated ted by referen 0‐10394)). Management nce to Exhibit 1 Incentive Com 10.25 of Data I mpensation Plan I/O’s 1997 Ann n dated Janua nual Report on ry 1, 1997 n Form 10‐ 10.3 3 Amended reference 10394)). 10.4 4 Amended reference 10394)). and Restated to Exhibit 10. Performance B 26 of Data I/O Bonus Plan da O’s 1997 Annu ated January 1 ual Report on , 1997 (Incorp Form 10‐K (F porated by File No. 0‐ and Restated to Exhibit 10. Data I/O Cor 32 of Data I/O poration 1996 O’s 1997 Annu 6 Director Fee ual Report on e Plan (Incorp Form 10‐K (F orated by File No. 0‐ 10.5 and 5 Amended May 16, 2 March 31, Rest 2003 (Incorpo 2003). tated 1982 rated by refe Employee rence to Data Pu Stock a I/O’s 2003 n dated Plan urchase ent dated Proxy Stateme 10. 6 Amended dated May April 6, 200 and Restated y 24, 2006 (Inco 06). Data I/O Cor orporated by r poration 2000 reference to D 0 Stock Compe ata I/O’s 2006 ensation Incen 6 Proxy Statem ntive Plan ment dated 10. 7 Form of O on Form 10 ption Agreeme 0‐K (File No. 0‐ ent (Incorpora ‐10394)). ted by referen nce to Data I/O O’s 2004 Annu ual Report 10.8 8 Amended 2011 (Inco 0‐10394)). and Restated orporated by re Executive Ag eference to Da greement with ata I/O’s 2011 h Joel S. Hatle Annual Repor en dated Dece rt on Form 10K ember 31, K (File No. 9 10.9 Lease, Red PLCC date Report on dmond East Bu ed February 28 Form 10K (File s between Dat usiness Campu 8, 2006 (Incor rporated by r ). e No. 0‐10394) ta I/O Corpora reference to D ation and Carr Data I/O’s 200 Redmond 05 Annual 10. 10 Second Am Realty Lim Data I/O’s mendment to L mited Partnersh 2010 Annual R Lease, (Redmo hip, made as o Report on Form ond East) betw of January 31, m 10‐K (File No o. 0‐10394)). ween Data I/O 2011. (Incorp Corporation a porated by ref and Arden ference to 10. 11 Amended approved filed April 5 and Restated May 17, 2011 5, 2011). Data I/O Cor (Incorporated rporation 2000 d by reference 0 Stock Comp e to Data I/O’s ensation Incen s 2011 Proxy S ntive Plan Statement 10. 12 Form of Re Data I/O’s estricted Stock June 30, 2006 k Award Agreem Quarterly Rep ment (Incorpo port on Form 1 orated by refer 10‐Q (File No. 0 rence to Exhibi 0‐10394)). it 10.29 of 10. 13 Patent Pur Form 8‐K f rchase Agreem filed on March ment (Incorpor 25, 2008)). rated by refere ence to Data I I/O’s Current R Report on 10. 14 First Amen I/O’s Curre ndment to the ent Report on F e Patent Purch Form 8‐K filed ase Agreemen on March 25, nt (Incorporate 2008). ed by referenc ce to Data 10. 15 Great Wes Plan and T (File No. 0‐ st Financial (fo Trust (Incorpor ‐10394)). ormerly Orcha ated by refere rd Trust Comp ence to Data I/O pany) Defined O’s 2007 Annu Contribution ual Report on F Prototype Form 10‐K 50 10. 16 Great Wes (Incorpora 10394)). st Financial (f ted by referen ormerly Orcha nce to Data I/ ard Trust Com /O’s 2007 Ann mpany) Non‐st ual Report on tandardized 40 n Form 10‐K (F 01(k) Plan File No. 0‐ 10. 17 Great Wes Plan and T reference t st Financial (fo Trust Amendm to Data I/O’s 2 ormerly Orchar ment for Pensio 009 Annual Re rd Trust Comp on Protection eport on Form pany) Defined Act and Heart 10‐K (File No. Contribution t Act. (Incorp 0‐10394)). Prototype orated by 10. 18 Form of I Annual Rep ndemnification port on Form 1 n Agreement. 10‐K (File No. 0 0‐10394)). (Incorporate ed by referen nce to Data I/ /O’s 2010 10. 19 Asset Purc Software T filed May 3 by referen portions th chase Agreeme Technology (Inc 3, 2011 with po nce to Data I/O hat had been m ent dated Apri corporated by ortions omitte O’s Form 10‐Q made in the ori il 29, 2011, wi reference to D d pursuant to Q filed April 3 ginal Form 8‐K ith the Miller Data I/O’s Curr a confidential 3, 2012, which K filing). Trust, for acqu rent Report on treatment req h included the uisition of n Form 8‐K quest, and redacted 10. 20 Executive A reference t Agreement wi to Data I/O’s 2 ith Anthony A 012 Annual Re Ambrose dated eport on Form d October 25, 10‐K (File No. 2012. (Incorp 0‐10394)). orated by 10. 21 Letter Agre Report on eement with A Form 8‐K filed Anthony Ambro on October 29 ose (Incorporat 9, 2012). ted by referen nce to Data I/O O’s Current 10. 22 Amended approved filed April 3 and Restated May 10, 2012 3, 2012). Data I/O Cor (Incorporated poration 2000 d by reference 0 Stock Compe e to Data I/O’s ensation Incen s 2012 Proxy S ntive Plan Statement 10. 23 Executive A to Data I/O Agreement wit O’s 2013 Annua th Rajeev Gula al Report on Fo ati dated July 2 orm 10‐K (File 25, 2013. (Inc corporated by . No. 0‐10394)). reference 10. 24 Letter Agr Report on eement with Form 8‐K filed Rajeev Gulati on July 31, 20 (Incorporated 13). d by reference e to Data I/O’ ’s Current 10. 25 Form of R 10.29 of Da estricted Stoc ata I/O’s Marc ck Unit Award h 31, 2014 Qua Agreement ( arterly Report Incorporated on Form 10‐Q by reference Q (File No. 0‐10 0394)). to Exhibit 10. 26 Amended approved A 31, 2014 Q and Restated April 30, 2014 Quarterly Repo Data I/O Cor (Incorporated rt on Form 10‐ poration 2000 d by reference ‐Q (File No. 0‐1 0 Stock Compe e to Exhibit 10 10394)). ensation Incen .30 of Data I/O ntive Plan O’s March 10. 27 Form of Ex June 30, 20 xecutive Agree 014 Quarterly ement (Incorp Report on Form orated by refe m 10‐Q (File No erence to Exh o. 0‐10394)) ibit 10.31 of D Data I/O’s 10. 28 Letter Agre I/O’s June eement with J 30, 2014 Quar oel S. Hatlen ( terly Report on (Incorporated n Form 10‐Q (F by reference t File No. 0‐1039 to Exhibit 10.3 94)). 32 of Data 10. 29 Third Ame Realty Lim 10.29 of Da endment to Le ited Partnersh ata I/O’s June 3 ease, (Redmon ip, made as of 30, 2015 Quar nd East) betwe f June 1, 2015 terly Report on een Data I/O (Incorporated n Form 10‐Q (F Corporation a d by reference File No. 0‐1039 and Arden to Exhibit 94)). 10. 30 Great We (Incorporat 10394)). est Financial ted by referen Adoption A nce to Data I/ Agreement #0 O’s 2015 Ann 005 Non‐stan ual Report on ndardized 401 Form 10‐K (F 1(k) Plan File No. 0‐ 10. 31 Great We (Incorporat 10394)). est Financial ted by referen Adoption A nce to Data I/ Agreement #0 O’s 2016 Ann 005 Non‐stan ual Report on ndardized 401 Form 10‐K (F 1(k) Plan File No. 0‐ 51 10. 32 Negotiatio executed J (Incorporat Report on based on exhibits ha supplemen Commissio n Protocol fo uly 20, 2016, ted by referen Form 10‐Q (F confidential t ave been filed s ntal basis a co on upon reques or the Purcha between Data nce to Exhibit File No. 0‐103 reatment gran separately with opy of any o st.) se of Data I/ a I/O Corporat 10.31 of Data 394)). (Portion nted by the S h the SEC. The mitted schedu /O’s PSV7000, tion and Bosch a I/O’s Septem ns of this exh SEC. The om e registrant un ules to the Se , a supply a h Car Multime mber 30, 2016 ibit have been itted portions dertakes to fu ecurities and agreement dia Group Quarterly n omitted s of these rnish on a Exchange 10. 33 Standstill a Corporatio to Data I/O and Voting Ag on, David Kane O’s Current Rep greement, dat n and Kanen W port on Form 8 ted as of July Wealth Manage 8‐K filed on July y 13, 2016, by ement LLC (Inc y 14, 2016). y and among corporated by Data I/O reference 10. 34 Fifth Amen LLC, made 30, 2017, Q ndment to Lea as of Septemb Quarterly Repo ase, between ber 12, 2017, ( ort on Form 10 Data I/O Corp (Incorporated ‐Q (File No. 0‐ poration and B by reference t 10394) BRE WA OFFIC to Data I/O’s S E OWNER September 21. 1 Subsidiarie es of the Regist trant 23. 1 Consent of f Independent Registered Pu blic Accountin 31 Cer rtification – Se ction 302: 1 31. 31.2 2 Chi Chi ef Executive O ef Financial Of Officer Certifica fficer Certificat tion tion 32 Cer rtification – Se ction 906: 1 32. 32.2 2 Chi Chi ef Executive O ef Financial Of Officer Certifica fficer Certificat tion tion g Firm 55 56 57 58 59 60 101 Int teractive Date Files Pursuant t to Rule 405 o of Regulation S S‐T Item m 16. Form 10 0‐K Summary Non ne. 52 IGNATURES SI Pur rep suant to the re ort to be signe equirements o ed on its behalf f Section 13 or f by the unders r 15(d) of the S signed, thereu Securities Excha nto duly autho ange Act of 19 orized. 934, the Regist rant has duly c caused this DAT TED: March 2 8, 2018 DATA A I/O CORPORA ATION ) (REGISTRANT) By: /s An President a s/Anthony Am nthony Ambro nd Chief Execu brose ose utive Officer Pur on b suant to the re behalf of the R equirements o Registrant and f the Securities in the capaciti s Exchange Act es and on the t of 1934, this dates indicated report has bee d. en signed below w by the follow wing persons NAME & DATE E TITLE By: /s/Anthon Anthony A y Ambrose___ mbrose ______ March 28, 2018 President a (Principal E and Chief Exec Executive Offic cutive Officer cer), Director ancial Officer Chief Oper Vice Presid Secretary, (Principal F rating and Fina dent Treasurer Financial and A Accounting Off ficer) Director Director Director Director By: /s/Joel S. H Joel S. Hat Hatlen_______ tlen ______ March 28, 2018 By: /s/Douglas Douglas W s W. Brown___ W. Brown _____ _ March h 28, 2018 By: /s/Brian T. Brian T. C . Crowley_____ rowley ___ ___ March h 28, 2018 By: /s/Alan B. Alan B. How Howe_______ we ______ _ Marc h 28, 2018 By: /s/Mark J. Mark J. Ga Gallenberger_ llenberger _______ March h 28, 2018 53 SCH EDULE II – CON DATA I/ NSOLIDATED V /O CORPORATI VALUATION AN ION ND QUALIFYIN NG ACCOUNTS (in n thousands) ear Ended Dece Ye Allowance fo ember 31, 201 or bad debts 6: Ye ear Ended Dece Allowance fo ember 31, 201 or bad debts 7: (1) Uncollectab written off, ble accounts net of recover ries Balance at Beginning of Period ed/ ed) sts Charge (Credite to Cos and Expens ses Ded ductions‐ Describe D Balance at End of Period $43 $55 $ ($2) (1) $96 $96 ($2 24) $1 (1) $73 54 EXH HIBIT 21.1 DATA I/ /O CORPORATI ION SUBSIDIARIE S OF THE REGI ISTRANT The e following tab le indicates the e name, jurisdi iction of incorp poration and b basis of owners ship of each of f Data I/O’s sub bsidiaries: State o of Or Washing or Jurisdiction rganization gton ge of Percentag urities Voting Sec Owne ed % 100% Washing gton Territory y of Guam Canada Germany y China % 100% 100% % % 100% % 100% % 100% % 100% Name of Data I/O f Subsidiary International, Inc. RTD, Inc. Data I/O FSC Internatio onal, Inc. Data I/O Canada Corpo oration Data I/O GmbH Data I/O Electronics (Sh hanghai) Co., L Ltd. Data I/O Programação de Sistemas Lt tda. Brazil 55 EXH HIBIT 23.1 CO NSENT OF IN DEPENDENT REGISTERED PUBLIC ACCO OUNTING FIR RM We the inco 761 022 (File have issued o Annual Repo orporation by 164, 002‐8678 254, 33‐03958, e No. 333‐1215 ur report date ort of Data I/ reference of s 5, 002‐98115, 333‐107543, 3 566). ed March 28, 20 /O Corporatio said report in 002‐78394, 3 333‐81986, 33 018, with resp n on Form 10 the Registrati 33‐95608, 33‐ 33‐48595, 333‐ ect to the con 0‐K for the ye on Statement 66824, 33‐420 ‐121861, 333‐1 solidated finan ear ended De s of Data I/O 010, 33‐26472 151006, 333‐16 ncial statemen ecember 31, 20 Corporation o 2, 33‐54422, 3 66730, and 33 nts and schedu 017. We con on Form S‐8 (F 333‐20657, 33 3‐175840) and le included in nsent to the File Nos. 002‐ 33‐55911, 33‐ d on Form S‐3 /s/G Grant Thornton n LLP Sea Ma ttle, Washingt rch 28, 2018 ton 56 EXH HIBIT 31.1 Cer Pur As A Sec tification by Ch suant to 18 U. Adopted Pursu tion 302(a) of hief Executive S.C. Section 13 uant to the Sarbanes‐O Officer 350 Oxley Act of 20 002 I, An 1) 2) 3) 4) 5) nthony Ambro I have review Based upon material fact made, not mi Based on my present in all the periods p The registran procedures ( defined in Exc a) Designed under o subsidiar report is b) Designed designed preparat c) Evaluate our conc by this an d) Disclosed during th that has reporting The registran financial repo performing th a) all signifi which ar informat b) any fraud registran t: ose, certify that wed this annual report on For e, this annual my knowledge make the sta necessary to respect to the isleading with the financial s y knowledge, pects the finan l material resp presented in th is annual repo tifying officer nt’s other cert as defined in Exchange Act change Act Ru les 13a‐15(f)0 ure controls an d such disclosu n, to ensure ur supervision known to us b ries, is made k ed; being prepare d such interna l control over pervision, to p d under our su l statements fo ion of financia eness of the re d the effective the effectiven clusions about ased on such e nnual report b al report any d in this annu most recent f he registrant’s fected or is re materially aff g. nt’s other certi orting, to the he equivalent f cant deficienc e reasonably l tion; and d, whether or nt’s internal co functions): ies and materi ikely to advers not material, ntrols over fina ifying officer a registrant’s a m 10‐K of Data report does n atements made period covere statements, an cial condition, rt; and I are re Rules 13a‐15 for the registra nd procedures that material by others withi a I/O Corporat ot contain any e, in light of t ed by this annu nd other finan results of ope ion; y untrue state the circumstan ual report; ncial informati erations and c sponsible for 5(e) and 15d‐1 ant and we hav s, or caused su information in those entiti establishing a 15(e)) and inte ve: uch disclosure relating to th ies, particularl ement of mate nces under wh erial fact or om hich such stat mit to state a tements were ion included i ash flows of th n this annual he registrant a report, fairly as of, and for, and maintaini ernal control o ng disclosure over financial controls and reporting (as controls and he registrant, y during the p procedures to including its period in whic o be designed consolidated ch this annual orting, or caus financial repo nable assurance provide reason rposes in acco or external pur closure contro egistrant’s disc ness of the disc closure contro d evaluation; and e registrant’s i change in the the registrant’ fiscal quarter ( y to materially asonably likely sed such intern e regarding th rdance with ge ols and proced ols and proced nal control ove he reliability of enerally accept ures and pres ures, as of the er financial re f financial repo ted accounting ented in this a e end of the pe porting to be orting and the g principles; annual report eriod covered internal contro ’s fourth fiscal y affect, the re ol over financ l quarter in th egistrant’s inte cial reporting t e case of an a ernal control o that occurred annual report) over financial and I have disc auditors and t closed, based o the audit com on our most r mmittee of reg recent evaluat gistrant’s boar ion of interna rd of directors l control over s (or persons al weaknesses sely affect the s in the design registrant’s ab or operation o bility to record of internal con d, process, sum trol over finan mmarize and re ncial reporting eport financial that involves ancial reportin ng. management or other emp ployees who ha ave a significa nt role in the Dat te: March 28, 2 2018 /s/ Anthony A Anthony Amb Chief Executiv (Principal Exec Ambrose rose ve Officer cutive Officer) 57 EXH HIBIT 31.2 Cer Pur As A Sec tification by Ch suant to 18 U. Adopted Pursu tion 302(a) of hief Financial O S.C. Section 13 uant to the Sarbanes‐O Officer 350 Oxley Act of 20 002 I, Jo 1) 2) 3) 4) 5) ertify that: oel S. Hatlen, ce wed this annual I have review my knowledge Based upon necessary to material fact isleading with made, not mi y knowledge, Based on my l material resp present in all presented in th the periods p nt’s other cert The registran as defined in procedures ( change Act Ru defined in Exc d such disclosu a) Designed ur supervision under o ries, is made k subsidiar being prepare report is d such interna b) Designed d under our su designed ion of financia preparat d the effective c) Evaluate clusions about our conc nnual report b by this an d in this annu d) Disclosed he registrant’s during th materially aff that has g. reporting nt’s other certi The registran orting, to the financial repo he equivalent f performing th cant deficienc a) all signifi e reasonably l which ar tion; and informat d, whether or b) any fraud nt’s internal co registran report on For e, this annual make the sta respect to the the financial s pects the finan is annual repo tifying officer Exchange Act les 13a‐15(f)0 ure controls an n, to ensure known to us b ed; l control over pervision, to p l statements fo eness