-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RHFqh/z+fhifVqkIkk4/nd1aSU7nNMvPTd7LXenk0CQoKsXn3emuC8v+sr44YdcS YhS9bUAKX5wZNRKW0rTjag== 0000912057-02-012695.txt : 20020415 0000912057-02-012695.hdr.sgml : 20020415 ACCESSION NUMBER: 0000912057-02-012695 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DATA I/O CORP CENTRAL INDEX KEY: 0000351998 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 910864123 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-10394 FILM NUMBER: 02594883 BUSINESS ADDRESS: STREET 1: 10525 WILLOWS RD NE STREET 2: P O BOX 97046 CITY: REDMOND STATE: WA ZIP: 98073-9746 BUSINESS PHONE: 4258676922 MAIL ADDRESS: STREET 1: P O BOX 97046 STREET 2: 10525 WILLOWS RD NE CITY: REDMOND STATE: WA ZIP: 98073-9746 10-K405 1 a2073908z10-k405.htm 10-K405
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the period from to
Commission File No. 0-10394

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

Washington
(State or other Incorporation)

91-0864123
(I.R.S. Employer Identification Number)

10525 Willows Road N.E., Redmond, Washington, 98052
(425) 881-6444

(Address, including zip code, of registrant's principle executive offices and
telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

NONE

Securities registered pursuant to Section 12(g) of the Act:

Common Stock (No Par Value)

Series A Junior Participating Preferred Stock

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

Aggregate market value of voting and non-voting common stock held
by non-affiliates of the registrant as of March 6, 2002

$11,496,612

7,664,408 shares of Common Stock, no par value, outstanding as of March 6, 2002

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Proxy Statement relating to its May 15, 2002
Annual Meeting of Shareholders are incorporated into Part III of this Annual Report on Form 10-K.

DATA I/O CORPORATION

FORM 10-K
For the Fiscal Year Ended December 31, 2001

INDEX

		Page
Part I
Item 1.	Business	3
Item 2.	Properties	16
Item 3.	Legal Proceedings	16
Item 4.	Submission of Matters to a Vote of Security Holders	16
Part II
Item 5.	Market for Registrant's Common Equity and Related Stockholder Matters	17
Item 6.	Selected Five-Year Financial Data	18
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20
Item 7A.	Quantitative and Qualitative Disclosure About Market Risk	25
Item 8.	Financial Statements and Supplementary Data	26
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	48
Part III
Item 10.	Directors and Executive Officers of the Registrant	48
Item 11.	Executive Compensation	48
Item 12.	Security Ownership of Certain Beneficial Owners and Management	48
Item 13.	Certain Relationships and Related Transactions	48
Part IV
Item 14.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	49
Signatures		54

PART I

Item 1. Business

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

General

Data I/O® Corporation ("Data I/O" or the "Company") is engaged in the design, manufacture, and sale of programming systems that are used by designers and manufacturers of electronic products. The Company's programming system products are used to program integrated circuits ("ICs" or "devices" or "semiconductors") with the specific unique data for the product within which the ICs will be used, and are an important tool for the electronics industry which is experiencing growing use of programmable ICs. Data I/O markets and distributes its programming systems worldwide, and is a global leader in this market. The Company was incorporated in the State of Washington in 1969.

Business Restructuring

In the second quarter of 2001, the Company recorded a restructuring charge of $460,000 associated with actions taken to reduce the Company's breakeven point and realign the Company with its growth activities. This operational repositioning was mandated by the impact of the economic slowdown and the decline in capital spending across a high number of customer groups had on general demand for programming equipment.

The Company's second quarter repositioning included the following four components: a reduction in the Company's global workforce of approximately 40 persons or 20% of the workforce; discontinuance or reallocation of numerous projects and activities not essential to the Company's long-term goals; streamlining of activities to decrease discretionary marketing, distribution and promotional expenses; and consolidation of numerous functions across the organization to create a team which was more productive and able to respond faster to global customer needs.

On July 12, 2001, during its third quarter, the Company announced that it would take further strategic actions to reduce its breakeven point, which included the following actions: closure of a facility in Germany and moving its operations to other locations within the Company; combining the Company's four product families into two business groups; consolidating service groups across the organization to create a team more responsive to global customer needs; and targeting certain other expense reductions for the third quarter, including a closure of the Company's Redmond facility for one week. A restructuring charge of $499,000 was recorded in the third quarter.

In the fourth quarter of 2001, the Company reduced its staff by an additional 29 persons. The actions taken were meant to further reduce the Company's breakeven point and bring it closer to forecasted revenues, and to maintain the cash position of the Company. The Company incurred restructuring costs of $252,000 during the fourth quarter.

At December 31, 2001 all restructuring expenses associated with the activities detailed above were paid except for approximately $88,000, which was primarily associated with facility consolidation, and consulting and legal fees.

The Company believes that progress made in these areas has positioned the Company for a successful turnaround. However, the Company cannot guarantee that the Company will return to profitable operations, nor is there any assurance that its turnaround efforts will be successful.

Industry Background

Data I/O operates in a niche of the electronics equipment industry that provides programming systems used to load specific data and design information into programmable devices. These systems are purchased by companies that design and manufacture electronic products that utilize programmable devices. These companies, who are Data I/O's primary customers, design and manufacture a broad range of electronic products for both consumer and industrial use.

Programmable devices represent an approximately $13 billion segment of the semiconductor industry, and have grown more rapidly than the semiconductor industry as a whole in recent years. Programmable devices offer advantages to the electronic product designer to bring products to market more quickly and inexpensively than using fixed-function devices, and can offer the advantage of simpler product upgrades. Programmable devices also offer attractive functionality to the user of the electronic product, such as storing personal information or customizing product functionality. As a result, use of programmable devices is growing rapidly in both high-volume consumer electronic products and more complex electronic systems.

Due to this growth, there are currently over 100 vendors of programmable devices, and thousands of different programmable devices on the market, designed with a variety of different technologies developed by the different vendors. The technology trends driving the programmable device market result in a broad range of requirements for programming information into these devices. These technology trends include high-density flash memory, complex and high pin-count programmable logic, small chip-scale packages, low-voltage operation, in-system programming protocols, and multiple semiconductor technologies requiring different programming methods. These technology advances require advanced programming equipment to support them.

Automated programming systems are increasingly used to handle the miniaturized and fine-pitch programmable device packages in high-volume manufacturing and programming. This automated handling equipment is critical for minimizing damage to the delicate leads of the devices and for increasing handling and programming capacity. The integration of programming and handling functions into one product for the high-volume customer has been a significant development for the Company over the past few years as it tries to provide a complete programming solution for both high-volume manufacturing environments and high-volume programming center customers.

Products

In order to accommodate the expanding variety and quantities of programmable devices being manufactured today, Data I/O offers multiple solutions to cover many different types of devices used by its customers in the various market segments and applications. The Company works closely with major manufacturers of programmable devices to develop its products to meet the requirements of a particular device. Many of these IC manufacturers endorse Data I/O's programming systems as equipment they recommend for end-user applications, as well as for use in their own environments. Just as breadth of device support can be critical to some customers, high performance and fit to the customer's process is increasingly critical, particularly for high-volume manufacturers using programmable devices within their products. The Company accordingly invested heavily in developing products to address the needs of these high volume focused needs and process-oriented customers.

Data I/O's line of programming systems includes a broad range of products, systems, modules, and accessories, which the Company groups into two general categories: automated programming systems and non-automated programming systems. Automated programming systems are broken down further into two categories: off-line and in-line. In addition, the Company provides device support and service on all of its products.

Within the categories of automated and non-automated systems, Data I/O targets specific solutions at specific market segments. Data I/O optimizes the solution based on the customer's device, process and business needs. Data I/O believes the market growth opportunity is no longer addressed by relatively costly universal solutions with very broad device support but instead by optimized systems which provide customers with the economical programming solutions for high volumes of devices and lean processes. Data I/O's recent product introductions have focused on these high growth markets and targeted their specific needs.

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

Automated Programming Systems

The high growth rates in Flash device consumption and the growth of the industries using Flash make this customer group a priority for Data I/O. As the amount of memory used in these areas increases, manufacturers are faced with issues related to programming times and costs. To address these issues and needs, Data I/O introduced the ProLINE-RoadRunner two years ago, a unique and innovative in-line programming system, with programming speed capability which outstretches the speed at which Flash devices can currently accept data. The ProLINE-RoadRunner mounts directly onto the assembly machine in the production line and delivers programmed parts from blank reels of devices, to the production line in a just in time fashion. The ProLINE-RoadRunner eliminates production bottlenecks associated with high density Flash devices, allowing last minute firmware changes to be made and eliminating programmed part inventories, ultimately streamlining and reducing the customers production and process costs. The ProLINE-RoadRunner enables customers to implement lean processes and is a key element to Data I/O's "Connected Strategy", allowing customers and partners to manage their firmware supply chain. The ProLINE-RoadRunner retails at $135,000. The Company has designed ProLINE-RoadRunner products to support surface mount placement machines manufactured by Siemens, Fuji, Universal and Assembleon.

The PS200 and PS300 automated programming solution offer highly flexible solutions for off-line batch programming. The PS200 and PS300 systems can be configured to support not only Flash devices, but a wide variety of other devices, and provides a number of marking, labeling, and input/output options. Most importantly, changeovers are extremely fast. This feature allows the electronic manufacturing services "EMS" or programming center to rapidly respond to diverse demands with very little downtime. The PS200 and PS300 systems can be optimized for any job to maximize throughput and when combined with fast changeover times and high reliability provide the highest levels of output during a production shift. For smaller memory, microcontroller and logic devices, the Company's ProMaster systems offer a cost-effective, high-yield automated solution. Prices for these off-line systems range from $50,000 to $500,000, with an average configuration costing between $200,000-$300,000.

Non-Automated Programming Systems

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

Engineering customers typically use single-site programming systems during the prototype phase of a new design, and may purchase inexpensive systems for limited device needs or more expensive

systems to support more complex devices or a large variety of device types. Single-site programming systems can perform programming on only one programmable device at a time.

Data I/O offers a range of high quality, universal single socket manual programming solutions through its UniSystem family of programming systems. The UniSite and 3980 xpi programming systems offer the highest levels of signal integrity which ensure the highest programming standards. Popular in military, aerospace, telecommunications and other mission critical applications, the systems range from $7,000 to $25,000.

For applications which are more cost constrained or need higher volumes of devices programmed, the ChipWriter and Sprint families of products offer excellent value for the money and versatility. The Sprint Quad and Octal programming systems offering 4 and 8 socket universal programming configurations for the higher volume applications. These two families of products range in price from under $1,000 to $16,000 for the multiple socket solutions.

Data I/O in February 2002 introduced the FlashPAK Networked Programming System, which leverages the high-speed proprietary programming technology in the ProLINE-RoadRunner system. The FlashPAK system priced at $6,000 is the world's fastest programming architecture, limited today only by the speed at which Flash devices can accept data. As device technology allows faster programming times, customers can benefit from FlashPAK's ability to take advantage of the increased speed. The FlashPAK is another key element of Data I/O's connected strategy providing original equipment manufacturers "OEMs" and new product introduction "NPI" facilities with a high performance Flash programming system that can be used to validate designs before moving down the firmware supply chain. For manufacturing applications, the FlashPAK is a high speed, multi-socket, small footprint desktop solution that provides manual programming operations with the highest level of flexibility at the lowest cost per part.

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

Customers

The Company sells its products to customers worldwide in a broad range of industries including telecommunications, consumer electronics, computers, test and measurement, medical, transportation, military, aerospace, electronic contract manufacturing, and semiconductors. These customers either design and/or manufacture electronic products that incorporate programmable devices or provide device programming services. During 2001, the Company sold products to over 2,500 customers throughout the world, none of whom accounted for 10% or more of the Company's net sales.