of the re the effectiven ased on such e al report any most recent f fected or is re functions): ies and materi ikely to advers m 10‐K of Data report does n atements made period covere statements, an cial condition, rt; and I are re Rules 13a‐15 for the registra nd procedures that material by others withi a I/O Corporat ot contain any e, in light of t ed by this annu nd other finan results of ope ion; y untrue state the circumstan ual report; ncial informati erations and c sponsible for 5(e) and 15d‐1 ant and we hav s, or caused su information in those entiti establishing a 15(e)) and inte ve: uch disclosure relating to th ies, particularl ement of mate nces under wh erial fact or om hich such stat mit to state a tements were ion included i ash flows of th n this annual he registrant a report, fairly as of, and for, and maintaini ernal control o ng disclosure over financial controls and reporting (as controls and he registrant, y during the p procedures to including its period in whic o be designed consolidated ch this annual orting, or caus financial repo nable assurance provide reason rpose in accord or external pur closure contro egistrant’s disc ness of the disc closure contro d evaluation; and e registrant’s i change in the the registrant’ fiscal quarter ( y to materially asonably likely sed such intern e regarding th dance with gen ols and proced ols and proced nal control ove he reliability of nerally accepte ures and pres ures, as of the er financial re f financial repo ed accounting ented in this a e end of the pe porting to be orting and the principles; annual report eriod covered internal contro ’s fourth fiscal y affect, the re ol over financ l quarter in th egistrant’s inte cial reporting t e case of an a ernal control o that occurred annual report) over financial ifying officer a registrant’s a and I have disc auditors and t closed, based o the audit com on our most r mmittee of reg recent evaluat gistrant’s boar ion of interna rd of directors l control over s (or persons al weaknesses sely affect the s in the design registrant’s ab or operation o bility to record of internal con d, process, sum trol over finan mmarize and re ncial reporting eport financial not material, ntrols over fina that involves ancial reportin ng. management or other emp ployees who ha ave a significa nt role in the Dat te: March 28, 2 2018 tlen /s/ Joel S. Hat Joel S. Hatlen Chief Financia (Principal Fina l Officer ancial Officer) 58 Exh hibit 32.1 Cer Pur As A Sec tification by Ch suant to 18 U. Adopted Pursu tion 906 of the hief Executive S.C. Section 13 uant to e Sarbanes‐Oxl Officer 350 2 ley Act of 2002 In c 201 Exe Sarb connection wit 17 as filed wit cutive Officer banes‐Oxley A h the annual r th the Securit of the Compa ct of 2002, tha eport of Data ies and Excha any, certify, th at: I/O Corporatio ange Commiss at pursuant to on (the “Comp ion on the da o 18 U.S.C. Sec any”) on Form ate hereof (th ction 1350, as m 10‐K for the p he “Report”), s adopted purs period ended D I, Anthony Am suant to Sectio December 31, mbrose, Chief on 906 of the (1) (2) The Re The inf operat eport fully com formation con tions of the Co mplies with the tained in the R mpany. requirements Report fairly p of § 13(a) or 1 resents, in all 15(d) of the Sec material respe curities Exchan ects, the financ nge Act of 1934 cial condition a 4; and and results of /s/ Anthony A Anthony Amb Chief Executiv (Principal Exec Ambrose rose ve Officer cutive Officer) Dat te: March 28, 2 2018 59 Exh hibit 32.2 Cer Pur As A Sec tification by Ch suant to 18 U. Adopted Pursu tion 906 of the hief Financial O S.C. Section 13 uant to e Sarbanes‐Oxl Officer 350 2 ley Act of 2002 In c 201 Offi Oxle connection wit 17 as filed with icer of the Com ey Act of 2002 h the annual r h the Securitie mpany, certify , that: eport of Data es and Exchang y, that pursuan I/O Corporatio ge Commission nt to 18 U.S.C. on (the “Comp n on the date Section 1350 any”) on Form hereof (the “R 0, as adopted p m 10‐K for the p Report”), I, Joe pursuant to Se period ended D el S. Hatlen, C ection 906 of t December 31, Chief Financial the Sarbanes‐ (1) (2) The Re The inf operat eport fully com formation con tions of the Co mplies with the tained in the R mpany. requirements Report fairly p of Section 13( resents, in all a) or 15(d) of t material respe the Securities E ects, the financ Exchange Act o cial condition a of 1934; and and results of tlen /s/ Joel S. Hat Joel S. Hatlen Chief Financia (Principal Fina l Officer ancial Officer) Dat te: March 28, 2 2018 60 DATA I/O CORPORATION NOTICE OF 2018 ANNUAL MEETING and PROXY STATEMENT DATA I/O CORPORATION April 4, 2018 To Our Shareholders: You are cordially invited to attend the 2018 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. The meeting will begin at 10:00 a.m. Pacific Daylight Time on Monday, May 21, 2018. 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, consideration of a proposal to amend and restate Data I/O’s 2000 Stock Compensation Plan and advisory votes on executive compensation and the frequency of future advisory votes. 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 21, 2018. Sincerely, Anthony Ambrose President and Chief Executive Officer (This page intentionally left blank) DATA I/O CORPORATION NOTICE OF ANNUAL MEETING OF SHAREHOLDERS ‐ May 21, 2018 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 10:00 a.m. Pacific Daylight Time, on Monday, May 21, 2018, at Data I/O’s principal offices, 6645 185th Ave NE, Suite 100, Redmond, Washington 98052, for the following purposes: (1) (2) (3) (4) (5) (6) 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, 2018. 2000 Stock Compensation Incentive Plan: To consider and vote on a proposal to amend and restate the Data I/O Corporation 2000 Stock Compensation Incentive Plan (the “2000 Plan”) and to increase the number of shares reserved for issuance under the 2000 Plan by an additional 300,000 shares of common stock. Say on Pay – Advisory Vote on Executive Compensation: To consider and vote on an advisory resolution on the compensation of our named executive officers. Say on Frequency – Advisory Vote on the Frequency of Advisory Votes on Executive Compensation: To consider and vote on an advisory basis on the frequency of future advisory votes 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 21, 2018. 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 23, 2018, as the Record Date for the determination of shareholders entitled to notice of, and to vote at, the 2018 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, 2018 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. (This page intentionally left blank) DATA I/O CORPORATION 6645 185th Ave NE, Suite 100 Redmond, Washington 98052 ____________________ PROXY STATEMENT ANNUAL MEETING OF SHAREHOLDERS May 21, 2018 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 Monday, May 21, 2018, at 10:00 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 23, 2018, (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 2017 Annual Report to Shareholders are being mailed to shareholders on or about April 13, 2018. 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) “WITHHOLD” 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, 2018, 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 a proposal to amend the Data I/O Corporation 2000 Stock Compensation Incentive Plan (the “2000 Plan”) to increase the number of shares reserved for issuance under the 2000 Plan by an additional 300,000 shares of common stock, check the appropriate box under Item No. 3 on your proxy card. You may (a) vote “FOR” approval of the amendment to the 2000 Plan, (b) vote “AGAINST” approval of the amendment to the 2000 Plan, or (c) “ABSTAIN” from voting on the approval of the amendment to the 2000 Plan. To vote on Proposal 4, 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. To vote on Proposal 5, Say on Frequency – Advisory Vote on the Frequency of Advisory Votes on Executive Compensation, you may vote “FOR” (a) every year, (b) every two years, (c) every three years, or (d) “ABSTAIN” from voting. 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 8,293,267 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 1 Proxy 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 proposals to ratify the continued appointment of Grant Thornton as Data I/O’s independent auditors and approve the amendment and restatement of the 2000 Plan and 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 proposals. Abstentions and broker non‐votes on the proposals will have no effect because approval of the proposal is based solely on the votes cast. 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. Say on Frequency – The advisory vote on the frequency of future advisory votes on the compensation of Data I/O’s named executive officers will be determined by the frequency alternative receiving the greatest number of votes—every year, every two years, or every three years. You may vote ”FOR” holding future advisory votes on executive compensation every year, every two years, or every three years, or you may choose to abstain. Abstentions and broker non‐votes have no effect in determining the frequency alternative. 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; Proposal 3, Amendment and restatement of the 2000 Plan; and Proposal 4, 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; Proposal 3, Amendment and restatement of the 2000 Plan; Proposal 4, Say on Pay; and Proposal 5, Say on Frequency, 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 23, 2018, was $8.02 per share. Principal Holders of Data I/O’s Common Stock The following table sets forth information for 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 23, 2018. 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 486,340 (1) 5.86% 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 2 Proxy Renaissance Technologies LLC Renaissance Technologies Holding Corporation 800 Third Avenue New York, NY 10022 658,400 (2) 7.94% (1) The holding shown is as of December 31, 2017, 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 21, 2018) 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 486,340 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 48,300 shares, shared voting power for 110,000 shares and shared dispositive power for 442,500 shares, with an aggregate amount of 486.340 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 442,540 shares, with an aggregate amount of 442,540 shares, however disclaiming beneficial ownership of shares managed by Penbrook Management and AnKap Partners; and Barbara Burke DiCostanzo has shared voting power for 110,000 shares and shared dispositive power for 442,5400 shares; with an aggregate amount of 454,790 shares, however disclaiming beneficial ownership of shares managed by Penbrook Management and AnKap Partners;. (2) The holding reported as of February 6, 2017, as jointly reported by Renaissance Technologies LLC (“RTC”) and Renaissance Technologies Holding Corporation (“RTHC”) on the most recent (filed February 14, 2018) Schedule 13G filed under the Securities Exchange Act of 1934. The Schedule 13G indicates that RTC has sole voting power and dispositive power for 658,400 shares and RTHC has sole voting power and dispositive power for 658,400 shares comprising the shares beneficially owned by RTHC, because of RTHC’s majority ownership of RTC. 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 23, 2018. 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) (1) Less than 1 percent each. Amount and Nature of Beneficial Ownership Percent of Shares Outstanding 203,069 113,507 38,174 31,774 44,556 26,900 21,900 479,880 2.4% 1.4% (1) (1) (1) (1) (1) 5.8% 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 2017 and again in early 2018 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 is posted on Our Code of Ethics was reviewed by our Board of Directors during 2017 and again in early 2018 and no changes were made. The current version of our Code of Ethics 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 2017 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 2018 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 56, 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 4 Proxy revenues. He is a member of the Evergreen Health Foundation Board of Trustees. Mr. Ambrose has a Bachelor’s of Science in Engineering from Princeton University. 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 62, 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 2016. 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 has a Bachelor’s 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 57, was appointed a director of Data I/O effective June 5, 2012. Mr. Crowley is currently Vice‐President of Engineering and Operations for Alitheon, a machine vision company. Previously Mr. Crowley was President of Symbio, a global software services company he joined in July 2015. 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 Bachelor’s 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 54, 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 Master’s of Business Administration from Northwestern University and a Bachelor’s 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 56, 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 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 for Covad Communications, 5 Proxy Manufacturers Hanover Trust Company. He is currently a board member since 2009 and Vice Chairman of Determine, Inc. (NASDAQ: DTRM); a board member since July 2017 of Widepoint (NYSE AMERICAN: WYY); a board member since April 2017 of MagicJack Vocaltec (NASDAQ: CALL); a board member since February 2018 of Cafepress (NASDAQ: PRSS) and has served on a number of private and public boards including in the past five years Urban Communications and Qualstar. He has a Master’s of Business Administration in Finance from Indiana University and a Bachelor’s of Science – Business Administration and Marketing from University of Illinois. Mr. Howe has extensive wireless, business development, financial, CEO, CFO, 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, 2017, there were six meetings of the Board of Directors. Each of the incumbent directors who was on the Board of Directors during 2017 attended 100% 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, Mr. Crowley and Mr. Ambrose attended our 2017 Annual Meeting in person and Mr. Gallenberger and Mr. Howe attended via telephone. The Board of Directors had three standing Committees during 2017: the Corporate Governance and Nominating Committee, the Audit Committee, and the Compensation Committee. Each committee was comprised solely of independent directors during 2017, 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 2017 and through the date of this Proxy Statement. Audit Committee Director M=member Doug Brown Brian Crowley M Alan Howe Mark Gallenberger M Anthony Ambrose Chair Compensation Committee M M Chair Corporate Governance and Nominating Committee M Chair M M Comments Chairman of the Board President & CEO Corporate Governance and Nominating Committee 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 two times in 2017. 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 6 Proxy 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 2017 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 2017. See the “Report of the Audit Committee” for additional information. 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 three times during 2017. As authorized by the Compensation Committee charter, the Compensation Committee may retain consultants or other advisors to assist in carrying out its responsibilities. An independent compensation consultant, Radford a part of AON, was engaged by the Compensation Committee for $4,200 in 2017 for consulting on Board of Director compensation. Additionally, general compensation surveys were purchased during the year. Consideration of Director Nominees The Corporate Governance and Nominating Committee has developed, and the Board has approved, 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 CGNC considered each director’s contributions to the company as well as the results of the Board of Directors self‐evaluations process. 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. 7 Proxy 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 2018 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 ballot for the 2018 Annual Meeting of Shareholders, shareholders were required to deliver nominations for proposed director nominees to Data I/O by February 17, 2018. While no formal candidate nominations were made by shareholders for election at the 2018 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 2016 and 2017, 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 2017, 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 18, 2017, was granted a restricted stock award for 2,400 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 and restricted stock awards were 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, all non‐employee directors have met 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 met the stock ownership target requirement. 8 Proxy DIRECTOR COMPENSATION The following table shows compensation paid by Data I/O to non‐employee directors during 2017. 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) Name (a) Douglas W. Brown (1)(2) $41,000 $17,436 $0 Brian T. Crowley (1)(2) $39,000 $17,436 Alan B. Howe (1)(2) $46,000 $17,436 Mark J. Gallenberger (1)(2) $39,000 $17,436 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Total ($) (h) $58,436 $56,436 $63,436 $56,436 (1) Each outside director elected at the annual meeting in 2017 was awarded 2,400 shares of restricted stock with a fair value of $17,436 on May 18, 2017, vesting in one year or the next annual meeting, if earlier. (2) Brian Crowley had 15,000 option awards outstanding at December 31, 2017. No other outside director had option awards outstanding at December 31, 2017. 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 2017. 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 Auditing Standards No. 61, as amended, 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, is involved in selecting and approving the independent auditors’ lead audit partner, and discusses the overall scope and plans for the audits. The Committee meets with the independent 9 Proxy 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 2017, of which five were attended by Data I/O’s independent auditors. 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, 2017, for filing with the Securities and Exchange Commission. The Committee has considered the impact of changing independent auditors and 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, 2018 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, 2017, and 2016 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, 2017, and 2016, were approximately $197,610 and $188,864, respectively. Audit Related Fees: No aggregate fees were billed for the years ended December 31, 2017 and 2016 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, 2017, and 2016 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, 2017 and 2016 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 2017, all services provided by the independent auditors were pre‐approved. Shareholder Vote EXECUTIVE COMPENSATION At our 2017 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 10 Proxy disclosures in our Proxy Statement. The proposal was approved by our shareholders with 99.55 percent of the votes cast voting “for” approval and 0.45 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. 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”; Benefits; and Perquisites and other perceived benefits. Long‐term equity incentives; 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: 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 i. ii. Variable compensation should be a critical element of compensation and be set to be comparably competitive and to provide strong incentives 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 MICP payout can range from 0% to 200% of each executive’s MICP Target based upon the actual achieved MICP Measures for the period. The 2016 and 2017 MICP Target percentages for our executive officers were as follows: Executive's Prorated MICP 2016 Target 60% Executive's Prorated MICP 2017 Target 65% July 2017 Increased Target to 70% 45% 45% 47.5% 47.5% 50% 50% Ambrose Gulati Hatlen Estimated Payout at Maximum Measure for 2018 140% 100% 100% The Compensation Committee determined that for 2016 and 2017 it was 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. Given Data I/O’s growing profitability over the last several years as well as the increased level of operating expense, The Compensation Committee had determined for 2018 that it will be critical to emphasize profitability. For 2016 and 2017, the Compensation Committee established two measures; one for Financial Performance (“FP”) is based on achievement of various levels of operating income as percentage of revenue. See 11 Proxy 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 new product deliverables, spending and cost reductions, and new customer targets. 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 2017 was set, such that up to approximately 27% of target percentage incentive compensation could be achieved by this measure. For 2016 and 2017, the payout is a combination of the two (FP & PSP) measures. For 2018, the FP is based on achievement of various levels of operating income established for the year as a percentage of revenue, and there will be no PSP. The Compensation Committee believes that for 2016, 2017 and 2018, 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 2016 the MICP payout was approximately 117% of target with payout achieved under the combined FP and PSP measure. For 2017 the MICP payout was approximately 192% 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. Data I/O Corporation 2016 & 2017 MICP Variable Compensation Matrix Range of Payouts (actual results interpolated) The 2016 and 2017 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 27% 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. 2016 Financial Performance Matrix (FP) Operating Profit as a % of Revenue FP matrix payout as a % of Target 0.0% 0% 2.5% 50% 2017 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 Payout 5.0% 100% Target 200% Payout 10.0% 200% Target 200% Payout 12.0% 200% 7.5% 150% 8.5% 150% Long‐Term Equity Incentives. The Compensation Committee approves grants under the Data I/O Corporation 2000 Plan (“the 2000 Plan”). This is Data I/O’s only long‐term employee incentive plan. The primary purpose of the 2000 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. New options or stock awards may also be granted to the Board of Directors under the 2000 Plan. 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‐ 12 Proxy qualified executives who typically command compensation packages which include a significant equity incentive. All restricted stock unit awards granted to our executive officers in 2016 and 2017 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 date of the next Annual Meeting of Shareholders, 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 event 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.” Award Process The timing of our typical grant/award is usually 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 generally 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 2016 or 2017. 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. 13 Proxy 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, results delivered, compensation surveys and the competitive conditions in the market. No salary base pay adjustments were made from 2013 to 2016 for Mr. Ambrose. In July 2017, he received an increase to $330,000 in base salary per year. His compensation adjustments previously were in the form of increases in the number of shares of restricted stock unit awards to Mr. Ambrose annually to 50,000 in 2016 and to 60,000 in 2017, and Mr. Ambrose received an increase in his MICP target from 60% in 2016 to 70% in July 2017. 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 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 awards 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 14 Proxy 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. Tax reform in 2017 has revised and eliminated the performance‐based pay exception for new or modified compensation arrangements for 2018. The Compensation Committee is aware of this limitation and believes that no compensation to be paid by Data I/O in 2018 will exceed the $1 million limitation of Section 162(m), as the incentive and taxable equity compensation expected to be paid or issued in 2018 continues to be excluded under a prior unmodified performance‐based compensation arrangement, except possibly related to a change of control. The new Section 162(m) treatment will be part of future compensation considerations. 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: 2000 Plan The 2000 Plan allows for the granting of “Awards”, which include options, restricted stock and other awards made pursuant to the 2000 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 is 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. 15 Proxy 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, which provided 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 23, 2018, approximately 5, 26 and 5 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. 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) $330,000 $817,991 131,250 $165,000 131,250 Joel S. Hatlen (3) Rajeev Gulati (6) $134,351 $659,366 62,500 $120,000 62,500 $115,000 $524,753 55,000 $115,000 55,000 (1) Maximum vesting on Change in Control as of March 23, 2018. (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 23, 2018. (3) Minimum amount per Data I/O standard employee severance plan; no formal executive severance plan is in place as of March 23, 2018. A letter agreement provides that Mr. Hatlen’s severance shall be equal to the Data I/O 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 23, 2018. (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 2016 and 2017 to each of our named executive officers. Name1 (a) 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) Anthony Ambrose Chief Executive Officer & President Joel Hatlen Vice President Chief Operating & Financial Officer Secretary, Treasurer Rajeev Gulati Vice President Chief Technical Officer 2017 2016 $320,000 $310,000 $150 $0 $435,900 $129,750 $0 $0 $398,892 $217,625 $0 $0 $10,909 $1,165,851 $669,036 $11,661 2017 2016 $232,500 $225,000 $0 $750 $181,625 $64,875 $0 $0 $213,003 $118,465 $0 $0 $11,987 $11,818 $639,115 $420,908 2017 2016 $227,500 $225,000 $0 $0 $181,625 $51,900 $0 $0 $206,052 $118,465 $0 $0 $12,228 $11,008 $627,405 $406,373 (1) Data I/O currently has three named executive officers. (2) No base pay adjustments were made for executive officers in 2016. Base pay adjustments for executive officers were (3) (4) (5) made effective July 1, 2017. Employee service award paid in 2016 to Mr. Hatlen and in 2017 to Mr. Ambrose. Amount represents the fair value of restricted stock or the fair value of stock options granted during the year. All options granted to executive officers are granted in tandem with an equal number of SARs. SARs are only exercisable upon the occurrence of certain events leading to a change in the control of Data I/O. See “Change in Control and Other Termination Arrangements.” No options and SARs were awarded to executive officers in 2016 or 2017. Amounts earned under the MICP variable compensation arrangement in place for the year. (6) (7) Not applicable for Data I/O. (8) These amounts represent for Mr. Ambrose, Mr. Hatlen, and Mr. Gulati Data I/O’s matching contributions to Data I/O’s 401(k) Plan, and the value of group term life insurance in excess of premiums paid by each of the executive officers under the standard employee benefit plans. 17 Proxy OUTSTANDING EQUITY AWARDS AT FISCAL YEAR‐END Option Awards Stock Awards Number of Securities Underlying Unexer‐ cised Options Exercisable (#) (b) Number of Securities Underlying Unexe‐ rcised Options Unexer‐ cisable (#) (c) Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) (d) Option Exercise Price ($) (e) Option Expiration Date (f) 0 0 0 0 0 0 Name (a) Anthony Ambrose Joel Hatlen Rajeev Gulati Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) (i) Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) (j) Number of Shares or Units of Stock Held That Have Not Vested (#) (#) (g) Market Value of Shares or Units of Stock That Have Not Vested ($) (h) 131,250 $1,580,250 62,500 $752,500 55,000 $662,200 0 0 0 $0 $0 $0 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, 2017. (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)) Equity compensation plans approved by the security holders (1) (2) Equity compensation plans not approved by the security holders Total 40,630 ‐ 40,630 $6.17 ‐ $6.17 296,178 ‐ 296,178 (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 565,850 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. 18 Proxy 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 2018. Grant Thornton LLP examined the consolidated financial statements of Data I/O for the year ended December 31, 2017. 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 2018. PROPOSAL 3: AMENDMENT TO 2000 PLAN At the Annual Meeting, the shareholders of Data I/O will be asked to approve an amendment and restatement of the 2000 Plan, which, if approved, will increase the number of shares of Common Stock that have been made available under the 2000 Plan by an additional 300,000 shares, to an aggregate of 2,528,739 shares, the fair market value of such securities is $20,280,487 as of March 23, 2018 as well as make certain other modifications to the 2000 Plan. As of March 23, 2018, Data I/O has outstanding options and awards with respect to 557,600shares of Common Stock and 243,861 shares of Common Stock available for grants. Approval of the proposed increase will also be deemed a ratification of the terms of the 2000 Plan, as amended. The Board of Directors believes that the 2000 Plan has contributed to strengthening the incentive of participating employees to achieve the objectives of Data I/O and its shareholders by encouraging employees to acquire a greater proprietary interest in Data I/O. The Board of Directors believes that additional shares must be reserved for use under the 2000 Plan to enable Data I/O to attract and retain key employees through the granting of options under the 2000 Plan. The proposed increase in the number of shares reserved under the 2000 Plan is not required or intended to cover awards previously made under the 2000 Plan. As such, no new plan benefits have been granted to date, and future awards under the 2000 Plan are not yet determinable. Information concerning outstanding awards under the 2000 Plan is available in this proxy statement in the following tables and the narrative accompanying them: Summary Compensation Table, Outstanding Equity Awards at Fiscal Year End and Director Compensation. This proposal will be approved, if a quorum is present, and if the number of votes cast, in person or by proxy, in favor of the proposal exceeds the number of votes cast against the proposal. The Board of Directors recommends a vote FOR approval of the proposed amendment and restatement of the 2000 Plan. Unless instructed otherwise, it is the intention of the persons named in the accompanying form of proxy to vote shares represented by properly executed proxies in favor of the above‐referenced amendment to the 2000 Plan. Description of the 2000 Plan, As Proposed to be Amended and Restated The following description of the 2000 Plan, as proposed to be amended and restated, is qualified in its entirety by reference to the full text of such 2000 Plan, a copy of which is attached to this Proxy Statement as Appendix A. The purpose of the 2000 Plan is to enhance the long‐term shareholder value of Data I/O by offering opportunities to employees, persons to whom offers of employment have been extended, directors, officers, consultants, agents, advisors and independent contractors of Data I/O and its subsidiaries to participate in Data I/O’s growth and success, and to encourage them to remain in the service of Data I/O and its