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

Flash memory growth. The Flash memory segment is experiencing some of the most impressive growth of all programmable devices. As cell phones, PDAs, games consoles, set top boxes and other consumer devices become more capable, powerful and compact the demand for Flash units and megabytes continues to grow at a rate >10% even in the light of decreasing semiconductor revenues in 2001, i.e. the number of Flash devices forecast for 2002 is 1.4 billion units. Customers in these

segments include Siemens, Motorola, Kyocera, Nokia, Ericsson, Pace, Microsoft and their EMS partners including Flextronics, Solectron, Celestica and Samina-SCI.

Microcontroller growth. As the demand for smarter electronic devices increases, this drives the demand for greater numbers of microcontroller devices. Many household appliances today contain a microcontroller to control the critical functions of the product and provide new features. Examples of such appliances include toasters, refrigerators, garage door openers and even thermostats. This fact creates new market opportunities for Data I/O. In addition, the number of microcontrollers in automotive electronic applications is growing rapidly, with some cars having as many as 60 or more microcontrollers, that control functions from airbag and ABS systems to air conditioning, information centers and entertainment and communication systems. The automotive segment is also therefore a critical and growing target segment for Data I/O solutions.

Vision & Mission. Data I/O's mission is to design and deliver innovative customer-focused programming solutions, which enable customers to manage their firmware supply chain, getting their products to market faster, while reducing costs in their process. Data I/O products and services are designed to make programming easy, delighting its customers and satisfying their whole process needs.

Helping customers manage their firmware supply chain. In modern electronics, hardware has increasingly become a commodity. Wireless telephones are a notable example. Most of the innovation and competitive advantage of a telephone comes from the software buried inside the telephone, which is commonly referred to as "firmware". Companies use firmware to differentiate their products from their competitors' products, constantly writing new code to add features. This allows them to build multiple models with identical hardware and many versions of firmware, all on one production line. Any improvement in production efficiency boosts the profitability of all products on that line. Many OEM's now outsource production to specialists in EMS to maximize the profit impact from highly efficient production. The challenges of managing the firmware supply chain remain, however, and can even increase with this additional interface. The Company's systems allow its customers—both OEM and EMS companies—to build telephones with the exact firmware (feature set) that consumers specify, virtually real-time with the latest software release. Thus, the Company helps its customers eliminate inventory risks, delays, rework, and lost market opportunities while enabling them to better serve their customers.

Data I/O realizes this vision through it's newly introduced connected strategy, which leverages network capable products to move the customer's intellectual property seamlessly and securely up and down the supply chain.

Geographic Markets and Distribution

The Company markets and sells its products through a combination of direct sales, internal telesales, and indirect sales representatives and distributors. The Company continually evaluates its sales channels against its evolving markets and customers.

U.S. Sales

The Company markets its products throughout the U.S. using a variety of sales channels including its own field sales management personnel, independent sales representatives, and a direct telesales organization. The Company's U.S. independent sales representatives obtain orders on an agency basis, with shipments made directly to the customer by the Company. Sales of the Company's semiconductor programming equipment products requiring installation by the Company that is other than perfunctory are recorded when installation is complete, or at the later of customer acceptance or installation, if an acceptance clause is specified in the sales terms. Revenue from other product sales is recognized at the

time of shipment. Revenue from the sale of service and update contracts is recorded as deferred revenue and recognized on a straight-line basis over the contractual period.

Foreign Sales

Foreign sales represented 64% of net sales of the Company's programming systems in each of 2001 and 2000 and 58% in 1999 (see Note 14 of "Notes to Consolidated Financial Statements"). Foreign sales are made through the Company's wholly-owned subsidiaries in Germany, China and Canada, as well as through independent distributors and sales representatives located in 35 other countries. Sales made through foreign subsidiaries requiring installation by the Company that is other than perfunctory are recorded when installation is complete, or at the later of customer acceptance or installation, if an acceptance clause is specified in the sales terms. Revenue from other product sales is recognized at the time of shipment. Revenue from the sale of service and update contracts is recorded as deferred revenue and recognized on a straight-line basis over the contractual period. The Company's independent foreign distributors purchase Data I/O products in U.S. Dollars for resale and the sale is recognized at the time of shipment to the distributor. As with U.S. sales representatives, sales made by international sales representatives are on an agency basis with shipments made directly to the customer by the Company. These sales are denominated in U.S. Dollars and are recognized upon shipment, if installation is perfunctory or does not need to be performed by the Company, or when the equipment is installed at the end-user's site, if installation is more than perfunctory and is to be performed by the Company, or in the case where acceptance is required, upon acceptance.

Total foreign sales are determined by the geographic area into which the products are sold and delivered, and include not only sales by foreign subsidiaries but also export sales from the U.S. to the Company's foreign distributors and representatives' customers. Foreign sales do not include transfers between the Company and its foreign subsidiaries. Export sales are subject to U.S. Department of Commerce regulations. The Company has not, however, experienced any difficulties to date as a result of these requirements.

Fluctuating exchange rates and other factors beyond the Company's control, such as international monetary stability, tariff and trade policies, and U.S. and foreign tax and economic policies, affect the level and profitability of foreign sales. The Company is unable to predict the effect of such factors on its business.

Competition

The competition in the programming systems market is highly fragmented with a large number of smaller organizations offering inexpensive solutions. It is estimated that for the past few years the total number of programming systems sold each year is less than $150 million, with Data I/O capturing an estimated 20 to 25% of the global market.

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

Therefore, addressing customers process needs has rapidly become an important factor and is likely the key to increasing the opportunity for programming solutions beyond the $150 million threshold. Data I/O estimates that customers are spending between $1 to $2 billion a year on programming memory, microcontroller and logic devices and much of this programming is achieved through the use of the customers' test equipment or homegrown solutions. The main competitive

solution in the programmable market is, therefore, the in-house solution, and the opportunity exists to substitute customers with more economical and more easily maintainable solutions to solve the problems which traditional programmers do not address. Boundary scan tools also fall into this category, this is still a small market with a number of small companies participating who primarily focus on test systems. There has been a trend towards using in-system programming, which Data I/O has the opportunity to address.

Manufacturing, Raw Materials, and Backlog

During 2001, Data I/O consolidated its manufacturing operations in its principal facility in Redmond, Washington, where it manufactures automated and non-automated programming systems and closed its operation in Amtzell, Germany where it had manufactured adapters. In its manufacturing processes, the Company uses a combination of standard components, proprietary custom ICs and fabricated parts manufactured to Data I/O specifications. Most components used are available from a number of different suppliers and subcontractors but certain items, such as some handler and programmer subassemblies, custom ICs, hybrid circuits and connectors, are purchased from single sources. The Company believes that additional sources can be developed for present single-source components without significant difficulties in obtaining supplies. There can, however, be no assurance that single-source components will continue to be readily available. If the Company cannot develop alternative sources for these components, or if it experiences deterioration in relationship with these suppliers, there may be delays or reductions in product introductions or shipments, which may materially adversely affect the Company's operating results. To best support its long-term direction, the Company continues to evaluate its manufacturing capabilities against future requirements for new products and technologies and the related investment required to enhance or upgrade capabilities versus its options for outsourcing.

Manufacturing of the Sprint non-automated programming systems, which were integrated into the Data I/O product line during 1999 after the acquisition of SMS in November 1998, is currently provided by an outside supplier located in Germany. Shipments from the outside supplier are received at the Company's plant in Redmond where they are combined with internally produced tops and adapters to complete the manufacturing process. These operations were moved from the Amtzell, Germany operation in 2001.

In accordance with industry practices, generally all orders are subject to cancellation prior to shipment without penalty except for contracts calling for custom configuration. To date, such cancellations have not had a material effect on the Company's sales volume. To meet customers' delivery requirements, Data I/O manufactures certain of its products based upon a combination of backlog and anticipated orders. Most orders are scheduled for delivery within 1 to 60 days after receipt of the order. The Company's backlog of pending orders was approximately $1.9 million, $3.0 million, and $1.7 million as of December 31, 2001, December 28, 2000 and December 30, 1999, respectively. The size of backlog at any particular date is not necessarily a meaningful indicator of the trend of the Company's business.

Research and Development

Data I/O believes that continued investment in research and development is critical to the Company's future success. The Company continues to make substantial investments in the development of new technologies and products and significant enhancement of existing products. Future growth is to a large extent dependent upon the timely development and introduction of new products and algorithm development for the latest programmable devices. The Company is currently focusing its research and development efforts in its strategic growth markets, namely new programming technology and automated handling systems for the manufacturing environment. The Company is also focusing on increasing its capacity and responsiveness for new device support requests from customers and

programmable IC manufacturers by revising and enhancing its internal processes and tools. During this past year the Company's research and development has resulted in additional surface mount placement versions of RoadRunner, PS200 and PS300, XPI and FlashPak.

During 2001, 2000 and 1999 the Company made expenditures for research and development of $6,740,000, $8,716,000, and $8,403,000, respectively, representing 25.1% 20.3% and 24.6% of net sales, respectively. Research and development costs are expensed as incurred.

Patents, Copyrights, Trademarks, and Licenses

Intellectual property rights applicable to various Data I/O products include patents, copyrights, trade secrets and trademarks. Rather than depend on patents and copyrights, which are frequently outdated by rapid technological advancements in the electronics industry, Data I/O relies primarily on product development, engineering, manufacturing and marketing skill to establish and protect its market position. However, for certain strategic technology the Company uses patent protection as an additional means of protecting its intellectual property.

The Company attempts to protect its rights in proprietary software products, including its TaskLink and product, by retaining the title to and copyright of the software and documentation, by including appropriate contractual restrictions on use and disclosure in its licenses, and by requiring its employees to execute non-disclosure agreements. The Company's software products are typically shipped in sealed packages on which notices are prominently displayed informing the end-user that, by breaking the seal of the packaging, the end-user agrees to be bound by the license agreement contained in the package. The license agreement includes limitations on the end-user's authorized use of the product, as well as restrictions on disclosure and transferability. The legal and practical enforceability and extent of liability for violations of license agreements that purport to become effective upon opening of a sealed package are unclear. The Company is not aware of any situation where a license agreement restricting an end-user's authorized use of a licensed product resulted in enforcement action. The Company's software products are not normally sold separately from sales of programming systems. However, on those occasions where software is sold separately, revenue is recognized when a sales agreement exists, when delivery has occurred, when the fee is fixed or determinable, and when collectibility is probable.

Because of the rapidly changing technology in the semiconductor, electronic equipment and software industries, there is a possibility that portions of the Company's products might infringe upon existing patents or copyrights, and the Company may, therefore, be required to obtain licenses or discontinue the use of the infringing technology. The Company believes that any exposure it may have regarding possible infringement claims is a reasonable business risk similar to that being assumed by other companies in the electronic equipment and software industries. However, any claim of infringement, with or without merit, could be costly and a diversion of management's attention, and an adverse determination could adversely affect the Company's reputation, preclude it from offering certain products, and subject it to substantial liability.

Employees

As of December 31, 2001, the Company had 155 total employees, of which 29 were located outside the U.S. The Company also utilizes independent contractors for specialty work, primarily in research and development, and utilizes temporary workers to adjust capacity to fluctuating demand. Many of Data I/O's employees are highly skilled and the Company's continued success will depend in part upon its ability to attract and retain employees who are in great demand within the industry. None of the Company's employees are represented by a collective bargaining unit and the Company believes relations with its employees are favorable.

Environmental Compliance

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

Executive Officers of the Registrant

Set forth below is certain information concerning the executive officers of the Company as of March 6, 2002:

Name	Age	Position
Frederick R. Hume	59	President and Chief Executive Officer
Joel S. Hatlen	43	Vice President Finance Chief Financial Officer Secretary and Treasurer
John Vicklund	56	Vice President Human Resources
Irene Bjorklund	54	Vice President of Sales and Marketing

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

Joel S. Hatlen joined the Company in September 1991 as a Senior Tax Accountant and became Tax Manager in December 1992. He was promoted to Corporate Controller in December 1993. In February 1997, he was named Chief Accounting Officer and Corporate Controller. In January 1998, he was promoted to Vice President of Finance and Chief Financial Officer, Secretary and Treasurer. From September 1981 until joining the Company, Mr. Hatlen was employed by Ernst & Young LLP, where his most recent position was Senior Manager.