subsidiaries and to acquire and maintain stock ownership in Data I/O. The 2000 Plan may be administered either by the Board of Directors or a committee or committees appointed by (in either case, the “Committee”), and consisting of two or more independent members of, the Board of Directors. The Committee will have broad discretion to determine the amount and type of awards and terms and conditions of the awards. Individual grants will generally be based on a person’s present and potential contribution to Data I/O. As of March 23, 2017, Data I/O had approximately 103 employees and 4 non‐employee directors who would be eligible to participate in the 2000 Plan. Consultants, agents, advisors, and independent contractors can be eligible under the 2000 Plan. Because the grant of awards is based upon a determination made by the Committee after a consideration of various factors, Data I/O currently cannot determine the nature and amount of any awards that will be granted in the future to any eligible individual or group of individuals. However, with respect to awards granted prior to 2018, the maximum number of shares that could be granted under the 2000 Plan during any calendar year to covered employees (generally the chief executive officer and the three other most highly compensated officers, other than the chief financial officer, whose compensation is required to be disclosed pursuant to the rules and regulations under the Securities Exchange Act of 1934, as amended) was 200,000, except that Data I/O could make additional one‐time grants to newly hired participants of up to 100,000 shares per such participant. In addition, the maximum 19 Proxy number of shares that can be granted to a non‐employee director of Data I/O during any calendar year is limited to 100,000. Data I/O believes that with these limitations and other provisions of the 2000 Plan, options granted prior to November 2, 2017 under the 2000 Plan and remain unmodified will generate “qualified performance‐based compensation” within the meaning of Section 162(m) of the Internal Revenue Code and will, therefore, not be subject to the $1,000,000 cap on deductibility for federal income tax purposes of certain compensation payments in excess of $1,000,000. See “Certain Federal Income Tax Consequences” below. Awards may be granted in the form of incentive stock options (“ISOs”) within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), nonqualified stock options (“NQOs”) (each ISO or NQO, an “Option” and collectively, “Options”), stock appreciation rights, stock awards in the form of restricted stock (“Restricted Stock”), or other arrangements determined by the Committee. Any award may be granted either alone or in tandem with other awards granted under the 2000 Plan. The option price of ISOs shall be as determined by the Committee, but shall not be less than 100% of the fair market value of the Common Stock on the grant date. The option price of NQOs may be less than the fair market value of the Common Stock on the date of the grant; however, as a matter of policy Data I/O does not grant options with an exercise price that is less than the fair market value of the shares on the date of grant of the option. The Committee may condition the grant of the award upon the attainment of specified performance goals or other criteria, which need not be the same for all participants. No ISOs may be granted under the 2000 Plan on or after February 22, 2027 (February 21, 2028 if this proposal is approved), but ISOs outstanding under the 2000 Plan may extend beyond that date. Options. Options granted under the 2000 Plan may be ISOs or NQOs. The exercise price of ISOs may not be less than the fair market value of the shares subject to the ISO on the date of grant. The term of any ISO granted under the 2000 Plan may not exceed ten years. In addition, ISOs are subject to certain other limitations in order to take advantage of the favorable U.S. tax treatment that may be available for ISOs. Restricted Stock. Restricted Stock awards consist of non‐transferable shares of Common Stock of Data I/O which may be subject to a right of purchase by Data I/O although Data I/O has not subjected any such awards to a repurchase right. The Committee may provide for the lapse of the transfer restrictions over a period of time, or may accelerate or waive such restrictions, in whole or in part, based on service, performance or other criteria determined by the Committee. Stock Appreciation Rights. A stock appreciation right will give the holder the right to receive an appreciation distribution in an amount equal to the excess of the fair market value of the number of shares of Common Stock covered by the right over the exercise price per share subject to the right. Stock appreciation rights may be granted separately or in tandem with a related Option. Payment may be made in a combination of shares of Common Stock or in cash, as determined by the Committee. The consideration payable upon issuance or exercise of an award and any taxes related to an award must generally be paid in cash or check. However, the Committee, in its sole discretion, may, either at the time the Option is granted or at any time before it is exercised and subject to such limitations as the Committee may determine, authorize payment by the tender of Common Stock already owned by the participant for at least six months having a fair market value on the day prior to the exercise date equal to the aggregate Option exercise price, by net exercise of the Option, by delivery of a promissory note, by delivery of a properly executed exercise notice, together with irrevocable instruction (i) to a third‐party designated by Data I/O to deliver to Data I/O the amount of sale or loan proceeds to pay the exercise price and withholding tax obligations and (ii) to Data I/O to deliver the certificates for such shares to the third‐party, or by such other consideration as the Committee may permit. In addition, to assist a holder of award (excluding a holder who is an officer or director of Data I/O due to Sarbanes Oxley restrictions) in acquiring shares of Common Stock pursuant to an award granted under the 2000 Plan, the Committee, in its sole discretion, may authorize, either at the grant date or at any time before the acquisition of Common Stock pursuant to the award, the extension of a loan to the holder by Data I/O, the payment by the holder of the purchase price, if any, of the Common Stock in installments, or the guarantee by Data I/O of a loan obtained by the grantee from a third‐party. Awards generally may be exercised at any time within three months after termination of a participant’s employment by, or consulting relationship with, Data I/O (but, only to the extent exercisable or payable at the time of termination). However, if termination is due to the participant’s death or disability, the award generally may be exercised for one year. Except as authorized by the Committee, no award shall be assignable or otherwise transferable by a participant other than by will or by the laws of descent and distribution. The Committee may adjust the performance goals and measurements applicable to awards. The Committee also may waive in whole or in part any or all restrictions, conditions, vesting or forfeiture with respect to any award granted under the 2000 Plan. The Board of Directors may amend, alter or discontinue the 2000 Plan or any award at any time, except that the consent of a participant is required if the participant’s rights under an outstanding award would be impaired. In addition, the shareholders of Data I/O must approve any amendment, alteration or discontinuance of the 2000 Plan that would (i) increase the total number of shares reserved 20 Proxy under the 2000 Plan, (ii) with respect to provisions solely as they relate to ISOs, to the extent required for the 2000 Plan to comply with Section 422 of the Code, (iii) to the extent required by other applicable laws, rules or regulations or (iv) to the extent that the Board of Directors otherwise concludes that shareholder approval is advisable. The 2000 Plan constitutes an unfunded plan for incentive and deferred compensation. Data I/O is not required to create trusts or arrangements to meet its obligations under the 2000 Plan to deliver stock or make payments. In the event of a “change in control” of Data I/O, as defined in the 2000 Plan, in which the outstanding options do not remain outstanding or are not assumed by the surviving entity or replaced with comparable options, the vesting of outstanding “qualifying” awards under the 2000 Plan will, unless the applicable agreement with respect to the award or the Committee determines otherwise, subject to certain limitations, be accelerated in full. If outstanding options remain outstanding after a change of control or are assumed by the surviving entity or replaced with comparable options, subject to certain limitations, the vesting of outstanding “qualifying” options will be accelerated to the extent of 25% of the unvested portion thereof and the vesting of outstanding Qualifying Shares will be accelerated to the extent of 25% of the unvested portion thereof. Director option grants and certain change in control agreements provide for 100% vesting of all options on a change in control. Further, if the holder of any “qualifying” award which remains outstanding or is assumed by the surviving entity in a change of control transaction is terminated involuntarily within 180 days of the change of control, the vesting of all options and other awards held by such person will be accelerated in full. A “qualifying” award is defined as an option or 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. A “change in control” is defined to include (i) a merger or consolidation of Data I/O in which more than 50% of the voting power of Data I/O’s outstanding stock outstanding 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 Data I/O’s assets. Certain Federal Income Tax Consequences THE FOLLOWING SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES IS BASED UPON EXISTING STATUTES, REGULATIONS AND INTERPRETATIONS THEREOF. THE APPLICABLE RULES ARE COMPLEX, AND INCOME TAX CONSEQUENCES MAY VARY DEPENDING UPON THE PARTICULAR CIRCUMSTANCES OF EACH PLAN PARTICIPANT. THIS PROXY STATEMENT DESCRIBES FEDERAL INCOME TAX CONSEQUENCES OF GENERAL APPLICABILITY, BUT DOES NOT PURPORT TO DESCRIBE PARTICULAR CONSEQUENCES TO EACH INDIVIDUAL PLAN PARTICIPANT, OR FOREIGN, STATE OR LOCAL INCOME TAX CONSEQUENCES, WHICH MAY DIFFER FROM THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES. Incentive Stock Options Awards and Exercise of Options. ISOs are intended to constitute “incentive stock options” within the meaning of Section 422 of the Code. ISOs may be granted only to employees of Data I/O (including directors who are also employees). The recipient of an Option (the “Optionee”) does not recognize taxable income upon either the grant or exercise of an ISO. However, the excess of the fair market value of the shares purchased upon exercise over the Option exercise price (the “Option Spread”) is includable in the Optionee’s “alternative minimum taxable income (“AMTI”) for purposes of the alternative minimum tax (“AMT”). The Option Spread is generally measured on the date of exercise and is includable in AMTI in the year of exercise. Special rules regarding the time of AMTI inclusion may apply for shares subject to a “substantial risk of forfeiture” (including, in the case of each person subject to the reporting requirements of Section 16(b) of the Exchange Act). In addition, when stock is acquired subject to a “substantial risk of forfeiture”, an Optionee’s holding period for purposes of determining whether any capital gain or loss on sale is long‐term will generally not begin until the restriction lapses. Sale of Option Shares. If an Optionee holds the shares purchased under an ISO for at least two years from the date the ISO was granted and for at least one year from the date such shares were transferred to the Optionee, any gain from a sale of the shares other than to Data I/O should be taxable as capital gain. Under these circumstances, Data I/O would not be entitled to a tax deduction at the time the ISO was exercised or at the time the stock was sold. If an Optionee were to dispose of stock acquired pursuant to an ISO before the end of the required holding periods (a “Disqualifying Disposition”), the amount by which the market value of the stock at the time the ISO was exercised exceeded the exercise price (or, if less, the amount of gain realized on the sale) would be taxable as ordinary income, and Data I/O would be entitled to a corresponding tax deduction in the year of sale. Such income is subject to information reporting requirements. Gain from a Disqualifying Disposition in excess of the amount required to be recognized as ordinary income is capital gain. Optionees are required to notify Data I/O promptly after making a Disqualifying Disposition. If the stock is sold to Data I/O rather than to a third party, the sale may not produce capital gain or loss. A sale of shares 21 Proxy to Data I/O will constitute a redemption of such shares, which could be taxable as a dividend unless the redemption is “not essentially equivalent to a dividend” within the meaning of the Code. Exercise With Stock. If an Optionee pays for ISO shares with shares of Data I/O acquired under an ISO or a qualified employee stock purchase plan (“Statutory Option Stock”), the tender of shares is a Disqualifying Disposition of the Statutory Option Stock if the above described (or other applicable) holding periods respecting those shares have not been satisfied. If the holding periods with respect to the Statutory Option Stock are satisfied, or the shares were not acquired under a statutory stock option of Data I/O, then any appreciation in value of the surrendered shares is not taxable upon surrender. Special basis and holding period rules apply where previously‐owned stock is used to exercise an ISO. Nonqualified Stock Options Awards and Exercise of Options. An Optionee is not taxable upon the award of an NQO. Federal income tax consequences upon exercise will depend upon whether the shares thereby acquired are subject to a “substantial risk of forfeiture”. If the shares are not subject to a “substantial risk of forfeiture”, or if they are so restricted and the Optionee files a Section 83(b) Election with respect to the shares, the Optionee will have ordinary income at the time of exercise measured by the Option Spread on the exercise date. The Optionee’s tax basis in the shares will be their fair market value on the date of exercise, and the holding period for purposes of determining whether capital gain or loss upon sale is long‐ or short‐term also will begin on that date. If the shares are subject to a “substantial risk of forfeiture” and no Section 83(b) Election is filed, the Optionee will not be taxable upon exercise, but instead will have ordinary income on the date the stock is no longer subject to a “substantial risk of forfeiture”, in an amount equal to the difference between the amount paid for the shares under the Option and their fair market value as of the date of lapse; in addition, the Optionee’s holding period will begin on the date of lapse. Whether or not the shares are subject to a “substantial risk of forfeiture”, the amount of ordinary income taxable to an Optionee who was an employee at the time of grant constitutes “supplemental wages” subject to a withholding of income and employment taxes by Data I/O, and Data I/O receives a corresponding income tax deduction. Sale of Option Shares. Upon sale, other than to Data I/O, of shares acquired under a NQO, an Optionee generally will recognize capital gain or loss to the extent of the difference between the sale price and the Optionee’s tax basis in the shares, which will be long‐term gain or loss if the employee’s holding period in the shares is more than one year. If the stock is sold to Data I/O rather than to a third party, the sale may not produce capital gain or loss. A sale of shares to Data I/O will constitute a redemption of such shares, which could be taxable as a dividend unless the redemption