John Vicklund joined the Company in January 2001 as Vice President of Human Resources. Prior to joining Data I/O Mr. Vicklund served as Director of Human Resources at Canyon Creek Cabinet Company from March 2000 to December 2000. Mr. Vicklund also served as Director of Human Resources at Pacific Aerospace & Electronics, Inc. from March 1999 to November 1999, and Hatch & Kirk Inc. from June 1997 to February 1999. Mr. Vicklund served as a Project Coordinator for South King County Tech Prep Consortium from January 1996 to November 1996. Mr. Vicklund was employed from 1974 to 1994 at ELDEC, serving as Vice President of Human Resources.

Irene Bjorklund joined the Company in March 2001 as Vice President of Sales and Marketing. Prior to joining Data I/O Ms. Bjorklund served as a principal in Bjorklund Consulting. Ms. Bjorklund served as a Senior Vice President at The Sentry Group from April 1997 to October 1999. She was employed at the Accugraph Corporation from January 1995 to October 1996 as Alliance Program Manager. Ms. Bjorklund served in positions of increasing responsibility at Hewlett Packard from November 1972 to October 1992, including positions as Area Sales Manager and Area General Manager. She also served as a scientific programmer at Bendix Corporation from October 1969 to August 1972.

Cautionary Factors That May Affect Future Results

The Company's disclosure and analysis in this Annual Report contains some forward-looking statements. Forward-looking statements provide the Company's current expectations or forecasts of future events. The reader can identify these statements by the fact that they do not relate strictly to historical or current facts. In particular, these include statements relating to future action, prospective products, new technologies, future performance or results of current and anticipated products, sales efforts, expenses, outsourcing of function, the outcome of contingencies, and financial results.

Any or all of the forward-looking statements in this Annual Report or in any other public statement made may turn out to be wrong. They can be affected by inaccurate assumptions the Company might make or by known or unknown risks and uncertainties. Many factors—for example, product competition and product development—will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may materially vary.

We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. The reader is advised, however, to consult any future disclosures the Company makes on related subjects in the Company's 10-Q, 8-K and 10-K reports to the SEC and press releases. Also, note that the Company provides the following cautionary discussion of risks, uncertainties and possible inaccurate assumptions relevant to its business. These are factors that the Company thinks could cause the Company's actual results to differ materially from expected and historical results. Other factors besides those listed here could also adversely affect the Company. This discussion is permitted by the Private Securities Litigation Reform Act of 1995.

RISK FACTORS

Development, Introduction and Shipment of New Products

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

For example, the Company may encounter these problems:

•: technical problems in the development of a new programming system platform or the robotics for new automated handing systems
•: inability to hire qualified personnel
•: delays or failures to perform by third parties involved in the Company's development projects

The Company's sales in the past four years have been significantly adversely affected by delays in developing and releasing new products. Some customers waited for the Company's new products, while many others purchased products from its competitors. Delays in the completion and shipment of new products, or failure of customers to accept new products, may result in a decline in sales in 2002.

Variability in Quarterly Operating Results

The Company's operating results tend to vary from quarter to quarter. The Company's revenue in each quarter is substantially dependent upon orders received within that quarter. Conversely, the Company's expenditures are based on investment plans and estimates of future revenues. The Company may, therefore, be unable to quickly reduce its spending if its revenues decline in a given quarter. As a result, operating results for that quarter will suffer. The Company's results of operations for any one quarter are not necessarily indicative of results for any future periods.

Other factors which may cause the Company's quarterly operating results to fluctuate include:

•: increased competition
•: timing of new product announcements
•: product releases and pricing changes by us or the Company's competitors
•: market acceptance or delays in the introduction of new products
•: production constraints
•: the timing of significant orders
•: customers' budgets
•: adverse movements in exchange rates, interest rates or tax rates
•: cyclical nature of demand for the Company's customers' products
•: general economic conditions in the countries where the Company sells products

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

Rapid Technological Change

Product technology in the Company's industry evolves rapidly, making timely product innovation essential to success in the marketplace. The introduction of products with improved technologies or features may render the Company's existing products obsolete and unmarketable. Technological advances that may negatively impact the Company's business include:

•: new device package types requiring hardware and software changes in order to be programmed by the Company's products
•: electronics equipment manufacturing practices, such as widespread use of in-circuit programming
•: customer software platform preferences different from those on which the Company's products operate
•: more rigid industry standards, which would decrease the value-added element of the Company's products and support services

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

Economic and Market Conditions

The Company's business is highly impacted by capital spending plans and other economic cycles that affect the users and manufacturers of ICs. These industries are highly cyclical and are characterized by rapid technological change, short product life cycles, fluctuations in manufacturing capacity and pricing and gross margin pressures. As the Company experienced in 2001, its operations may in the future reflect substantial fluctuations from period-to-period as a consequence of such industry patterns, general economic conditions affecting the timing of orders from major customers, and other factors affecting capital spending. These factors could have a material adverse effect on the Company's business and financial condition.

Competition

Technological advances have reduced the barriers of entry into the programming systems markets. The Company expects competition to increase from both established and emerging companies. Certain competitors have increased their market share in the Company's business. The Company believes this is due in part to its product development delays. If the Company fails to compete successfully against current and future sources of competition, the Company's profitability and financial performance will be adversely impacted.

Dependence on IC Manufacturers

The Company works closely with most semiconductor manufacturers to ensure that its programming systems comply with their requirements. In addition, many semiconductor manufacturers recommend the Company's programming system for use by users of their programmable devices. These working relationships enable the Company to keep its programming systems product line up-to-date and provide end-users with broad and current programmable device support. The Company's business may be adversely affected if its relationships with semiconductor manufactures deteriorate.

Dependence on Suppliers

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

Because the Company relies on a small number of suppliers for certain parts, the Company is subject to possible price increases by these suppliers. Also, the Company may be unable to accurately forecast its production schedule. If the Company underestimates its production schedule, suppliers may be unable to meet the Company's demand for components. This delay in the supply of key components may materially adversely affect the Company's business. Over estimation of demand will lead to excess inventories that may become obsolete before they are used.

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

Reliance on Third-Party Distribution Channels

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

International Operations

International sales represented 64% of the Company's net revenue for the fiscal year ended December 31, 2001. The Company expects that international sales will continue to be a significant portion of its net revenue. International sales may fluctuate due to various factors, including:

•: migration of manufacturing to low cost geographies

•: unexpected changes in regulatory requirements
•: tariffs and taxes
•: difficulties in staffing and managing foreign operations
•: longer average payment cycles and difficulty in collecting accounts receivable
•: fluctuations in foreign currency exchange rates
•: impact of the Euro
•: compliance with applicable export licensing requirements
•: product safety and other certification requirements
•: political and economic instability

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

The Company operates subsidiaries in Germany, China and Canada. The Company's business and financial condition is sensitive to currency exchange rates or any other restrictions imposed on their currencies. Currency exchange fluctuations in Canada, China and Germany may adversely affect the Company's investment in its subsidiaries.

Protection of Intellectual Property

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

Acquisitions

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

•: burdening management and the Company's operating teams during the integration of the acquired entity
•: diverting management's attention from other business concerns
•: failure to successfully integrate the acquired products
•: lack of acceptance of the acquired products by the Company's sales channels or customers
•: entering markets where the Company has no or limited prior experience
•: potential loss of key employees of the acquired company
•: additional burden of support for an acquired programmer architecture

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

Dependence on Key Personnel

Refer to the section captioned "Employees" above.

Potential Volatility of Stock Price

The stock prices of technology companies tend to fluctuate significantly, and many experienced significant reductions in value during 2001. The Company believes factors such as announcements of new products by it or its competitors and quarterly variations in financial results may cause the market price of its Common Stock to fluctuate substantially. In addition, overall volatility in the stock market, particularly in the technology company sector, is often unrelated to the operating performance of companies. If these market fluctuations continue in the future, they may adversely affect the price of the Company's Common Stock.

Item 2. Properties

In May 1997, the Company completed the sale of the land and building comprising its Redmond, Washington corporate headquarters and it is currently leasing the 96,000 square foot building on a 10-year leaseback agreement with an option to renew the lease for an additional 10 years. This lease required base annual rental payments in 2001 of approximately $981,000. See Note 6 of "Notes to Consolidated Financial Statements." As part of the Company's 1999 restructuring plan implementation, the Company vacated one floor of the leased Redmond facility (approximately 25,000 square feet) and have sublet the majority of this space for a period of 28 months beginning January 1, 2000, at a rate of approximately $33,000 per month.

In addition to the Redmond facility, approximately 9,000 square feet is leased at five foreign locations including the Company's Canadian sales and service office located in Mississauga, Ontario, German sales, service and engineering operations located in Munich, Germany, and 3 sales and service offices in China. As part of the 2001 restructuring of the Company's German operations, the Company discontinued its manufacturing operations in Amtzell and consolidated the engineering and support operations into the Company's facilities in Munich and Redmond. The building space in Amtzell has been vacated and is no longer being leased by the Company.

Item 3. Legal Proceedings

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

Item 4. Submission of Matters to a Vote of Shareholders

No matters were submitted for a vote of shareholders of the Company during the fourth quarter of the fiscal year ended December 31, 2001.

PART II

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

The following table shows, for the periods indicated, the high and low bid information for the Company's common stock as reported by the NASDAQ National Market tier of The NASDAQ Stock Market (NASDAQ symbol is DAIO).

	Period	High		Low
2001	Fourth Quarter	$	2.11	$	1.30
	Third Quarter		2.81		1.50
	Second Quarter		2.84		1.50
	First Quarter		3.81		1.50
2000	Fourth Quarter	$	5.25	$	1.88
	Third Quarter		4.88		3.63
	Second Quarter		5.25		2.00
	First Quarter		7.13		2.38

The approximate number of shareholders of record as of March 6, 2002 was 774.

Except for a special cash dividend of $4.15 per share paid on March 8, 1989, the Company has not paid cash dividends on its common stock and does not anticipate paying regular cash dividends in the foreseeable future.

No shares of unregistered securities were made by the Company during the period ended December 31, 2001.

Item 6. Selected Five-Year Financial Data

The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and the notes thereto and the information contained herein in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company adopted SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101) in the fourth quarter of fiscal year 2000, effective beginning of the first quarter of fiscal year 2000. The pro forma information in the table below reflects the adoption of SAB 101. Historical results are not necessarily indicative of future results.

		Year Ended
		Dec. 31, 2001			Dec. 28, 2000			Dec. 30, 1999			Dec. 31, 1998			Dec. 25, 1997
		(In Thousands, Except Employee and Per Share Data)
For The Year:
	Net sales	$	26,826		$	42,909		$	34,113		$	35,338		$	46,284
	Cost of goods sold		15,078			22,760			17,948			24,933			22,748

	Gross margin		11,748			20,149			16,165			10,405			23,536
	Research and development		6,740			8,716			8,403			9,109			7,807
	Selling, general and administrative		9,707			10,616			11,022			14,386			13,924
	Write-off acquired in-process R&D(1)		—			—			—			1,959			—
	Net provision for business restructuring(2)		1,211			(255	)		(215	)		4,370			—

	Operating income (loss)		(5,910	)		1,072			(3,045	)		(19,418	)		1,805
	Non-operating income		124			876			1,920			952			2,757

	Income (loss) from continuing operations before income taxes and cumulative effect of accounting change		(5,786	)		1,948			(1,125	)		(18,466	)		4,562
	Income tax expense		(224	)		(36	)		(55	)		(58	)		(176	)

	Income (loss) from continuing operations, before cumulative effect of accounting change		(6,010	)		1,912			(1,180	)		(18,524	)		4,386
	Income from discontinued operations		—			90			831			894			7,114
	Cumulative effect of accounting change		—			(2,531	)		—			—			—

	Net income (loss)	$	(6,010	)	$	(529	)	$	(349	)	$	(17,630	)	$	11,500
	Pro forma net income (loss)							$	(2,880	)	$	(17,630	)	$	11,500

At Year-end:
	Working capital	$	12,010		$	16,792		$	16,179		$	15,084		$	33,226
	Total assets	$	20,340		$	28,746		$	30,050		$	40,089		$	57,736
	Total debt		—			—			—		$	564		$	2,000
	Stockholders' equity	$	12,154		$	18,039		$	18,058		$	18,909		$	34,614
	Number of employees from continuing operations		155			224			199			270			328

Common Stock Data(3):
	Basic earnings per share:
		From continuing operations, after taxes, before cumulative effect of accounting change	$	(0.79	)	$	0.26		$	(0.16	)	$	(2.59	)	$	0.63
		Net income (loss)	$	(0.79	)	$	(0.07	)	$	(0.05	)	$	(2.46	)	$	1.66
		Pro forma net income (loss)							$	(0.40	)	$	(2.46	)	$	1.66
	Diluted earnings per share:
		From continuing operations, after taxes, before cumulative effect of accounting change	$	(0.79	)	$	0.26		$	(0.16	)	$	(2.59	)	$	0.62
		Net income (loss)	$	(0.79	)	$	(0.07	)	$	(0.05	)	$	(2.46	)	$	1.62
		Pro forma net income (loss)							$	(0.40	)	$	(2.46	)	$	1.62
	Book value per share at year-end		$	1.59		$	2.41		$	2.48		$	2.63		$	4.92
	Shares outstanding at year-end			7,614			7,495			7,290			7,187			7,039
	Weighted-average basic shares outstanding			7,572			7,405			7,254			7,154			6,909
	Weighted-average diluted shares outstanding			7,572			7,405			7,254			7,154			7,087

Key Ratios:
	Current ratio			2.9			2.9			2.7			1.8			2.7
	Gross margin to sales			43.8	%		47.0	%		47.4	%		29.4	%		50.9	%
	Operating income (loss) to sales			(22.0	)%		2.5	%		(8.9	)%		(54.9	)%		3.9	%
	Income (loss) from continuing operations to sales			(22.4	)%		4.5	%		(3.5	)%		(52.4	)%		9.5	%
	Return on average stockholders' equity			(39.8	)%		10.6	%		(6.3	)%		(63.5	)%		16.8	%

Footnotes:

(1): For further discussion, see Note 3 of "Notes to Consolidated Financial Statements."
(2): For further discussion, see Note 2 of "Notes to Consolidated Financial Statements."
(3): For further discussion, see Note 1 of "Notes to Consolidated Financial Statements."

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

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This Act provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about themselves as long as they identify these statements as forward-looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements other than statements of historical fact made in this Annual Report on Form 10-K are forward-looking. In particular, statements herein regarding industry prospects; future results of operations or financial position; integration of acquired products and operations; market acceptance of the Company's newly introduced or upgraded products; development, introduction and shipment of new products; and any other guidance on future periods are forward-looking statements. Forward-looking statements reflect management's current expectations and are inherently uncertain. The Company's actual results may differ significantly from management's expectations. The following discussions and the section entitled "Business—Cautionary Factors That May Affect Future Results" describes some, but not all, of the factors that could cause these differences.

BUSINESS RESTRUCTURING PROGRESS

In the second quarter of 2001, the Company recorded a restructuring charge of $460,000 associated with actions taken to reduce the Company's breakeven point and realign the Company with growth activities. This operational repositioning was mandated by the impact which the economic slowdown and decline in capital spending across a high number of customer groups had on general demand for programming equipment.

In the fourth quarter of 2001, the Company reduced its staff by 29 persons. The actions taken were meant to reduce the Company's breakeven point and bring it closer to forecasted revenues, and to maintain the cash position of the Company. The Company incurred restructuring costs of $252,000 during the fourth quarter as a result of the staff reduction.

At December 31, 2001 all restructuring expenses associated with the activities detailed above had been paid except approximately $88,000.

Results of Continuing Operations

NET SALES

Net Sales by Product Line:			2001			Change		2000			Change		1999
			(In Thousands)
Non-automated programming systems			$	11,821		(33.1	)%	$	17,672		(16.0	)%	$	21,043
Automated programming systems				15,005		(40.5	)%		25,237		93.1	%		13,070

Totals			$	26,826		(37.5	)%	$	42,909		25.8	%	$	34,113

Net sales by location:
	United States		$	9,526		(38.9	)%	$	15,588		8.8	%	$	14,330
		% of total		35.5	%				36.3	%				42.0	%
	International		$	17,300		(36.7	)%	$	27,321		38.1	%	$	19,783
		% of total		64.5	%				63.7	%				58.0	%

2001 vs. 2000

The Company experienced a decline in revenues in each of the last 3 quarters of 2001 versus 2000. The decline is attributed to the Company experiencing a reduction in orders for both automated and non-automated programming equipment. The Company believes this to be due to the general economic slowing in the wireless communications industry, among contract manufacturers and in other sectors of the electronics industry. The decline in revenues occurred in both the US and International markets. The Company sees a continuing trend in migration of customers moving manufacturing operations into low-cost geographies, thereby increasing International Sales opportunities.

2000 vs. 1999

The Company adopted SAB 101 in the fourth quarter of fiscal year 2000, effective as of the beginning of the first quarter of fiscal year 2000. Year 2000 Net Sales increased by $8,796,000 or 26%, of which $4,062,000 was as a result of adopting SAB 101. Automated systems increased by $12,167,000 or 93%, primarily due to increased PP-100 sales and the introduction of the ProLINE-RoadRunner. Sales of non-automated systems decreased by $3,371,000 or 16%, primarily due to a decline in sales of the Company's older non-automated programming systems. Sales of automated systems overtook non-automated systems for the first time in 2000. Automated systems are expected to continue to make-up a majority of Net Sales. The introduction of the ProLINE-RoadRunner added to automated sales as the Company continued to work with SMT equipment manufacturers and design ProLINE-RoadRunners to work with other versions of SMT equipment.

Product sales in the US increased by $1,300,000 or 8.8% in 2000. International sales increased $7,538,000 or 38.1%.

GROSS MARGIN

	2001			Change		2000			Change		1999
	(In Thousands)
Gross margin	$	11,748		(41.7	)%	$	20,149		24.6	%	$	16,165
Percentage of net sales		43.8	%				47.0	%				47.4	%

2001 vs. 2000

Gross margins decreased sharply from 2000 to 2001. The Company experienced a decrease in both gross margin dollars and gross margin percentage. The drop in gross margin dollars was roughly in proportion to the decline is revenue dollars. By implementing cost reductions and three restructuring

activities during 2001, the Company was able to keep the reduction in gross margin percentage to 3.2%.

2000 vs. 1999

The Company adopted SAB 101 in the fourth quarter of fiscal year 2000, effective as of the beginning of the first quarter of fiscal year 2000. The 24.6% increase in gross margin from 1999 to 2000 is attributable to the 25.8% increase in revenue from year to year including the effects of adopting SAB 101. The net impact of the adoption of SAB 101 was to increase the gross margin in 2000 by $2,317,000.

RESEARCH AND DEVELOPMENT

	2001			Change		2000			Change		1999
	(In Thousands)
Research and development	$	6,740		(22.7	)%	$	8,716		3.7	%	$	8,403
Percentage of net sales		25.1	%				20.3	%				24.6	%

2001 vs. 2000

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

The Company believes it is essential to invest in R&D to significantly enhance its existing products and to create new products as markets develop and technologies change. The Company is focusing its R&D efforts in its strategic growth markets, namely new programming technology and automated programming systems for the manufacturing environment, particularly for high-density Flash memory applications. During 2001, additional versions of the ProLINE RoadRunner were introduced, as well as the PS200 and PS300 automated programming systems. In February 2002 the Company introduced FlashPak, its newest programming system.

2000 vs. 1999

R&D spending increased slightly in 2000 from the prior year. The $313,000 increase in spending was due to increased spending for device research and development for new products. The Company has committed to developing new products to upgrade its product offering. During 2000 the ProLINE-RoadRunner was introduced. The Company will continue to rollout new products to meet customer demands and replace products which no longer meet customer requirements. The R&D spending as a percentage of net sales decreased substantially as a result of flat spending and significantly increased revenues from year to year.

SELLING, GENERAL AND ADMINISTRATIVE

	2001			Change		2000			Change		1999
	(In Thousands)
Selling, general and administrative	$	9,707		(8.6	)%	$	10,616		(3.7	)%	$	11,022
Percentage of net sales		36.2	%				24.7	%				32.3	%

2001 vs. 2000

Selling, General and Administrative (SG&A) spending decreased by $909,000 in 2001 versus the prior year due primarily to the restructuring actions and reduced marketing expenses. The Company has increased its direct sales force and decreased its dependence on outside sales rep firms to sell its products.

2000 vs. 1999

SG&A expenses decreased both in dollars and as a percentage of net sales in 2000 compared to 1999. The total expenditures decreased $406,000 and as a percentage of net sales, expenditures dropped by 7.6%. Sales and marketing expenses were relatively flat year to year, the majority of the decrease in spending coming from general and administrative expenses due to one time cost reductions that occurred in the fourth quarter. As a result of moving from a self-insured medical plan to a medical plan covered by insurance, the Company was able to reduce the reserve established to cover medical payments for submitted claims. This one-time savings accounted for the majority of the savings from year to year.

INTEREST

	2001			Change		2000			Change		1999
	(In Thousands)
Interest income	$	239		(49.3	)%	$	471		(36.4	)%	$	741
Interest expense	$	(16	)	(36.0	)%	$	(25	)	(32.4	)%	$	(37	)

2001 vs. 2000

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

2000 vs. 1999

The decrease in interest income for 2000 as compared to 1999 was due to the decrease in cash, cash equivalents and marketable securities, which were used to fund operating losses during the year.

INCOME TAXES

		2001			2000			1999
		(In Thousands)
Income tax expense		$	224		$	36		$	55

2001 vs. 2000 and 2000 vs. 1999

Income tax expense in all years relates entirely to foreign income taxes. For financial reporting purposes the Company has established tax valuation reserves against its deferred tax assets because of the uncertainty relating to the realization of such asset values. The Company had valuation allowances of $9.0 million at December 31, 2001 compared to $7.0 million at December 28, 2000 and $6.9 million at December 30, 1999.

INFLATION AND CHANGES IN FOREIGN CURRENCY EXCHANGE RATES

Sales and expenses incurred by foreign subsidiaries are denominated in the subsidiary's local currency and translated into U.S. Dollar amounts at average rates of exchange during the year. The Company recognized foreign currency transaction losses of $222,000 and $82,000 in 2001 and 2000 respectively. The transaction losses resulted primarily from sales by the German subsidiary to its main customer which were invoiced in US dollars. The Company hedges its foreign currency exposure on sales of inventory and certain loans to its foreign subsidiaries through the use of foreign exchange contracts. See Note 1 of "Notes to Consolidated Financial Statements."

Financial Condition

LIQUIDITY AND CAPITAL RESOURCES

		2001			Change			2000			Change			1999
		(In Thousands)
Working capital		$	12,010		$	(4,782	)	$	16,792		$	613		$	16,179

In 2001, net cash provided by operating activities was $1.5 million. Inventories decreased by $2.8 million primarily due to the aggressive measures undertaken during the year to reduce inventory levels, reduction of incoming purchased components and the implementation of lean manufacturing techniques. Accounts Receivable decreased by $5.0 million due to the lower shipment levels in the fourth quarter of 2001 versus the prior year.

The Company estimates that capital expenditures for property, plant and equipment during 2002 will be between $750,000 and $1.2 million. Although the Company expects that such expenditures will be made, it had no significant outstanding purchase commitments at December 31, 2001. Such expenditures are expected to be funded from existing and internally generated funds or may be leased. The Company established a foreign line of credit for 50,000 Euros in February 2002.