is “not essentially equivalent to a dividend” within the meaning of the Code. Exercise With Stock. If the Optionee pays the option exercise price by tendering other shares of Common Stock of the Company then owned by the Optionee, the Optionee will recognize ordinary income in an amount equal to the fair market value of the number of shares received upon exercise of the option, which exceed the number of shares tendered by the Optionee. If the surrendered shares are Statutory Option Stock as described above under “Incentive Stock Options”, with respect to which the applicable holding period requirements for favorable income tax treatment have not expired, then the newly acquired shares substituted for the Statutory Option Shares should remain subject to the federal income tax rules governing the surrendered shares, but the surrender should not constitute a Disqualifying Disposition of the surrendered stock. Net Exercise. If a NQO is exercised through a net exercise, Data I/O will not require payment of the exercise price of the NQO but will reduce the number of shares issued upon exercise by the largest number of whole shares that have a Fair Market Value that does not exceed the aggregate exercise price. With respect to any remaining balance of the aggregate exercise price, Data I/O will accept a cash payment from the Optionee. The Optionee will recognize ordinary income in an amount equal to the excess of the aggregate fair market value of the shares that otherwise would be issued upon exercise of the NQO over the aggregate exercise price of the NQO being exercised. The Optionee’s tax basis in the shares received is their fair market value at the time of exercise. Restricted Stock Awards Grant and Lapse of Restrictions. Section 83(b) election of the Internal Revenue Code allows a the holder of a restricted stock award to elect, within 30 days after the date he receives a restricted stock award, to recognize and be taxed on ordinary income equal to the fair market value of the common stock at that time. If the holder does not make a Section 83(b) election within 30 days from the date he receives a restricted stock award, the holder will recognize ordinary income equal to the fair market value of the common 22 Proxy stock at expiration of the restriction period. The holder’s basis in the shares will equal their fair market value at the time the holder recognizes ordinary income. The holder will be taxed at ordinary income rates on cash dividends paid before the end of the restriction period. Subject to the general rules concerning deductibility of compensation, Data I/O will be allowed an income tax deduction in the amount that, and for our taxable year in which, the holder recognizes ordinary income in connection with a restricted stock award. Dividends on the restricted stock that are received by the holder before the end of the restriction period also will be deductible by Data I/O subject to the general rules concerning compensation. Forfeiture of Restricted Stock. If the holder does not make the Section 83(b) election described above and, before the restriction period expires, he forfeits the restricted stock under the terms of the award, the holder will not recognize any ordinary income in connection with the restricted stock award. If the holder does make a Section 83(b) election and subsequently forfeits the restricted stock under the terms of the award, the holder will not be allowed an ordinary income tax deduction with respect to the forfeiture. However, the holder may be entitled to a capital loss. Sale of Shares. The holder cannot sell or otherwise dispose of the restricted stock until after the restriction period expires. When shares are sold after the restriction period expires, the holder will recognize gain or loss in an amount by which the sale price of the shares differs from his tax basis in the shares. If, as usually is the case, the shares are a capital asset in the hands of the holder, any gain or loss recognized on a sale or other disposition of the shares will qualify as capital gain or loss. Any capital gain or loss recognized upon sale of the shares will be treated as long‐term capital gain or loss if the holder held the shares for more than 12 months from the date he recognized ordinary income with respect to the shares and as short‐term capital gain or loss if he held the stock for 12 months or less from the date the holder recognized ordinary income. Stock Appreciation Rights Grant. At the time a SAR is granted, the recipient will not recognize any taxable income. Exercise. At the time the holder exercises a SAR, he will recognize ordinary income equal to the cash received, or fair market value of any shares of common stock received, at that time (in the amount that is equal to the excess of the fair market value of a share of our common stock on the date the SAR is exercised over the grant price of the SAR). The holder’s tax basis in any shares received will equal the fair market value of those shares at the time he recognizes ordinary income as a result of exercising the SAR. Subject to the general rules concerning deductibility of compensation, Data I/O will be allowed an income tax deduction in the amount that, and for our taxable year in which, the holder recognizes ordinary income upon the exercise of a SAR. Sale of Shares. If, as usually is the case, shares received upon exercise of a SAR (if any) are a capital asset in the hands of the holder, any additional gain or loss recognized on a subsequent sale or exchange of the shares will not be ordinary income but will qualify as a capital gain or loss. Any capital gain or loss recognized upon sale of the shares will be characterized as long‐term capital gain or loss if the holder held the shares for more than 12 months and as short‐term capital gain or loss if the holder held the stock for 12 months or less. For purposes of determining whether the gain will be recognize long‐term or short‐term capital gain or loss on the subsequent sale of the shares, the holding period will begin at the time the SAR was exercised. Change in Control Depending on the terms of an award and the determination of the Committee, upon a change in control of Data I/O, restrictions on awards may lapse, or the award may mature or become exercisable, on an accelerated schedule. If this type of benefit, or other benefits and payments connected with an award that result from a change in control of Data I/O, are granted to certain individuals (such as our executive officers), the benefits and payments may be deemed to be “parachute payments” within the meaning of Section 280G of the Internal Revenue Code. Section 280G provides that if parachute payments to an individual equal or exceed three times the individual’s “base amount,” the excess of the parachute payments over one times the base amount (1) will not be deductible by Data I/O and (2) will be subject to a 20% excise tax payable by the individual. “Base amount” is the individual’s average annual compensation over the five taxable years preceding the taxable year in which the change in control occurs. Deductibility of Executive Compensation Under Code Section 162(m) Section 162(m) of the Code generally limits to $1,000,000 the amount that a publicly‐held corporation is allowed each year to deduct for the compensation paid to each of the corporation’s “covered employees” which generally includes the chief executive officer, the chief financial officer and the corporation’s three other most highly compensated executive officers whose compensation is required to be disclosed under rules and regulations under the Securities Exchange Act of 1934. Any individual who 23 Proxy is a covered employee at any time during a tax year commencing after 2016 will remain a covered employee permanently. However, awards of “qualified performance‐based qualified compensation” that were awarded pursuant to a written binding contract in effect as of November 2, 2017 are “grandfathered” under prior law and are not subject to the $1,000,000 deduction limit as long as they are not materially modified. In general, to qualify as performance‐based compensation, the following requirements need to be satisfied: (1) payments must be computed on the basis of an objective, performance‐based compensation standard determined by a committee consisting solely of two or more “outside directors,” (2) the material terms under which the compensation is to be paid, including the business criteria upon which the performance goals are based, and a limit on the maximum bonus amount which may be paid to any participant pursuant with respect to any performance period, must be approved by a majority of the corporation’s shareholders and (3) the committee must certify that the applicable performance goals were satisfied before payment of any performance‐based compensation. It is expected that stock options and SARs that were outstanding on November 2, 2017 and were issued with an exercise price that is not less than the fair market value of the stock at the date of grant will be performance based compensation for purposes of exclusion from the $1,000,000 deduction limit under Section 162(m). PROPOSAL 4: 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 2018 Annual Meeting of Shareholders pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the 2017 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 2018 by operating income as a percentage of revenue and/or achievement of key 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. PROPOSAL 5: SAY ON FREQUENCY ‐ ADVISORY VOTE ON FREQUENCY OF FUTURE ADVISORY VOTES ON EXECUTIVE COMPENSATION The Board of Directors requests that the shareholders vote, on an advisory basis, whether the frequency of future advisory votes on the compensation of our named executive officers shall occur “every year”, “every two years”, or “every three years”. The Board recommends that the future advisory votes on the compensation of our named executive officers occur “every year”. The Board believes that an annual executive compensation advisory vote will facilitate more direct shareholder input about executive compensation. An annual executive compensation advisory vote is consistent with our policy of reviewing our compensation program annually, as well as seeking frequent input from our shareholders on corporate governance and executive compensation matters. 24 Proxy The Board of Directors believes that holding the executive compensation advisory vote every year is in the best interests of the Company and its shareholders and recommends voting for a frequency of “EVERY YEAR”. The Company will report the voting results in a current report on Form 8‐K that will be filed after the Annual Shareholders Meeting. In addition, the Company will disclose in a current report on Form 8‐K within the time frame required by SEC rules the decision by the Company as to the frequency of shareholder advisory votes on executive compensation in light of the results of this shareholder advisory vote. 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 2018 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 17, 2018, in the case of the 2018 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 2019 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 20, 2019. 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 2018 Annual Meeting was February 17, 2018. 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 2017 Annual Meeting. Eligible shareholders who intend to have a proposal considered for inclusion in Data I/O’s proxy materials for presentation at the 2019 Annual Meeting must submit the proposal to Data I/O at its principal offices no later than December 14, 2018. Shareholders who intend to present a proposal at the 2019 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 20, 2019, 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 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. 25 Proxy 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 Investor Relations by email at materials, you may request a separate copy at no cost to you by contacting 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, 6645 185th Avenue NE, Suite 100, 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. 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, 2017 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 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. for a nominal By Order of the Board of Directors /s/ Anthony Ambrose Anthony Ambrose President and Chief Executive Officer Redmond, Washington April 4, 2017 26 Proxy Appendix A DATA I/O CORPORATION 2000 STOCK COMPENSATION INCENTIVE PLAN 1. PURPOSES 1.1 The purpose of the Data I/O Corporation 2000 Stock Compensation Incentive Plan, as amended and restated, (the “2000 Plan”) is to enhance the long‐term shareholder value of Data I/O Corporation, a Washington corporation (the “Company”), by offering opportunities to employees, persons to whom offers of employment have been extended, directors, officers, consultants, agents, advisors and independent contractors of Data I/O and its Subsidiaries (as defined in Section 2) to participate in Data I/O's growth and success, and to encourage them to remain in the service of Data I/O and its Subsidiaries and to acquire and maintain stock ownership in Data I/O. 2. DEFINITIONS For purposes of the 2000 Plan, the following terms shall be defined as set forth below: 2.1 Acquired Entities. “Acquired Entities” has the meaning given in Section 6.2. 2.2 Acquisition Transaction. “Acquisition Transaction” has the meaning given in Section 6.2. 2.3 Award. “Award” means a grant made to a Participant pursuant to the 2000 Plan, including, without limitation, grants of Options, Stock Appreciation Rights, Stock Awards, Other Stock‐Based Awards or any combination of the foregoing. 2.4 Board. “Board” means the Board of Directors of Data I/O. 2.5 Cause. “Cause” means dishonesty, fraud, misconduct, disclosure of confidential information, conviction of, or a plea of guilty or no contest to, a felony under the laws of the United States or any state thereof, habitual absence from work for reasons other than illness, intentional conduct which causes significant injury to Data I/O, habitual abuse of alcohol or a controlled substance, in each case as determined by the Plan Administrator, and its determination shall be conclusive and binding. 2.6 Change in Control. “Change in Control” means (i) the consummation of a merger or consolidation of Data I/O with or into another entity or any other corporate reorganization, if more than 50% of the combined voting power of the continuing or surviving entity’s securities outstanding immediately after such merger, consolidation or other reorganization is owned by persons who were not shareholders of Data I/O immediately prior to such merger, consolidation or other reorganization or (ii) the sale, transfer or other disposition of all or substantially all of Data I/O’s assets. A transaction shall not constitute a Change in Control if its sole purpose is to change the state of Data I/O’s incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held Data I/O’s securities immediately before such transaction. 27 Proxy 2.7 Code. “Code” means the Internal Revenue Code of 1986, as amended from time to time. 2.8 Common Stock. “Common Stock” means the common stock, no par value, of Data I/O. 2.9 Disability. “Disability” means a medically determinable mental or physical impairment or condition of the Holder which is expected to result in death or which has lasted or is expected to last for a continuous period of twelve (12) months or more and which causes the Holder to be unable, in the opinion of the Plan Administrator on the basis of evidence acceptable to it, to perform his or her duties for Data I/O and, in the case of a determination of Disability for purposes of determining the exercise period for an Incentive Stock Option, to be engaged in any substantial gainful activity. Upon making a determination of Disability, the Plan Administrator shall, for purposes of the 2000 Plan, determine the date of the Holder’s termination of employment, service or contractual relationship. 2.10 Exchange Act. “Exchange Act” means the Securities Exchange Act of 1934, as amended. 