As a result of its significant product development, customer support, and selling and marketing efforts, the Company has required substantial working capital to fund its operations. Management believes that the Company has sufficient working capital available under its operating plan to fund its operations and capital requirements through at least December 31, 2002. Any substantial inability to achieve the current business plan could have a material adverse impact on the Company's financial position, liquidity, or results of operations and may require the Company to reduce expenditures and/or seek additional financing to enable it to continue operations through December 31, 2002.

SHARE REPURCHASE PROGRAM

Under a previously announced share repurchase program, the Company is authorized to repurchase up to 1,123,800 shares (approximately 14.8%) of its outstanding common stock. These purchases may be executed through open market purchases at prevailing market prices, through block purchases or in privately negotiated transactions, and may commence or be discontinued at any time. As of December 31, 2001, the Company has repurchased 1,016,200 shares under this repurchase program at a total cost of approximately $7.1 million. The Company has not repurchased shares under this plan since the second quarter of 1997 although it still has the authority to do so.

SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

Sales of the Company's semiconductor programming equipment products requiring installation by the Company that is other than perfunctory are recorded when installation is complete, or at the later of customer acceptance or installation, if an acceptance clause is specified in the sales terms. Revenue from other product sales is recognized at the time of shipment. Revenue from the sale of service and update contracts is recorded as deferred revenue and recognized on a straight-line basis over the contractual period. The Company's software products are not normally sold separately from sales of programming systems. However, on those occasions where software is sold separately, revenue is recognized when a sales agreement exists, when delivery has occurred, when the fee is fixed or determinable, and when collectibility is probable.

when installation is other than perfunctory, to recognize such revenues when installation is complete, or at the later of customer acceptance or installation, if an acceptance clause is specified in the sales terms. The Company believes the change in accounting principle is preferable based on guidance provided in SEC Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements. There was no tax impact as of a result of the change in accounting principle, as all affected jurisdictions had net operating loss carryforwards

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

The Company currently uses only foreign currency hedge derivative instruments, which, at a given date, are not material. However, the Company is exposed to interest rate risks. The Company generally invests in high-grade commercial paper with original maturity dates of twelve months or less and money market funds to minimize its exposure to interest rate risk on its marketable securities, which are classified as available-for-sale as of December 31, 2001 and December 28, 2000. The Company believes that the market risk arising from holdings of its financial instruments is not material.

The table below provides information about the Company's marketable securities, including principal cash flows for 2002 and the related weighted average interest rates (in thousands):

	Principal Cash Flows For 2002			Estimated Fair Value at December 31, 2001		Principal Cash Flows For 2001			Estimated Fair Value at December 28, 2000
Corporate bonds	$	1,534 3.319	%	$	1,534	$	415 6.410	%	$	415
Medium and short-term notes		—			—		340 6.442	%		340
Euro-dollar bonds		399 3.520	%		399		1,189 6.565	%		1,189
Taxable Auction Securities		800 2.231	%		800		—			—
Asset Backed Securities		503 2.521	%		503		—			—

Total portfolio value	$	3,236		$	3,236	$	1,944		$	1,944

New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 (SFAS 141), Business Combinations. SFAS 141 applies to all business combinations initiated after September 30, 2001. The Statement also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. The adoption of SFAS 141 did not have an impact on the Company's consolidated financial statements.

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 (SFAS142), Goodwill and Other Intangible Assets. The provisions of SFAS 142 are required to be applied starting with fiscal years beginning after December 15, 2001 with earlier application permitted for entities with fiscal years beginning after March 15, 2001 provided that the first interim financial statements have not been previously issued. The statement is required to be applied at the beginning of the entity's fiscal year and to be applied to all goodwill and other intangible assets recognized in its financial statements to that date. The Company is currently evaluating the potential effect of the initial application of the SFAS 142 on its consolidated financial statements.

In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets to Be Disposed Of, and APB Opinion 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for segments of a business to be disposed of. SFAS is effective for fiscal years beginning after December 15, 2001. The Company is currently evaluating the potential effect of the initial application of the SFAS 144 on its consolidated financial statements.

Item 8. Financial Statements and Supplementary Data

See pages 30 through 47.

REPORT OF GRANT THORNTON LLP CERTIFIED PUBLIC ACCOUNTANTS

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

We have audited the accompanying consolidated balance sheet of Data I/O Corporation as of December 31, 2001, and the related statements of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that the Company plans and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Data I/O Corporation as of December 31, 2001, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

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


Seattle, Washington February 8, 2002		/s/ GRANT THORNTON LLP GRANT THORNTON LLP

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

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

We have audited the accompanying consolidated balance sheet of Data I/O Corporation as of December 28, 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the two years in the period ended December 28, 2000. Our audits also included the financial statement schedule for the two years in the period ended December 28, 2000 listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

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

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

Ernst & Young LLP

Seattle, Washington
February 7, 2001

REPORT OF MANAGEMENT

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

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

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


/s/ FREDERICK R. HUME FREDERICK R. HUME President and Chief Executive Officer		/s/ JOEL S. HATLEN JOEL S. HATLEN Vice President Finance Chief Financial Officer Secretary and Treasurer

DATA I/O CORPORATION

CONSOLIDATED BALANCE SHEETS

			Dec. 31, 2001			Dec. 28, 2000
			(In Thousands, Except Share Data)
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents		$	2,656		$	3,133
	Marketable securities			3,236			1,944
	Trade accounts receivable, net of allowance for doubtful accounts of $372 and $350			5,666			10,627
	Inventories			6,388			9,166
	Recoverable income taxes			—			91
	Other current assets			485			444

		TOTAL CURRENT ASSETS		18,431			25,405
Property, plant and equipment–net				1,741			2,190
Other assets				168			1,151

		TOTAL ASSETS	$	20,340		$	28,746

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
	Accounts payable		$	1,599		$	1,674
	Accrued compensation			848			2,073
	Deferred revenue			1,686			2,637
	Other accrued liabilities			1,871			1,623
	Accrued costs of business restructuring			88			117
	Income taxes payable			329			489

		TOTAL CURRENT LIABILITIES		6,421			8,613
Deferred gain on sale of property				1,765			2,094

				8,186			10,707
COMMITMENTS				—			—
STOCKHOLDERS' EQUITY
	Preferred stock—
		Authorized, 5,000,000 shares, including 200,000 shares of Series A Junior Participating
		Issued and outstanding, none		—			—
	Common stock, at stated value—
		Authorized, 30,000,000 shares
		Issued and outstanding, 7,613,754 and 7,494,542 shares		18,500			18,292
	Retained deficit			(6,173	)		(163	)
	Accumulated other comprehensive loss			(173	)		(90	)

		TOTAL STOCKHOLDERS' EQUITY		12,154			18,039

		TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	20,340		$	28,746

See notes to consolidated financial statements.

DATA I/O CORPORATION

CONSOLIDATED STATEMENT OF OPERATIONS

			For the Years Ended
			Dec. 31, 2001			Dec. 28, 2000			Dec. 30, 1999
			(In Thousands, Except Per Share Data)
Net sales			$	26,826		$	42,909		$	34,113
Cost of goods sold				15,078			22,760			17,948

	Gross margin			11,748			20,149			16,165

Operating expenses:
	Research and development			6,740			8,716			8,403
	Selling, general and administrative			9,707			10,616			11,022
	Net provision (reversal) for business restructuring			1,211			(255	)		(215	)

		Total operating expenses		17,658			19,077			19,210

		Operating income (loss)		(5,910	)		1,072			(3,045	)
Non-operating income (expense):
	Interest income			239			471			741
	Interest expense			(16	)		(25	)		(37	)
	Foreign currency exchange			(99	)		430			—
	Gain on dispositions and other			—			—			1,216

		Total non-operating income		124			876			1,920

Income (loss) from continuing operations before income taxes and cumulative effect of accounting change				(5,786	)		1,948			(1,125	)
Income tax expense				(224	)		(36	)		(55	)

Income (loss) from continuing operations before discontinued operations and cumulative effect of accounting change				(6,010	)		1,912			(1,180	)
Discontinued operations, net of income taxes:
Income from operations, net of income tax				—			90			831
Cumulative effect of accounting change, net of income tax				—			(2,531	)		—

Net loss			$	(6,010	)	$	(529	)	$	(349	)

Basic and diluted earnings (loss) per share:
	From continuing operations		$	(0.79	)	$	0.26		$	(0.16	)
	From discontinued operations			—			0.01			0.11
	From cumulative effect of accounting change			—			(0.34	)		—

		Basic and diluted loss per share	$	(0.79	)	$	(0.07	)	$	(0.05	)

Weighted-average basic and diluted shares outstanding				7,572			7,405			7,254
Pro forma amounts assuming the accounting change is applied retroactively
		Net loss							$	(2,880	)
		Net loss per share							$	(0.40	)

See notes to consolidated financial statements.

DATA I/O CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

				For the Years Ended
				Dec. 31, 2001			Dec. 28, 2000			Dec. 30, 1999
				(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
	Income (loss) from continuing operations			$	(6,010	)	$	1,912		$	(1,180	)
	Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used in) operating activities:
		Depreciation and amortization			2,206			2,074			2,145
		Net gain on dispositions			—			—			(1,113	)
		Write off of assets			18			—			—
		Equity income from and gain on sale of equity interest			—			—			(102	)
		Deferred income taxes			—			—			391
		Amortization of deferred gain on sale			(329	)		(331	)		(329	)
		Net change in:
			Trade accounts receivable		4,961			(5,079	)		(546	)
			Inventories		2,778			(2,929	)		(1,969	)
			Recoverable income taxes		91			114			3,161
			Other current assets		(48	)		101			532
			Accrued cost of business restructuring		(29	)		(376	)		(1,846	)
			Accounts payable and accrued liabilities		(1,212	)		(589	)		(4,838	)
			Deferred revenue		(951	)		11			(786	)

	Cash provided by (used in) operating activities of continuing operations				1,475			(5,092	)		(6,480	)
	Cash provided by operating activities of discontinued operations				—			90			831
	Cash used in cumulative effect of change in accounting principle				—			(2,531	)		—

		Net cash provided by (used in) operating activities			1,475			(7,533	)		(5,649	)
CASH FLOWS FROM INVESTING ACTIVITIES:
	Additions to property, plant and equipment				(785	)		(1,111	)		(1,245	)
	Net proceeds on sale of subsidiary				—			—			72
	Investment in JTAG Technologies				—			—			1,067
	Purchases of available-for-sale securities				(4,335	)		(2,346	)		(8,610	)
	Proceeds from maturities of available-for-sale securities				3,041			10,019			13,890

		Cash provided by (used in) investing activities			(2,079	)		6,562			5,174
CASH FLOWS FROM FINANCING ACTIVITIES
	Sale of common stock				209			171			166
	Proceeds from exercise of stock options				—			308			10

		Cash provided by financing activities			209			479			176

Decrease in cash and cash equivalents					(395	)		(492	)		(299	)
Effects of exchange rate changes on cash					(82	)		28			(112	)
Cash and cash equivalents at beginning of year					3,133			3,597			4,008

Cash and cash equivalents at end of year				$	2,656		$	3,133		$	3,597

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
	Interest			$	16		$	25		$	116
	Income taxes			$	172		$	41		$	71

See notes to consolidated financial statements.

DATA I/O CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

		Common Stock						Accumulated Other Comprehensive Income (Loss)
		Common Stock			Retained Earnings (Deficit)						Total Stockholders' Equity
		Shares	Amount		Retained Earnings (Deficit)						Total Stockholders' Equity
		(In Thousands, Except Share Data)
Balance at December 31, 1998		7,186,851	$	17,637	$	715		$	557		$	18,909
Stock options exercised		4,375		10		—			—			10
Issuance of stock through
	Employee Stock Purchase Plan	98,939		166		—			—			166
Comprehensive loss:
	Net loss	—		—		(349	)		—			(349	)
	Translation adjustment	—		—		—			(35	)		(35	)
	Unrealized gain on marketable securities	—		—		—			(643	)		(643	)

Total comprehensive loss												(1,027	)

Balance at December 30, 1999		7,290,165		17,813		366			(121	)		18,058
Stock options exercised		93,612		288		—			—			288
Issue of stock through
	Director Fee Plan	14,228		20		—			—			20
Issuance of stock through
	Employee Stock Purchase Plan	96,537		171		—			—			171
Comprehensive loss:
	Net loss	—		—		(529	)		—			(529	)
	Translation adjustment	—		—		—			28			28
	Unrealized gains on marketable securities	—		—		—			3			3

Total comprehensive loss												(498	)

Balance at December 28, 2000		7,494,542		18,292		(163	)		(90	)		18,039
Issuance of stock through
	Employee Stock Purchase Plan	119,212		208		—			—			208
Comprehensive loss:
	Net loss	—		—		(6,010	)		—			(6,010	)
	Translation adjustment	—		—		—			(82	)		(82	)
	Unrealized losses on marketable securities	—		—		—			(1	)		(1	)

Total comprehensive loss												(6,093	)

Balance at December 31, 2001		7,613,754	$	18,500	$	(6,173	)	$	(173	)	$	12,154

See notes to consolidated financial statements.

DATA I/O CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Data I/O® Corporation ("Data I/O" or the "Company") is engaged in the design, manufacture, and sale of programming systems that are used by designers and manufacturers of electronic products. The Company's programming system products are used to program integrated circuits ("ICs" or "devices" or "semiconductors") with the specific unique data for the product within which the devices will be used. Customers for the Company's programming system products are located around the world, primarily in the United States, Europe and the Far East. The Company's manufacturing operations are currently located in the United States. Manufacturing of the Company's Sprint non-automated programming systems is provided by an outside supplier located in Germany.

As a result of its significant product development, customer support, and selling and marketing efforts in a period of weak capital spending, the Company has required substantial working capital to fund its operations. Management believes that the Company has sufficient working capital available under its operating plan to fund its operations and capital requirements through at least December 31, 2002. Any substantial inability to achieve the current business plan could have a material adverse impact on the Company's financial position, liquidity, or result of operations and may require the Company to reduce expenditures and/or seek additional financing to enable it to continue operations through December 31, 2002.

Principles of Consolidation

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

Reporting Period

In 2001, the Company converted to reporting on a calendar year-end basis. Results of operations for 2000 and 1999 are each for a fifty-two week period. The first quarter of 2001 covered the period December 29, 2000 to March 31, 2001.

Use of Estimates

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

Stock-Based Compensation

The Company has elected to apply the disclosure-only provisions of the Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock Based Compensation. Accordingly, the Company accounts for employee stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and related interpretations. Compensation cost for stock options is measured as the excess, if any, of the fair value of the Company's Common Stock at the date of the grant over the stock option price.

Foreign Currency Translation

Assets and liabilities of foreign subsidiaries are translated at the exchange rate on the balance sheet date. Revenues, costs and expenses of foreign subsidiaries are translated at average rates of exchange prevailing during the year. Translation adjustments resulting from this process are charged or credited to stockholders' equity, net of taxes. Realized and unrealized gains and losses resulting from the effects of changes in exchange rates on assets and liabilities denominated in foreign currencies are included in non-operating expense as foreign currency transaction gains and losses.

In an effort to minimize the effect of exchange rate fluctuations on the results of its operations, the Company hedges portions of its foreign currency exposure through the use of forward exchange contracts, none of which are speculative. At December 31, 2001, the Company had approximately $1,300,000 in 3 foreign exchange contracts outstanding, the fair value of which was a gain of $28,000. The contract terms are 45-120 days. The hedges are perfectly effective, as currency, settlement date and amount of the underlying receivables and of the forward contracts coincide, and as spot rates are the same for both the hedge and the hedged item.

Cash and Cash Equivalents

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

Marketable Securities

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

Fair Value of Financial Instruments

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

Inventories

Inventories are stated at the lower of cost or market with cost being the currently adjusted standard cost, which approximates cost on a first-in, first-out basis.

Property, Plant and Equipment

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

The Company records impairment losses on long-lived assets used in operations when indicators of impairment are present and undiscounted cash flow estimated to be generated by those assets are less than the assets' carrying amount. In such cases, the amount of impairment is determined based on the relative fair values of the impaired assets. To date, no such impairment has been indicated.

Revenue Recognition

The Company previously recognized revenue from product sales at the time of shipment, or at customer acceptance, if an acceptance clause was specified in the sales terms. Effective December 31, 1999, the Company changed its method of accounting for product sales requiring Company installation, when installation is other than perfunctory, to recognize such revenues when installation is complete, or at the later of customer acceptance or installation, if an acceptance clause is specified in the sales terms. The Company believes the change in accounting principle is preferable based on guidance provided in SEC Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements. There was no tax impact as of a result of the change in accounting principle, as all affected jurisdictions had net operating loss carryforwards.

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

Research and Development

Research and development costs are expensed as incurred.

Advertising Expense

The Company expenses advertising costs as incurred. Total advertising expenses related to continuing operations were $487,000, $904,000, and $1,212,000 in 2001, 2000, and 1999, respectively.

Warranty Expense

The Company normally warrants its products against defects for periods ranging from ninety days to one year. The FlashPak which the Company recently introduced, carries a 3-year warranty on some components. The Company provides currently for the estimated cost that may be incurred under its product warranties.

Earnings (Loss) Per Share

Basic earnings/(loss) per share exclude any dilutive effects of stock options. Basic earnings/(loss) per share are computed using the weighted-average number of common shares outstanding during the period. Diluted earnings/(loss) per share are computed using the weighted-average number of common shares and common stock equivalent shares outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is antidilutive.

Earnings per share as presented on the statement of operations exclude employee stock options that were antidilutive of 44,361, 251,498 and 20,516 in 2001, 2000 and 1999, respectively. Total employee stock options outstanding were 1,115,508, 1,128,750, and 946,325 in 2001, 2000 and 1999 respectively.

Diversification of Credit Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of trade receivables. The Company's cash, cash equivalents and marketable securities consist of high quality financial instruments. The Company's trade receivables are geographically

dispersed and include customers in many different industries. Management believes that any risk of loss is significantly reduced due to the diversity of its end-customers and geographic sales areas. The Company performs on-going credit evaluations of its customers' financial condition and requires collateral, such as letters of credit and bank guarantees, whenever deemed necessary.

Derivatives

In June 1998, the Company adopted SFAS No. 133, Accounting for Derivatives and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments and requires recognition of derivatives as assets or liabilities in the statement of financial position and measurement of those instruments at fair value. The adoption of this standard by the Company did not materially impact its consolidated financial statements.

The Company utilizes forward foreign exchange contracts to reduce the impact of foreign currency exchange rate risks where natural hedging strategies cannot be effectively employed. All hedging instruments held by the Company are fair value hedges. Generally, these contracts have maturities less than one year and require the Company to exchange foreign currencies for U.S. dollars at maturity. The change in fair value of the open hedge contracts as of December 31, 2001 is an unrealized gain of $28,000 and is included in accounts payable on the balance sheet.

The Company does not hold or issue derivative financial instruments for trading purposes. The purpose of the Company's hedging activities is to reduce the risk that the valuation of the underlying assets, liabilities and firm commitments will be adversely affected by changes in exchange rates. The Company's derivative activities do not create foreign currency exchange rate risk because fluctuations in the value of the instruments used for hedging purposes are offset by fluctuations in the value of the underlying exposures being hedged. The Company is exposed to credit-related losses in the event of nonperformance by counterparties to forward exchange contracts. However, the Company has entered into these instruments with creditworthy financial institutions and considers the risk of nonperformance to be remote.

New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 (SFAS141), Goodwill and Other Intangible Assets. The provisions of SFAS 142 are required to be applied starting with fiscal years beginning after December 15, 2001 with earlier application permitted for entities with fiscal years beginning after March 15, 2001 provided that the first interim financial statements have not been previously issued. The statement is required to be applied at the beginning of the entity's fiscal year and to be applied to all goodwill and other intangible assets recognized in its financial statements to that date. The Company is currently evaluating the potential effect of the initial application of the SFAS 142 on its consolidated financial statements.

In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 supersedes SFAS 121, Accouning for the Impairment of Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB Opinion 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for segments of a business to be disposed of. SFAS is effective for fiscal years beginning after December 15, 2001. The Company is currently evaluating the potential effect of the initial application of the SFAS 144 on its consolidated financial statements.

NOTE 2—PROVISION FOR BUSINESS RESTRUCTURING

In the second quarter of 2001, the Company recorded a restructuring charge of $460,000 associated with actions taken to reduce the Company's breakeven point and realign the Company with growth activities. This operational repositioning was mandated by the impact which the economic slowdown and decline in capital spending across a high number of customer groups had on general demand for programming equipment.

On July 12, 2001, during its third quarter, the Company announced that it would take further strategic actions to reduce its breakeven point, which included the following actions: closure of a facility in Germany moving its operations to other locations within the Company; combining the Company's four product families into two business groups; consolidating service groups across the organization to create a team more responsive to global customer needs; and targeting certain other expense reductions for the third quarter, including a closure of the company's Redmond facility for one week. A restructuring charge of $499,000 was recorded in the third quarter.

At December 31, 2001 all restructuring expenses associated with the activities detailed above had been paid except approximately $88,000.

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

Description		Reserve Balance at Dec. 28, 2000			2001 Expenses			2001 Payments/ Write-offs		Reserve Balance at Dec. 31, 2001
Downsizing U.S. Operations:
	Employee severance	$	—		$	729		$	725	$	4
	Redmond facility consolidation		107			(5	)		56		46
	Consulting and legal expenses		—			71			52		19
Downsizing Foreign Operations			(10	)		416			407		19

Total		$	117		$	1,211		$	1,240	$	88

NOTE 3—ACQUISITION OF SMS HOLDING GMBH

In November 1998, the Company acquired SMS Holding GmbH ("SMS"), a privately held programming equipment company located in Wangen, Germany. The acquisition was accounted for using the purchase method of accounting with the Company paying $5,224,000 in cash, including $456,000 of direct acquisition costs. Net assets acquired included working capital and other assets of $294,000 and capitalized technology and other intangible assets of $2,971,000 which are being amortized over their estimated useful lives of 3 to 5 years on a straight-line basis. The Company recorded a charge in the fourth quarter 1998 of approximately $1,959,000 for in-process research and development relating to the acquisition.

NOTE 4—MARKETABLE SECURITIES

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

	Dec. 31, 2001		Dec. 28, 2000
Corporate bonds	$	1,534	$	415
Medium- and short-term notes		—		340
Euro-dollar bonds		399		1,189
Taxable auction securities		800		—
Asset backed securities		503		—

	$	3,236	$	1,944

At December 31, 2001, cost approximated market value for the Company's portfolio of marketable securities and there were no significant unrealized gains or losses. The maturity for all marketable securities held at December 31, 2001 is within calendar year 2002. The cost of securities sold is determined by the specific identification method.

NOTE 5—INVENTORIES

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

	Dec. 31, 2001		Dec. 28, 2000
Raw material	$	3,588	$	4,526
Work-in-process		1,354		2,756
Finished goods		1,446		1,884

	$	6,388	$	9,166

Reserves for excess and obsolete inventory are $2,469,000 and $2,587,000 at December 31, 2001 and December 28, 2000, respectively. Freight expense for incoming raw materials and freight out for product shipments is charged to cost of goods sold.

Certain parts used in the Company's products are currently available from either a single supplier or from a limited number of suppliers. If the Company cannot develop alternative sources for these components, or if the Company experiences deterioration in its relationship with these suppliers, there may be delays or reductions in product introductions or shipments, which may materially adversely affect its operating results.

Because the Company relies on a small number of suppliers for certain parts, it is subject to possible price increases by these suppliers. Also, the Company may be unable to accurately forecast its production schedule. If the Company underestimates its production schedule, suppliers may be unable to meet its demand for components. This delay in the supply of key components may materially adversely affect the Company's business.