2.11 Fair Market Value. “Fair Market Value” shall be as established in good faith by the Plan Administrator or (a) if the Common Stock is listed on the NASDAQ Capital Market, the mean between the high and low selling prices for the Common Stock as reported by the NASDAQ Capital Market for a single trading day or (b) if the Common Stock is listed on the New York Stock Exchange or the American Stock Exchange, the mean between the high and low selling prices for the Common Stock as such prices are officially quoted in the composite tape of transactions on such exchange for a single trading day. If there is no such reported price for the Common Stock for the date in question, then such price on the last preceding date for which such price exists shall be determinative of Fair Market Value. 2.12 Grant Date. “Grant Date” means the date the Plan Administrator adopted the granting resolution or a later date designated in a resolution of the Plan Administrator as the date an Award is to be granted. 2.13 Holder. “Holder” means the Participant to whom an Award is granted or the personal representative of a Holder who has died. 2.14 Incentive Stock Option. “Incentive Stock Option” means an Option to purchase Common Stock granted under Section 7 with the intention that it qualify as an “incentive stock option” as that term is defined in Section 422 of the Code. 2.15 Involuntary Termination. “Involuntary Termination” means termination of the Holder’s service to Data I/O (or the parent or subsidiary company employing such Holder) or the other party to the transaction constituting a Change in Control by reason of (i) the involuntary discharge of such Holder by Data I/O (or the parent or subsidiary company employing such Holder) or the other party to the transaction constituting a Change in Control for reasons other than Cause or (ii) the voluntary resignation of the Holder following (A) a change in such Holder’s position with Data I/O (or its successor or the parent or subsidiary company that employs such Holder) or the other party to the transaction constituting a Change in Control that materially reduces such Holder’s level of authority or responsibility or (B) a reduction in such Holder’s compensation (including base salary, fringe benefits and participation in bonus or incentive programs based on corporate performance) by more than 20%. 28 Proxy 2.16 Nonqualified Stock Option. “Nonqualified Stock Option” means an Option to purchase Common Stock granted under Section 7 other than an Incentive Stock Option. 2.17 Option. “Option” means the right to purchase Common Stock granted under Section 7. 2.18 Option Shares. “Option Shares” means the shares of Common Stock issuable upon a Holder’s exercise of an Option granted under the 2000 Plan. 2.19 Other Stock‐Based Award. “Other Stock‐Based Award” means an Award granted under Section 11. 2.20 Participant. “Participant” means an individual who is a Holder of an Award or, as the context may require, any employee, director (including directors who are not employees), officer, consultant, agent, advisor or independent contractor of Data I/O or a Subsidiary who has been designated by the Plan Administrator as eligible to participate in the 2000 Plan. 2.21 Plan Administrator. “Plan Administrator” means the Board or any committee designated to administer the 2000 Plan under Section 3.1. 2.22 Qualifying Award. “Qualifying Award” means an Option or an Award that is held by a person who had been an employee, director, consultant or agent to Data I/O for at least 180 days as of the effective date of a Change in Control. 2.23 Qualifying Shares. “Qualifying Shares” means shares of 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 termination of the Holder’s services to Data I/O. 2.24 Restricted Stock. “Restricted Stock” means shares of Common Stock granted pursuant to a Stock Award under Section 10, the rights of ownership of which are subject to restrictions prescribed by the Plan Administrator. 2.25 Securities Act. “Securities Act” means the Securities Act of 1933, as amended. 2.26 Stock Appreciation Right. “Stock Appreciation Right” means an Award granted under Section 9. 2.27 Stock Award. “Stock Award” means an Award granted under Section 10. 29 Proxy 2.28 Subsidiary. “Subsidiary,” except as expressly provided otherwise, means any entity that is directly or indirectly controlled by Data I/O or in which Data I/O has a significant ownership interest, as determined by the Plan Administrator, and any entity that may become a direct or indirect parent of Data I/O. 2.29 Unvested Portion. “Unvested Portion” means the portion of a Qualifying Award or Qualifying Shares that is/are unvested as of the effective date of a Change in Control. 2.30 Vested Portion. “Vested Portion” means the portion of a Qualifying Award or Qualifying Shares that is/are vested as of the effective date of a Change in Control. 3. ADMINISTRATION 3.1 Plan Administrator. The 2000 Plan shall be administered by the Board or a committee or committees (which term includes subcommittees) appointed by, and consisting of two or more members of, the Board. Any such committee shall have the powers and authority vested in the Board hereunder (including the power and authority to interpret any provision of the 2000 Plan or of any Award). The Board, or any committee thereof appointed to administer the 2000 Plan, is referred to herein as the "Plan Administrator." If and so long as the Common Stock is registered under Section 12(b) or 12(g) of the Exchange Act, the Board shall consider in selecting the Plan Administrator and the membership of any committee acting as Plan Administrator for any persons subject or likely to become subject to Section 16 under the Exchange Act the provisions regarding (a) “outside directors” as contemplated by Section 162(m) of the Code and (b) “Non‐Employee Directors” as contemplated by Rule 16b‐3 under the Exchange Act. The Board or Plan Administrator may delegate the responsibility for administering the 2000 Plan with respect to designated classes of eligible Participants to one or more senior executive officers or committees thereof, the members of which need not be members of the Board, subject to such limitations as the Board deems appropriate. Committee members shall serve for such term as the Board may determine, subject to removal by the Board at any time. 3.2 Administration and Interpretation by the Plan Administrator. Except for the terms, conditions and limitations explicitly set forth in the 2000 Plan, the Plan Administrator shall have exclusive authority, in its absolute discretion, to determine all matters relating to Awards under the 2000 Plan, including the selection of individuals to be granted Awards, the type of Awards, the number of shares of Common Stock subject to an Award, all terms, conditions, restrictions and limitations, if any, of an Award and the terms of any instrument that evidences the Award. The Plan Administrator shall also have exclusive authority to interpret the 2000 Plan and may from time to time adopt, change and rescind rules and regulations of general application for the 2000 Plan's administration. This authority shall include the sole authority to correct any defect, supply any omission or reconcile any inconsistency in this 2000 Plan and make all other determinations necessary or advisable for the administration of the 2000 Plan and do everything necessary or appropriate to administer the 2000 Plan. The Plan Administrator's interpretation of the 2000 Plan and its rules and regulations, and all actions taken and determinations made by the Plan Administrator pursuant to the 2000 Plan shall be conclusive and binding on all parties involved or affected. The Plan Administrator may delegate administrative duties to such of Data I/O's officers as it so determines. 4. STOCK SUBJECT TO THE 2000 PLAN 4.1 Authorized Number of Shares. As of March 10, 2000, Data I/O had outstanding options with respect to 1,215,000 shares of Common Stock and 270,499 shares of Common Stock available for additional grants under the 2000 Plan and the Data I/O 1986 Employee Stock Option Plan (“1986 Plan”). Subject to adjustment from time to time as provided in Section 14.1, Awards of the authorized but unissued shares of Common Stock under the 1986 Plan, or shares of Common Stock that become available under the 1986 Plan as a result of the expiration or termination of options, may be granted under this 2000 Plan. Awards for an additional 300,000 shares of Common 30 Proxy Stock shall also be available for issuance under the 2000 Plan. Shares issued under the 2000 Plan shall be drawn from authorized and unissued shares. See also Section 18 for 2000 Plan amendments. 4.2 Limitations. (a) Subject to adjustment from time to time as provided in Section 14.1, not more than 200,000 shares of Common Stock may be made subject to Awards under the 2000 Plan to any individual Participant in the aggregate in any one (1) calendar year, except that Data I/O may make additional one‐time grants to newly hired Participants of up to 100,000 shares per such Participant; such limitation shall be applied in a manner consistent with the requirements of, and only to the extent required for compliance with, the exclusion from the limitation on deductibility of compensation under Section 162(m) of the Code. (b) Subject to adjustment from time to time as provided in Section 14.1, not more than 100,000 shares of Common Stock may be made subject to Awards to any non‐employee director in the aggregate in any one calendar year. 4.3 Reuse of Shares. Any shares of Common Stock that have been made subject to an Award that cease to be subject to the Award (other than by reason of exercise or payment of the Award to the extent it is exercised for or settled in shares) and any shares repurchased by Data I/O from a Holder upon exercise of a right of repurchase shall again be available for issuance in connection with future grants of Awards under the 2000 Plan; provided, however, that any such shares shall be counted in accordance with the requirements of Section 162(m) of the Code if and to the extent applicable. Shares that are subject to tandem Awards shall be counted only once. Also, upon a stock‐for‐stock exercise only the net number of shares will be deemed to have been used under this 2000 Plan. 5. ELIGIBILITY Awards may be granted under the 2000 Plan to those officers, directors and key employees of Data I/O and its Subsidiaries as the Plan Administrator from time to time selects. Awards may also be made to consultants, agents, advisors and independent contractors who provide services to Data I/O and its Subsidiaries. 6. AWARDS 6.1 Form and Grant of Awards. The Plan Administrator shall have the authority, in its sole discretion, to determine the type or types of Awards to be made under the 2000 Plan. Such Awards may include, but are not limited to, Incentive Stock Options, Nonqualified Stock Options, Stock Appreciation Rights, Stock Awards and Other Stock‐Based Awards. Awards may be granted singly, in combination or in tandem so that the settlement or payment of one automatically reduces or cancels the other. Awards may also be made in combination or in tandem with, in replacement of, as alternatives to, or as the payment form for, grants or rights under any other employee or compensation plan of Data I/O. 6.2 Acquired Company Awards. Notwithstanding anything in the 2000 Plan to the contrary, the Plan Administrator may grant Awards under the 2000 Plan in substitution for awards issued under other plans, or assume under the 2000 Plan awards issued under other plans, if the other plans are or were plans of other acquired entities (“Acquired Entities”) (or the parent of the Acquired Entity) and the new Award is substituted, or the old Award is assumed, by reason of a merger, consolidation, acquisition of property or of stock, reorganization or liquidation (an “Acquisition Transaction”). If a written agreement pursuant to which an Acquisition Transaction is completed is approved by the Board and said agreement sets forth the terms and conditions of the substitution for or assumption of outstanding awards of the Acquired Entity, said terms and conditions shall be deemed to be the action of the Plan Administrator without any further action by the Plan Administrator, except as may be required for compliance with Rule 16b‐3 under the Exchange Act, and the persons holding such Awards shall be deemed to be Participants and Holders. 7. AWARDS OF OPTIONS 7.1 Grant of Options. 31 Proxy The Plan Administrator is authorized under the 2000 Plan, in its sole discretion, to issue Options as Incentive Stock Options or as Nonqualified Stock Options, which shall be appropriately designated. 7.2 Option Exercise Price. The exercise price for shares purchased under an Option shall be as determined by the Plan Administrator, but shall not be less than 100% of the Fair Market Value of the Common Stock on the Grant Date with respect to Incentive Stock Options. 7.3 Term of Options. The term of each Option shall be as established by the Plan Administrator or, if not so established, shall be six (6) years from the Grant Date. 7.4 Exercise of Options. The Plan Administrator shall establish and set forth in each instrument that evidences an Option the time at which or the installments in which the Option shall become exercisable, which provisions may be waived or modified by the Plan Administrator at any time. If not so established in the instrument evidencing the Option or otherwise set at the time of grant, the Option will be subject to the following: (a) 25% of the Option shall vest and become exercisable on each anniversary of the Grant Date such that the Option shall be fully vested on the fourth anniversary of the Grant Date; (b) in no event shall any additional Option Shares vest after termination of Holder’s employment by or service to Data I/O; and (c) the Plan Administrator may waive or modify the foregoing schedule at any time. To the extent that the right to purchase shares has accrued there under, an Option may be exercised from time to time by written notice to Data I/O, in accordance with procedures established by the Plan Administrator, setting forth the number of shares with respect to which the Option is being exercised and accompanied by payment in full as described in Section 7.5. An Option may not be exercised as to less than 100 shares at any one time (or the lesser number of remaining shares covered by the Option). 7.5 Payment of Exercise Price. The exercise price for shares purchased under an Option shall be paid in full to Data I/O by delivery of consideration equal to the product of the Option exercise price and the number of shares purchased. Such consideration must be paid in cash or check (unless, at the time of exercise, the Plan Administrator determines not to accept a personal check), except that the Plan Administrator, in its sole discretion, may, either at the time the Option is granted or at any time before it is exercised and subject to such limitations as the Plan Administrator may determine, authorize payment in cash and/or one or more of the following alternative forms: (a) tendering (either actually or, if and so long as the Common Stock is registered under Section 12(b) or 12(g) of the Exchange Act, by attestation) Common Stock already owned by the Holder for at least six months (or any shorter period necessary to avoid a charge to Data I/O's earnings for financial reporting purposes) having a Fair Market Value on the day prior to the exercise date equal to the aggregate Option exercise price; (b) a promissory note delivered pursuant to Section 12; (c) if and so long as the Common Stock is registered under Section 12(b) or 12(g) of the Exchange Act, delivery of a properly executed exercise notice, together with irrevocable instructions, to (i) a third party designated by Data I/O to deliver promptly to Data I/O the aggregate amount of sale or loan proceeds to pay the Option exercise price and any withholding tax obligations that may arise in connection with the exercise and (ii) Data I/O to deliver the certificates for such purchased shares directly to such third party, all in accordance with the regulations of the Federal Reserve Board; (d) the net exercise of the Option as defined below; or (e) such other consideration as the Plan Administrator may permit. In the case of a "net exercise" of an Option, the Company will not require a payment of the exercise price of the Option from the Holder but will reduce the number of shares of Common Stock issued upon the exercise by the largest number of whole shares that have a Fair Market Value that does not exceed the aggregate exercise price. With respect to any remaining balance of the aggregate exercise price, the Company will accept a cash payment from the Participant. The number of shares of Common Stock underlying an Option will decrease following the exercise of such Option to the extent of (i) shares used to pay the exercise price of an Option under the "net exercise" feature, (ii) shares actually delivered to the Holder as a result of such exercise, and (iii) shares withheld for purposes of tax withholding. 