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

NOTE 6—SALE - LEASEBACK

In May 1997, the Company completed the sale of the land and building comprising its Redmond, Washington, corporate headquarters for $13.8 million, less net transaction-related expenses and

reimbursements of approximately $400,000. The sale includes a 10-year leaseback of the building to the Company, with an option to renew the lease for an additional 10 years. The Company realized $12 million in cash after payment of transaction fees and taxes. The sale represented an overall pre-tax gain to the Company of $5.6 million. Of this amount, $2.3 million was recognized in 1997, with the remainder to be amortized over the life of the lease.

NOTE 7—PROPERTY, PLANT AND EQUIPMENT

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

	Dec. 31, 2001		Dec. 28, 2000
Leasehold improvements	$	229	$	205
Equipment		12,188		12,703

		12,417		12,908
Less accumulated depreciation		10,676		10,718

Property, plant and equipment—net	$	1,741	$	2,190

Total depreciation recorded for 2001, 2000, and 1999 was $940,000, $1,036,000, and $1,084,000 respectively.

NOTE 8—OTHER ASSETS

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

	Dec. 31, 2001		Dec. 28, 2000
Long-term lease deposits	$	66	$	66
Investment in product lines: SMS		3,272		3,272

		3,338		3,338
Less accumulated amortization		3,170		2,187

Other assets—net	$	168	$	1,151

Total amortization recorded for 2001, 2000, and 1999 was $969,000, $1,038,000, and $1,061,000, respectively.

Investment In Product Lines: SMS

In November 1998, the Company acquired SMS Holding GmbH (see Note 3—Acquisition of SMS Holding GmbH). In related transactions, the Company acquired a license to the technology, manufacturing and worldwide distribution rights to Unmanned Solutions' AH 400 robotic handler, which is used in the SMS fine pitch automated programming system. Of the total acquisition costs of these transactions, approximately $3.3 million of developed technology and other various intangible assets are reported as Other Assets in the accompanying balance sheets and are being amortized ratably over the economic life of the specific assets acquired (three to five years). The net book value of the assets capitalized in Other Assets related to this acquisition is $102,000 and $1.1 million at December 31, 2001 and December 28, 2000, respectively.

NOTE 9—COMMITMENTS

The Company has commitments under non-cancelable operating leases and other agreements, primarily for factory and office space, with initial or remaining terms of one year or more are as follows (in thousands):

2002	$	1,387
2003		1,399
2004		1,391
2005		1,337
2006		1,185
Thereafter		493

Total	$	7,192

Lease and rental expense were $1,342,000, $1,348,000, and $1,383,000 in 2001, 2000, and 1999 respectively. The Company has renewal options on substantially all of its major leases. The initial lease on the Redmond facility expires on December 31, 2006. So long as the Company is not in material default of the terms of the lease nor has there been a material adverse change in the financial condition of the Company, then the Company has the option to extend the lease for an additional five years on the same terms as the balance of the lease, except the rent shall be at the then prevailing fair market rental rate. The Company will also have the right for a second five-year extension by giving written notice at least six months prior to the end of the first extension.

As part of its restructuring plan implementation, the Company vacated one floor of its leased Redmond facility (approximately 25,000 square feet) and has sublet the majority of this space for a period of 28 months beginning January 1, 2000. This sublease income of approximately $33,000 per month is not reflected in the table above.

NOTE 10—STOCK AND RETIREMENT PLANS

Stock Option Plans

At December 31, 2001, there were 1,419,623 shares of common stock reserved for issuance of which 303,615 shares are available for future grant under the Company's employee stock option plans. Pursuant to these plans, options are granted to officers and key employees of the Company with exercise prices equal to the fair market value of the common stock at the date of grant and generally vest over four years. Certain options granted during 1998 and 1999 vest over two years. Options granted under the plans generally have a maximum term of six years from the date of grant except for certain options granted in January 1999 which have a maximum term of ten years.

Employee Stock Purchase Plan

Under the Employee Stock Purchase Plan, eligible employees may purchase shares of the Company's common stock at six-month intervals at 85% of the lower of the fair market value on the first or the last day of each six-month period. Employees may purchase shares having a value not exceeding 10% of their gross compensation during an offering period. During 2001, 2000 and 1999 a total of 119,212, 96,537, and 98,939 shares, respectively, were purchased under the plan at average prices of $1.66, $1.78, and $1.69 per share, respectively. On May 16, 2001, the shareholders approved an amendment to the Data I/O Corp 1982 Employee Stock Purchase plan to increase the number of shares reserved for future issuance under the Plan by an additional 300,000 shares. At December 31, 2001, a total of 317,991 shares were reserved for future issuance.

Stock Appreciation Rights Plan

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

Director Fee Plan

The Company has a Director Fee Plan, not currently in use, which had provided for payment to directors who are not employees of Data I/O Corporation by delivery of shares of the Company's common stock. For directors' service for 1999, a total of 14,228 shares were issued under the plan at a weighted average price of $1.41. Such shares were issued in the year following the year of service. No shares were issued from the plan to directors for 2001 and 2000 board service. Compensation expense recorded in 1999 related to the share issues was $20,000.

Retirement Savings Plan

The Company has a savings plan that qualifies as a cash or deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the plan, participating U.S. employees may defer up to 17% of their pre-tax salary, subject to IRS limitations. In fiscal years 2001, 2000 and 1999, the Company contributed one dollar for each dollar contributed by a participant, with a maximum contribution of 4% of a participant's earnings. The Company's matching contribution expense for the savings plan was approximately $271,000 $275,000, and $262,000 in 2001, 2000 and 1999, respectively.

Share Repurchase Program

Under a previously announced share repurchase program, the Company is authorized to repurchase up to 1,123,800 shares (approximately 14.8%) of its outstanding common stock. These purchases may be executed through open market purchases at prevailing market prices, through block purchases or in privately negotiated transactions, and may commence or be discontinued at any time. Through December 31, 2001, the Company has repurchased 1,016,200 shares under this repurchase program at a total cost of approximately $7.1 million. The Company has not repurchased shares under this plan since the second quarter of 1997, although it still has the authority to do so.

NOTE 11—STOCK-BASED COMPENSATION

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

	Employee Stock Options			Employee Stock Purchase Plan			Director Fee Plan
	2001	2000	1999	2001	2000	1999	2001	2000	1999
Risk-free interest rates	4.81	5.65	5.66	4.86	5.94	5.19	N/A	N/A	5.66
Volatility factors	.70	.63	.54	.70	.63	.54	N/A	N/A	.54
Expected life of the option in years	4.31	4.31	5.48	.50	.50	.50	N/A	N/A	1.0
Expected dividend yield	None	None	None	None	None	None	None	None	None

For purposes of pro forma disclosures, the estimated fair value of the options granted, which is estimated to be $1.36, $2.05 and $1.19 per share for 2001, 2000 and 1999, respectively, is amortized to expense over the options' vesting period.

The Company's pro forma information follows (in thousands, except per share data):

	Year Ended December
	2001			2000			1999
Net loss—as reported	$	(6,010	)	$	(529	)	$	(349	)
Net loss—pro forma	$	(6,450	)	$	(1,202	)	$	(1,009	)
Basic and diluted loss per share—as reported	$	(0.79	)	$	(0.07	)	$	(0.05	)
Basic and diluted loss per share—pro forma	$	(0.85	)	$	(0.16	)	$	(0.14	)

A summary of the Company's stock option activity, and related information follows:

		December 31, 2001			December 28, 2000			December 30, 1999
		Options		Weighted- Average Exercise Price	Options		Weighted- Average Exercise Price	Options		Weighted- Average Exercise Price
Outstanding at beginning of year		1,128,750		2.98	946,325		2.57	1,249,750		3.51
	Granted	117,500		2.35	327,500		4.00	521,750		2.15
	Exercised	—		—	(99,877	)	2.41	(4,375	)	2.09
	Expired or forfeited	(130,742	)	3.19	(45,198	)	3.06	(820,800	)	3.74

Outstanding—end of year		1,115,508		2.89	1,128,750		2.98	946,325		2.57

Exercisable at end of year		675,050		2.86	500,876		2.90	299,608		3.03

The following table summarizes information about stock options outstanding at December 31, 2001:

	Options Outstanding
	Options Outstanding			Options Exercisable
		Weighted- Average Remaining Contractual Life in Years		Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted- Average Remaining Contractual Life in Years	Weighted- Average Exercise Price	Number Exercisable	Weighted- Average Exercise Price
$1.33 - $2.38	342,500	3.41	1.94	198,750	1.97
$2.40 - $2.47	279,500	4.91	2.43	181,875	2.42
$2.63 - $3.48	349,508	3.24	3.46	229,362	3.47
$4.41 - $5.19	144,000	4.13	4.70	55,063	4.84

$1.33 - $5.19	1,115,508	3.82	2.89	675,050	2.86

NOTE 12—ACCUMULATED OTHER COMPREHENSIVE LOSS

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

	December 31, 2001			December 28, 2000
	(In Thousands)
Unrealized currency loss	$	(175	)	$	(93	)
Unrealized gain on marketable securities		2			3

Total accumulated other comprehensive loss	$	(173	)	$	(90	)

NOTE 13—INCOME TAXES

The Company accounts for income taxes using the liability method as prescribed by Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes.

Components of income (loss) from continuing operations before taxes:

				Year Ended December
				2001			2000		1999
				(In Thousands)
U.S. operations				$	(6,122	)	$	1,615	$	(1,194	)
Foreign operations					336			333		69

				$	(5,786	)	$	1,948	$	(1,125	)

Income tax expense (benefit) consists of:
	Current tax expense (benefit):
		U.S. federal			(11	)		—		(398	)
		State			6			—		7
		Foreign			223			36		55

					218			36		(336	)
Deferred tax expense (benefit)—U.S. federal					6			—		391

			Total income tax expense		224		$	36	$	55

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

A reconciliation of the Company's effective income tax rate and the U.S. federal tax rate is as follows:

	Year Ended December
	2001		2000		1999
Statutory rate	34.0	%	34.0	%	(34.0	)%
Foreign Sales Corporation tax benefit	—		(5.3	)	(3.1	)
State and foreign income tax, net of federal income tax benefit	(8.5	)	0.3		(9.3	)
Valuation allowance for deferred tax assets	(28.8	)	(27.9	)	32.2
Stock based compensation expense	—		—		17.6
Other	(0.6	)	0.7		1.5

	3.9	%	1.8	%	4.9	%

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

			Dec. 31, 2001			Dec. 28, 2000
Deferred income tax assets:
	Allowance for doubtful accounts		$	77		$	95
	Inventory and product return reserves			1,498			1,610
	Compensation accruals			123			195
	Accrued liabilities			1,116			1,217
	Book-over-tax depreciation and amortization			904			815
	Foreign net operating loss carryforwards			73			0
	US net operating loss carryforwards and credit carryforwards			5,162			2,702
	Other, net			14			348

				8,967			6,982
	Valuation allowance			(8,967	)		(6,982	)

		Total deferred income tax assets	$	0		$	0

The valuation allowance for deferred tax assets increased $1,985,000 and $66,000 during the years ended December 31, 2001 and December 28, 2000 respectively, due primarily to the taxable losses and to credit carryforwards generated in those years. The net operating loss carryforwards include $31,000 of stock option deductions. The net deferred tax assets have a full valuation allowance provided due to uncertainty regarding the Company's ability to utilize such assets in future years. Credit carryforwards consist primarily of research and development and alternative minimum tax credits. Net operating loss carryforwards expire in 2020 and 2021. Utilization of net operating loss and credit carryforwards is subject to certain limitations under Section 382 of the Internal Revenue Code of 1986, as amended.