32 Proxy 7.6 Post‐Termination Exercises. The Plan Administrator may establish and set forth in each instrument that evidences an Option whether the Option will continue to be exercisable, and the terms and conditions of such exercise, if a Holder ceases to be employed by, or to provide services to, Data I/O or its Subsidiaries, which provisions may be waived or modified by the Plan Administrator at any time. If not so established in the instrument evidencing the Option, the Option will be exercisable according to the following terms and conditions, which may be waived or modified by the Plan Administrator at any time. In case of termination of the Holder’s employment or services other than by reason of death or Cause, the Option shall be exercisable, to the extent of the number of shares purchasable by the Holder at the date of such termination, only (a) within one (1) year if the termination of the Holder’s employment or services are coincident with Disability or (b) within three (3) months after the date the Holder ceases to be an employee, director, officer, consultant, agent, advisor or independent contractor of Data I/O or a Subsidiary if termination of the Holder’s employment or services is for any reason other than death or Disability, but in no event later than the remaining term of the Option. Any Option exercisable at the time of the Holder’s death may be exercised, to the extent of the number of shares purchasable by the Holder at the date of the Holder’s death, by the personal representative of the Holder’s estate entitled thereto at any time or from time to time within one (1) year after the date of death, but in no event later than the remaining term of the Option. In case of termination of the Holder’s employment or services for Cause, the Option shall automatically terminate upon first discovery by Data I/O of any reason for such termination and the Holder shall have no right to purchase any Shares pursuant to such Option, unless the Plan Administrator determines otherwise. If a Holder’s employment or services with Data I/O are suspended pending an investigation of whether the Holder shall be terminated for Cause, all the Holder’s rights under any Option likewise shall be suspended during the period of investigation. A transfer of employment or services between or among Data I/O and its Subsidiaries shall not be considered a termination of employment or services. The effect of a Company‐approved leave of absence or short‐term break in service on the terms and conditions of an Option shall be determined by the Plan Administrator, in its sole discretion. 8. INCENTIVE STOCK OPTION LIMITATIONS To the extent required by Section 422 of the Code, Incentive Stock Options shall be subject to the following additional terms and conditions: 8.1 Dollar Limitation. To the extent the aggregate Fair Market Value (determined as of the Grant Date) of Common Stock with respect to which Incentive Stock Options are exercisable for the first time during any calendar year (under the 2000 Plan and all other stock option plans of Data I/O) exceeds $100,000, such portion in excess of $100,000 shall be treated as a Nonqualified Stock Option. In the event the Participant holds two (2) or more such Options that become exercisable for the first time in the same calendar year, such limitation shall be applied on the basis of the order in which such Options were granted. 8.2 10% Shareholders. If a Participant owns more than 10% of the total voting power of all classes of Data I/O's stock, then the exercise price per share of an Incentive Stock Option shall not be less than 110% of the Fair Market Value of the Common Stock on the Grant Date and the Option term shall not exceed five (5) years. The determination of 10% ownership shall be made in accordance with Section 422 of the Code. 8.3 Eligible Employees. Individuals who are not employees of Data I/O or one of its parent corporations or subsidiary corporations may not be granted Incentive Stock Options. For purposes of this Section 8.3, “parent corporation” and “subsidiary corporation” shall have the meanings attributed to those terms for purposes of Section 422 of the Code. 8.4 Term. The term of an Incentive Stock Option shall not exceed ten (10) years. 33 Proxy 8.5 Exercisability. To qualify for Incentive Stock Option tax treatment, an Option designated as an Incentive Stock Option must be exercised within three (3) months after termination of employment for reasons other than death, except that, in the case of termination of employment due to total Disability, such Option must be exercised within one (1) year after such termination. Employment shall not be deemed to continue beyond the first 90 days of a leave of absence unless the Participant's reemployment rights are guaranteed by statute or contract. 8.6 Taxation of Incentive Stock Options. In order to obtain certain tax benefits afforded to Incentive Stock Options under Section 422 of the Code, the Participant must hold the shares issued upon the exercise of an Incentive Stock Option for two (2) years after the Grant Date of the Incentive Stock Option and one (1) year from the date the shares are transferred to the Participant. A Participant may be subject to the alternative minimum tax at the time of exercise of an Incentive Stock Option. The Participant shall give Data I/O prompt notice of any disposition of shares acquired by the exercise of an Incentive Stock Option prior to the expiration of such holding periods. 8.7 Promissory Notes. The amount of any promissory note delivered pursuant to Section 12 in connection with an Incentive Stock Option shall bear interest at a rate specified by the Plan Administrator but in no case less than the rate required to avoid imputation of interest (taking into account any exceptions to the imputed interest rules) for federal income tax purposes. 8.8 Incorporation of Other Provisions. With respect to Incentive Stock Options, if this 2000 Plan does not contain any provision required to be included herein under Section 422 of the Code, such provision shall be deemed to be incorporated herein with the same force and effect as if such provision had been set out in full herein; provided, however, that to the extent any Option that is intended to qualify as an Incentive Stock Option cannot so qualify, the Option, to that extent, shall be deemed to be a Nonqualified Stock Option for all purposes of this 2000 Plan. 9. STOCK APPRECIATION RIGHTS 9.1 Grant of Stock Appreciation Rights. The Plan Administrator may grant a Stock Appreciation Right separately or in tandem with a related Option. 9.2 Tandem Stock Appreciation Rights. A Stock Appreciation Right granted in tandem with a related Option will give the Holder the right to surrender to Data I/O all or a portion of the related Option and to receive an appreciation distribution (in shares of Common Stock or cash or any combination of shares and cash, as the Plan Administrator, in its sole discretion, shall determine at any time) in an amount equal to the excess of the Fair Market Value for the date the Stock Appreciation Right is exercised over the exercise price per share of the right, which shall be the same as the exercise price of the related Option. A tandem Stock Appreciation Right will have the same other terms and provisions as the related Option. Upon and to the extent a tandem Stock Appreciation Right is exercised, the related Option will terminate. 9.3 Stand‐Alone Stock Appreciation Rights. A Stock Appreciation Right granted separately and not in tandem with an Option will give the Holder the right to receive an appreciation distribution in an amount equal to the excess of the Fair Market Value for the date the Stock Appreciation Right is exercised over the exercise price per share of the right. A stand‐alone Stock Appreciation Right will have such terms as the Plan Administrator may determine, except that the term of the right, if not otherwise established by the Plan Administrator, shall be ten (10) years from the Grant Date. 34 Proxy 9.4 Exercise of Stock Appreciation Rights. Unless otherwise provided by the Plan Administrator in the instrument that evidences the Stock Appreciation Right, the provisions of Section 7.6 relating to the termination of a Holder’s employment or services shall apply equally, to the extent applicable, to the Holder of a Stock Appreciation Right. 10. STOCK AWARDS 10.1 Grant of Stock Awards. The Plan Administrator is authorized to make Awards of Common Stock or of rights to receive shares of Common Stock to Participants on such terms and conditions and subject to such restrictions, if any (which may be based on continuous service with Data I/O or the achievement of performance goals related to (i) sales, gross margin, operating profits or profits, (ii) growth in sales, gross margin, operating profits or profits, (iii) return ratios related to sales, gross margin, operating profits or profits, (iv) cash flow, (v) asset management (including inventory management), or (vi) total shareholder return, where such goals may be stated in absolute terms or relative to comparison companies), as the Plan Administrator shall determine, in its sole discretion, which terms, conditions and restrictions shall be set forth in the instrument evidencing the Award. The terms, conditions and restrictions that the Plan Administrator shall have the power to determine shall include, without limitation, the manner in which shares subject to Stock Awards are held during the periods they are subject to restrictions and the circumstances under which forfeiture of Restricted Stock shall occur by reason of termination of the Holder's services or upon the occurrence of other events. 10.2 Issuance of Shares. Upon the satisfaction of any terms, conditions and restrictions prescribed with respect to a Stock Award, or upon the Holder's release from any terms, conditions and restrictions of a Stock Award, as determined by the Plan Administrator, Data I/O shall transfer, as soon as practicable, to the Holder or, in the case of the Holder's death, to the personal representative of the Holder's estate or as the appropriate court directs, the appropriate number of shares of Common Stock covered by the Award. 10.3 Waiver of Restrictions. Notwithstanding any other provisions of the 2000 Plan, the Plan Administrator may, in its sole discretion, waive the forfeiture period and any other terms, conditions or restrictions on any Restricted Stock under such circumstances and subject to such terms and conditions as the Plan Administrator shall deem appropriate. 11. OTHER STOCK‐BASED AWARDS The Plan Administrator may grant other Awards under the 2000 Plan pursuant to which shares of Common Stock (which may, but need not, be shares of Restricted Stock pursuant to Section 10) are or may in the future be acquired, or Awards denominated in stock units, including ones valued using measures other than market value. Such Other Stock‐Based Awards may be granted alone or in addition to or in tandem with any Award of any type granted under the 2000 Plan and must be consistent with the 2000 Plan’s purpose. 12. LOANS, INSTALLMENT PAYMENTS AND LOAN GUARANTEES To assist a Holder (excluding a Holder who is an officer or director of Data I/O) in acquiring shares of Common Stock pursuant to an Award granted under the 2000 Plan, the Plan Administrator, in its sole discretion, may authorize, either at the Grant Date or at any time before the acquisition of Common Stock pursuant to the Award, (a) the extension of a loan to the Holder by Data I/O, (b) the payment by the Holder of the purchase price, if any, of the Common Stock in installments, or (c) the guarantee by Data I/O of a loan obtained by the grantee from a third party. The terms of any loans, installment payments or loan guarantees, including the interest rate and terms of and security for repayment, will be subject to the Plan Administrator's discretion; provided, however, that repayment of any Company loan to the Holder shall be secured by delivery of a full‐recourse promissory note for the loan amount executed by the Holder, together with any other form of security determined by the Plan Administrator. The maximum credit available is the purchase price, if any, of the Common Stock acquired, plus the maximum federal and state income and employment tax liability that may be incurred in connection with the acquisition. 35 Proxy 13. ASSIGNABILITY Except as otherwise specified or approved by the Plan Administrator at the time of grant of an Award or any time prior to its exercise, no Award granted under the 2000 Plan may be assigned, pledged or transferred by the Holder other than by will or by the laws of descent and distribution, and during the Holder's lifetime, such Awards may be exercised only by the Holder. Notwithstanding the foregoing, and to the extent permitted by Section 422 of the Code, the Plan Administrator, in its sole discretion, may permit such assignment, transfer and exercise ability and may permit a Holder of such Awards to designate a beneficiary who may exercise the Award or receive compensation under the Award after the Holder's death; provided, however, that (i) any Award so assigned or transferred shall be subject to all the same terms and conditions contained in the instrument evidencing the Award, (ii) the original Holder shall remain subject to withholding taxes upon exercise, (iii) any subsequent transfer of an Award shall be prohibited and (iv) the events of termination of employment or contractual relationship set forth in subsection 7.6 shall continue to apply with respect to the original transferor‐Holder. 14. ADJUSTMENTS 14.1 Adjustment of Shares. In the event that, at any time or from time to time, a stock dividend, stock split, spin‐off, combination or exchange of shares, recapitalization, merger, consolidation, distribution to shareholders other than a normal cash dividend, or other change in Data I/O's corporate or capital structure results in (a) the outstanding shares, or any securities exchanged therefor or received in their place, being exchanged for a different number or class of securities of Data I/O or of any other corporation or (b) new, different or additional securities of Data I/O or of any other corporation being received by the holders of shares of Common Stock of Data I/O, then the Plan Administrator, in its sole discretion, shall make such equitable adjustments as it shall deem appropriate in the circumstances in (i) the maximum number and class of securities subject to the 2000 Plan as set forth in Section 4.1, (ii) the maximum number and class of securities that may be made subject to Awards to any individual Participant as set forth in Section 4.2, and (iii) the number and class of securities that are subject to any outstanding Award and the per share price of such securities, without any change in the aggregate price to be paid therefor. The determination by the Plan Administrator as to the terms of any of the foregoing adjustments shall be conclusive and binding. 14.2 Dissolution, Liquidation or Change in Control Transactions. (a) In the event of the proposed dissolution or liquidation of Data I/O, Data I/O shall notify each Holder at least fifteen (15) days prior to such proposed action. To the extent not previously exercised, all Awards will terminate immediately prior to the consummation of such proposed action. (b) Unless the applicable agreement representing an Award provides otherwise, or unless the Plan Administrator determines otherwise in its sole and absolute discretion in connection with any Change in Control, a Qualifying Award which is not vested or is not exercisable in full shall become exercisable or vested in connection with a Change in Control which becomes effective before the Holder’s service to Data I/O terminates as follows: (i) If the Qualifying Award remains outstanding following the Change in Control, is assumed by the surviving entity or its parent, or the surviving entity or its parent substitutes awards with substantially the same terms for such Qualifying Award, the vesting and exercisability of the Qualifying Award shall be accelerated to the extent of 25% of the Unvested Portion thereof, and the remaining 75% of the Unvested Portion of such Qualifying Award shall vest in accordance with the vesting schedule set forth in the applicable Award agreement. (ii) If the Qualifying Award remains outstanding following the Change in Control, is assumed by the surviving entity or its parent, or the surviving entity or its parent substitutes options with substantially the same terms for such Qualifying Award and if the Holder thereof is subject to an Involuntary Termination within 180 days following such Change in Control, then all Awards held by such Holder (or options issued in substitution thereof) shall become vested or exercisable in full, whether or not the vesting requirements set forth in the Award agreement have been satisfied, for a period of 90 days commencing on the effective date of such Holder’s Involuntary Termination, or if shorter, the remaining term of the Award. (iii) If a Qualifying Award does not remain outstanding, and either such Qualifying Award is not assumed by the surviving entity or its parent, or the surviving entity or its parent does not substitute awards with substantially the same terms for such Qualifying Award, such Qualifying Award shall become vested or exercisable in full, whether or not the vesting requirements 36 Proxy set forth in the Award agreement have been satisfied, for a period prior to the effective date of such Change in Control of a duration specified by the Plan Administrator, and thereafter the Award shall terminate. (c) Unless the applicable agreement representing an Award provides otherwise, or unless the Plan Administrator determines otherwise in its sole and absolute discretion in connection with any Change in Control, the vesting of Qualifying Shares shall be accelerated, and Data I/O’s repurchase right with respect to such shares shall lapse, in connection with a Change in Control which becomes effective before such Holder’s service to Data I/O terminates as follows: (i) If Qualifying Awards were outstanding at the effective time of the Change in Control and they are partially accelerated pursuant to Subsection (b)(i) above or if there were no Qualifying Awards outstanding at the effective time of the Change in Control, the vesting of all Qualifying Shares shall be accelerated to the extent of 25% of the Unvested Portion thereof, and the remaining 75% of the Unvested Portion of such Qualifying Shares shall vest in accordance with the vesting schedule set forth in the applicable Award agreement. (ii) If the preceding clause (i) applied and if a Holder of Qualifying Shares is subject to an Involuntary Termination within 180 days following the same Change in Control, then all Qualifying Shares held by such Holder (or shares issued in substitution thereof) shall become vested in full, whether or not the vesting requirements set forth in the applicable Award agreement have been satisfied. (iii) If Qualifying Awards were outstanding at the effective time of the Change in Control and they are accelerated in full pursuant to Subsection (b)(iii) above or otherwise, the vesting of all Qualifying Shares shall be accelerated in full, and Data I/O’s repurchase right with respect to all such shares shall lapse in full, whether or not the vesting requirements set forth in the applicable Award agreement have been satisfied. 14.3 Further Adjustment of Awards. Subject to the preceding Section 14.2, the Plan Administrator shall have the discretion, exercisable at any time before a sale, merger, consolidation, reorganization, dissolution, liquidation or Change in Control of Data I/O, as defined by the Plan Administrator, to take such further action as it determines to be necessary or advisable, and fair and equitable to Participants, with respect to Awards. Such authorized action may include (but shall not be limited to) establishing, amending or waiving the type, terms, conditions or duration of, or restrictions on, Awards so as to provide for earlier, later, extended or additional time for exercise, payment or settlement or lifting restrictions, differing methods for calculating payments or settlements, alternate forms and amounts of payments and settlements and other modifications, and the Plan Administrator may take such actions with respect to all Participants, to certain categories of Participants or only to individual Participants. The Plan Administrator may take such actions before or after granting Awards to which the action relates and before or after any public announcement with respect to such sale, merger, consolidation, reorganization, dissolution, liquidation or Change in Control that is the reason for such action. Without limiting the generality of the foregoing, if Data I/O is a party to a merger or consolidation, outstanding Awards shall be subject to the agreement of merger or consolidation. Such agreement, without the Holder’s consent, may provide for: (a) the continuation of such outstanding Award by Data I/O (if Data I/O is the surviving corporation); (b) the assumption of the 2000 Plan and some or all outstanding Awards by the surviving corporation or its parent; (c) the substitution by the surviving corporation or its parent of Awards with substantially the same terms for such outstanding Awards; or (d) the cancellation of such outstanding Awards with or without payment of any consideration. 14.4 Limitations. The grant of Awards will in no way affect Data I/O's right to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. 37 Proxy 14.5 Fractional Shares. In the event of any adjustment in the number of shares covered by any Award, any fractional shares resulting from such adjustment shall be disregarded and each such Award shall cover only the number of full shares resulting from such adjustment. 15. WITHHOLDING Data I/O may require the Holder to pay to Data I/O in cash the amount of any withholding taxes that Data I/O is required to withhold with respect to the grant, exercise, payment or settlement of any Award. Data I/O shall have the right to withhold from any Award or any shares of Common Stock issuable pursuant to an Award or from any cash amounts otherwise due or to become due from Data I/O to the Participant an amount equal to such taxes. Data I/O may also deduct from any Award any other amounts due from the Participant to Data I/O or a Subsidiary. 16. AMENDMENT AND TERMINATION OF 2000 PLAN 16.1 Amendment of 2000 Plan. The 2000 Plan may be amended by the Board in such respects as it shall deem advisable including, without limitation, such modifications or amendments as are necessary to maintain compliance with applicable statutes, rules or regulations; however, to the extent required for compliance with Section 422 of the Code or any applicable law or regulation, shareholder approval will be required for any amendment that will increase the aggregate number of shares as to which Incentive Stock Options may be granted or change the class of persons eligible to participate. Amendments made to the 2000 Plan which would constitute “modifications” to Incentive Stock Options outstanding on the date of such Amendments shall not be applicable to such outstanding Incentive Stock Options but shall have prospective effect only. The Board may condition the effectiveness of any amendment on the receipt of shareholder approval at such time and in such manner as the Board may consider necessary for Data I/O to comply with or to avail Data I/O, the Holders or both of the benefits of any securities, tax, market listing or other administrative or regulatory requirement which the Board determines to be desirable. Whenever shareholder approval is sought, and unless required otherwise by applicable law or exchange requirements, the proposed action shall require the affirmative vote of holders of a majority of the shares present, entitled to vote and voting on the matter without including abstentions or broker non‐votes in the denominator. 16.2 Termination Of 2000 Plan. Data I/O's shareholders or the Board may suspend or terminate the 2000 Plan at any time. The 2000 Plan will have no fixed expiration date; provided, however, that no Incentive Stock Options may be granted more than ten (10) years after the earlier of the 2000 Plan's adoption by the Board or approval by the shareholders. 17. GENERAL 17.1 Award Agreements. Awards granted under the 2000 Plan shall be evidenced by a written agreement which shall contain such terms, conditions, limitations and restrictions as the Plan Administrator shall deem advisable and which are not inconsistent with the 2000 Plan. 17.2 Continued Employment or Services; Rights In Awards. None of the 2000 Plan, participation in the 2000 Plan as a Participant or any action of the Plan Administrator taken under the 2000 Plan shall be construed as giving any Participant or employee of Data I/O any right to be retained in the employ of Data I/O or limit Data I/O's right to terminate the employment or services of the Participant. 17.3 Registration; Certificates For Shares. Data I/O shall be under no obligation to any Participant to register for offering or resale or to qualify for exemption under the Securities Act, or to register or qualify under state securities laws, any shares of Common Stock, security or interest in a security paid or issued under, or created by, the 2000 Plan, or to continue in effect any such registrations or qualifications if made. Data I/O may issue certificates for shares with such legends and subject to such restrictions on transfer and stop‐transfer instructions as counsel for Data I/O deems necessary or desirable for compliance by Data I/O with federal and state securities laws. 38 Proxy Inability of Data the authority deemed by Data I/O's counsel to be necessary for the lawful issuance and sale of any shares hereunder or the unavailability of an exemption from registration for the issuance and sale of any shares hereunder shall relieve Data I/O of any liability in respect of the non‐ issuance or sale of such shares as to which such requisite authority shall not have been obtained. regulatory body having jurisdiction, to obtain, from any I/O 17.4 No Rights As A Shareholder. No Option, Stock Appreciation Right or Other Stock‐Based Award shall entitle the Holder to any cash dividend, voting or other right of a shareholder unless and until the date of issuance under the 2000 Plan of the shares that are the subject of such Award, free of all applicable restrictions. 17.5 Compliance With Laws And Regulations. In interpreting and applying the provisions of the 2000 Plan, any Option granted as an Incentive Stock Option pursuant to the 2000 Plan shall, to the extent permitted by law, be construed as an “incentive stock option” within the meaning of Section 422 of the Code. 17.6 No Trust Or Fund. The 2000 Plan is intended to constitute an “unfunded” plan. Nothing contained herein shall require Data I/O to segregate any monies or other property, or shares of Common Stock, or to create any trusts, or to make any special deposits for any immediate or deferred amounts payable to any Participant, and no Participant shall have any rights that are greater than those of a general unsecured creditor of Data I/O. 17.7 Severability. If any provision of the 2000 Plan or any Award is determined to be invalid, illegal or unenforceable in any jurisdiction, or as to any person, or would disqualify the 2000 Plan or any Award under any law deemed applicable by the Plan Administrator, such provision shall be construed or deemed amended to conform to applicable laws, or, if it cannot be so construed or deemed amended without, in the Plan Administrator’s determination, materially altering the intent of the 2000 Plan or the Award, such provision shall be stricken as to such jurisdiction, person or Award, and the remainder of the 2000 Plan and any such Award shall remain in full force and effect. 18. EFFECTIVE DATE The 2000 Plan's effective date is the date on which it is adopted by the Board, so long as it is approved by Data I/O's shareholders at any time within twelve (12) months of such adoption. The original 2000 Plan was adopted by the Board on February 28, 2000, and approved by Data I/O's shareholders in May 2000. The 2000 Plan was amended and approved by the Board and Data I/O's shareholders in: 2002 to add an additional 200,000 shares, 2004, to add an additional 300,000 shares, 2006, to add an additional 300,000 shares, 2009, to add an additional 300,000 shares, 2011, to add an additional 300,000 shares, 2012, to add an additional 300,000 shares and 2017, to add an additional 250,000 shares of Common Stock to be reserved for issuance under the 2000 Plan. The 2000 Plan was amended and approved by the Board on April 30, 2014, to clarify certain sections of the 2000 Plan and approved by the Shareholders May 18, 2017. On February 21, 2018, the Board amended the 2000 Plan to add an additional 300,000 shares of Common Stock to be reserved for issuance under the 2000 Plan. 39 Proxy (This page intentionally left blank) Board of Directors Corporate Offices: Form 10-K Anthony Ambrose (2012) President/CEO Douglas W. Brown (2011) Executive Chairman All Star Directories, Inc. (Web Services Software) Brian T. Crowley (2012) Vice President of Engineering & Operations Alitheon (A Machine Vision Company) 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 Operations Officer 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 Am Haag 10 82166 Graefelfing Legal Counsel: 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 Operations Officer & Chief Financial Officer 6645 185th Ave NE, Suite 100, Redmond, WA 98052 (425) 881-6444 investorrelations@dataio.com. 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/investorrelations /financialreports.aspx or contact Joel Hatlen, Vice President, Chief Operations Officer & Chief Financial Officer, 6645 185th Ave NE, Suite 100, Redmond, WA 98052. Shareholders Meeting: The 2018 Annual Meeting of Shareholders will be held on Monday, May 21, 2018 at 10:00 a.m. Pacific Time at the Company’s headquarters: Data I/O Corporation 6645 185th Ave NE, Suite 100 Redmond, Washington 98052 Shareholder Information: 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 505000 Louisville, KY 40233 (888) 540-9882 Overnight correspondence Computershare 462 South 4th Street, Suite 1600 Louisville, KY 40202 Shareholder website: www.computershare.com/investor Shareholder online inquiries: https://www- us.computershare.com/investor/Contact Exchange Listing: Stock Symbol: DAIO NASDAQ Award Winning Programming & Security Provisioning Technology Programming Matters Since 1972 Data I/O has developed innovative solutions to enable the design and manufacture of electronic products for automotive, industrial/Internet-of-Things, consumer electronics, markets and their programming center and contract manufacturing partners. Today, our customers manufacture hundreds 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. Our expertise in programmable integrated circuits, global supply chain processes, factory integration 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, ensuring success for our customers. For more information, please visit www.dataio.com. Redmond, WA USA | Graefeling, Germany | Shanghai China
Continue reading text version or see original annual report in PDF format above