NOTE 14—SEGMENT AND GEOGRAPHIC INFORMATION

In 2001 and 1999, no customer accounted for 10% of the Company's consolidated revenues. In 2000, one customer accounted for 23% of the Company's revenue, no other customer accounted for more than 10%. Major operations outside the U.S. include sales and service support subsidiaries in Germany, Canada and China. The Company sold its Japan sales and service subsidiary in February 1999 for a gain of $1,113,000 which was primarily non-cash.

Geographic information of the continuing operations for the three years ended December 31, 2001 is presented in the table that follows. Net sales, as shown in the table below, are based upon the

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

		Year Ended December
		2001			2000			1999
		(In Thousands)
Net sales:
	U.S.	$	9,526		$	15,588		$	14,330
	Europe		8,730			19,678			12,598
	Rest of World		8,570			7,643			7,185

		$	26,826		$	42,909		$	34,113

Operating income (loss) from continuing operations:
	U.S.	$	(4,710	)	$	(3,070	)	$	(2,637	)
	Europe		(1,437	)		3,968			(68	)
	Rest of World		237			174			(40	)

		$	(5,910	)	$	1,072		$	(3,045	)

Identifiable assets of the continuing operations:
	U.S.	$	13,248		$	17,808		$	24,077
	Europe		4,059			7,692			4,232
	Rest of World		3,033			3,246			1,741

		$	20,340		$	28,746		$	30,050

NOTE 15—QUARTERLY FINANCIAL INFORMATION (unaudited)

The following table sets forth unaudited selected quarterly financial data for the Company for 2001 and 2000. Although the Company's business is not seasonal, growth rates of sales and earnings have varied from quarter to quarter as a result of factors such as stocking orders from international distributors, the timing of new product introductions, business acquisitions and dispositions, business restructuring, and short-term industry and general U.S. and international economic conditions. Information as to any one or more quarters is, therefore, not necessarily indicative of trends in the Company's business or profitability.

	Year Ended December 2001
For the quarters ended:	Year Ended December 2001
For the quarters ended:	Mar 31			June 30			Sept 30			Dec 31
	(In Thousands Except Per Share Data)
Net sales	$	7,883		$	6,487		$	6,479		$	5,977
Gross margin		2,736			2,810			3,355			2,847
Loss from continuing operations before cumulative effect of change in accounting principle		(2,147	)		(1,900	)		(501	)		(1,238	)
Net (loss)		(2,149	)		(1,920	)		(571	)		(1,370	)
Basic and diluted (loss) per share from continuing operations(2)	$	(0.28	)	$	(0.25	)	$	(0.07	)	$	(0.16	)
Basic and diluted (loss) per share(2)	$	(0.28	)	$	(0.25	)	$	(0.08	)	$	(0.18	)

(1): The restatement is due to the Company's adoption of SAB 101.

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

	Year Ended December 2000—As Restated
For the Quarters Ended	Year Ended December 2000—As Restated
For the Quarters Ended	Mar 30(1)			June 28(1)		Sept 30(1)		Dec 28
	(In Thousands Except Per Share Data)
Net sales	$	5,630		$	14,094	$	12,981	$	10,204
Gross margin		2,248			6,774		6,136		4,991
Income (loss) from continuing operations before cumulative effect of change in accounting principle		(2,536	)		1,966		1,495		1,023
Income from discontinued operations		—			—		—		90
Cumulative effect of change in accounting principle		(2,531	)		—		—		—
Net income (loss)		(5,080	)		1,949		1,491		1,111
Basic and diluted earnings (loss) per share from continuing operations(2)	$	(0.35	)	$	0.27	$	0.20	$	0.13
Basic and diluted earnings (loss) per share(2)	$	(0.70	)	$	0.26	$	0.20	$	0.14

NOTE 16—LONG-TERM DEBT

As of December 31, 2001 and December 28, 2000 the Company had no long-term debt outstanding. The Company established a foreign line of credit for 50,000 Euros in February, 2002.

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

A form 8K and Form 8-K/A were filed with the SEC on November 21, 2001 and November 28, 2001 respectively, which announced that the Company's board of directors (the "Board"), based on a recommendation from its Audit Committee, approved an action on November 14, 2001 to no longer engage Ernst & Young LLP as its independent auditors. The Audit Committee and the Board have approved another independent public accounting firm, Grant Thornton LLP, to be the Company's new independent auditors. Grant Thornton LLP accepted this appointment on November 27, 2001.

The reports of Ernst & Young LLP on the Company's financial statements for the past two fiscal years did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles, except that the Independent Auditor's Report on the consolidated financial statements of the Company for the fiscal year ended December 28, 2000 contained an explanatory paragraph regarding the Company's change in its method of accounting for revenue recognition.

In connection with the audits of the Company's financial statements for each of the two fiscal years ended December 28, 2000 and December 30, 1999, and in the subsequent interim period, there were no disagreements with Ernst & Young LLP on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedure which, if not resolved to the satisfaction of Ernst & Young LLP would have caused Ernst & Young LLP to make reference to the matter in their report.

PART III

Item 10. Directors and Executive Officers of the Registrant

Information regarding the Registrant's directors is set forth under "Election of Directors" in the Company's Proxy Statement relating to the Company's annual meeting of shareholders to be held on May 15, 2002 and is incorporated herein by reference. Such Proxy Statement will be filed within 120 days of the Company's year-end. Information regarding the Registrant's executive officers is set forth in Item 1 of Part I herein under the caption "Executive Officers of the Registrant."

Item 11. Executive Compensation

Information called for by Part III, Item 11, is included in the Company's Proxy Statement relating to the Company's annual meeting of shareholders to be held on May 15, 2002 and is incorporated herein by reference. The information appears in the Proxy Statement under the caption "Executive Compensation." Such Proxy Statement will be filed within 120 days of the Company's year-end.

Item 12. Security Ownership of Certain Beneficial Owners and Management

Information called for by Part III, Item 12, is included in the Company's Proxy Statement relating to the Company's annual meeting of shareholders to be held on May 15, 2002 and is incorporated herein by reference. The information appears in the Proxy Statement under the caption "Voting Securities and Principal Holders." Such Proxy Statement will be filed within 120 days of the Company's year-end.

Item 13. Certain Relationships and Related Transactions

None.

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

Executive Compensation Plans and Arrangements

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

(1)

Amended and Restated 1982 Employee Stock Purchase Plan. See Exhibit 10.7.

(2)

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

(3)

Summary of Management Incentive Compensation Plan. See Exhibit 10.12.

(4)

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

(5)

Amended and Restated 1986 Stock Option Plan. See Exhibit 10.19.

(6)

Form of Change in Control Agreements. See Exhibit 10.5.

(7)

1996 Director Fee Plan. See Exhibit 10.6 and 10.17.

(8)

Letter Agreement with Frederick R. Hume. See Exhibit 10.21.

(9)

Letter Agreement with Irene Bjorklund. See Exhibit 10.23

(a)

List of Documents Filed as a Part of This Report:

(1): Index to Financial Statements:

				Page
		Report of Grant Thornton LLP, Certified Public Accountant		27
		Report of Ernst & Young LLP, Certified Public Accountant		28
		Report of Management		29
		Consolidated Balance Sheets as of December 31, 2001 and December 28, 2000		30
		Consolidated Statements of Operations for each of the three years ended December 31, 2001		31
		Consolidated Statements of Cash Flows for each of the three years ended December 31, 2001		32
		Consolidated Statement of Stockholders' Equity for each of the three years ended December 31, 2001		33
		Notes to Consolidated Financial Statements		34

(2): Index to Financial Statement Schedules:

Schedule II—Consolidated Valuation and Qualifying Accounts

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

(3): Index to Exhibits:

3	Articles of Incorporation:
	3.1	The Company's restated Articles of Incorporation filed November 2, 1987 (Incorporated by reference to Exhibit 3.1 of the Company's 1987 Annual Report on Form 10-K (File No. 0-10394)).
	3.2	The Company's Bylaws as amended and restated as of March 2002.
	3.3	Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock (Incorporated by reference to Exhibit 1 of the Company's Registration Statement on Form 8-A filed March 13, 1998 (File No. 0-10394) ).
4	Instruments Defining the Rights of Security Holders, Including Indentures:
	4.1	Rights Agreement, dated as of April 4, 1998, between Data I/O Corporation and ChaseMellon Shareholder Services, L.L.C. as Rights Agent, which includes: as Exhibit A thereto, the Form of Right Certificate; and, as Exhibit B thereto, the Summary of Rights to Purchase Series A Junior Participating Preferred Stock (Incorporated by reference to the Company's Current Report on Form 8-K filed on March 13, 1998).
	4.2	Rights Agreement, dated as of March 31, 1988, between Data I/O Corporation and First Jersey National Bank, as Rights Agent, as amended by Amendment No. 1 thereto, dated as of May 28, 1992 and Amendment No. 2 thereto, dated as of July 16, 1997 (Incorporated by reference to the Company's Report on Form 8-K filed on March 13, 1998).
	4.3	Amendment No. 1, dated as of February 10, 1999, to Rights Agreement, dated as of April 4, 1998, between Data I/O Corporation and ChaseMellon Shareholder Services, L.L.C. as Rights Agent (Incorporated by reference to Exhibit 4.1 of the Company's Form 8-A/A dated February 10, 1999).
10	Material Contracts:
	10.1	Amended and Restated 1983 Stock Appreciation Rights Plan dated February 3, 1993 (Incorporated by reference to Exhibit 10.23 of the Company's 1992 Annual Report on Form 10-K (File No. 0-10394)).
	10.2	Amended and Restated Retirement Plan and Trust Agreement. (Incorporated by reference to Exhibit 10.26 of the Company's 1993 Annual Report on Form 10-K (File No. 0-10394)).
	10.3	First Amendment to the Data I/O Tax Deferred Retirement Plan (Incorporated by reference to Exhibit 10.21 of the Company's 1994 Annual Report on Form 10-K (File No. 0-10394)).
	10.4	Second Amendment to the Data I/O Tax Deferred Retirement Plan (Incorporated by reference to Exhibit 10.26 of the Company's 1995 Annual Report on Form 10-K (File No. 0-10394)).
	10.5	Form of Change in Control Agreements (Incorporated by reference to Exhibit 10.20 of the Company's 1994 Annual Report on Form 10-K (File No. 0-10394)).

				10.6		Data I/O Corporation 1996 Director Fee Plan (Incorporated by reference to Exhibit 10.27 of the Company's 1995 Annual Report on Form 10K (File No. 0-10394)).
				10.7		Data I/O Corporation 1982 Employee Stock Purchase Plan Amended and Restated December 11, 1996 (Incorporated by reference to Exhibit 10.1 to the Company's Registration Statement of Form S-8 (File No. 333-20657, filed January 29, 1997)).
				10.8		Purchase and Sale Agreement dated as of July 9, 1996 (Relating to the sale of Data I/O Corporation's headquarters property in Redmond, Washington consisting of approximately 79 acres of land and an approximately 96,000 square foot building. (Portions of this exhibit have been omitted pursuant to an application for an order granting confidential treatment. The omitted portions have been separately filed with the Commission) (Incorporated by reference to Exhibit 10.32 of the Company's 1996 Annual Report on Form 10-K (File No. 0-10394)).
				10.9		Letter dated as of December 20, 1996, First Amendment and extension of the Closing Date under that certain Purchase and Sale Agreement dated as of July 9, 1996. (Portions of this exhibit have been omitted pursuant to an application for an order granting confidential treatment. The omitted portions have been separately filed with the Commission) (Incorporated by reference to Exhibit 10.33 of the Company's 1996 Annual Report on Form 10-K (File No. 0-10394)).
				10.10		Letter dated as of February 17, 1997, Second Amendment and extension of the Closing Date under that certain Purchase and Sale Agreement dated as of July 9, 1996. (Portions of this exhibit have been omitted pursuant to an application for an order granting confidential treatment. The omitted portions have been separately filed with the Commission) (Incorporated by reference to Exhibit 10.34 of the Company's 1996 Annual Report on Form 10-K (File No. 0-10394)).
				10.11		Third Amendment to the Data I/O Tax Deferred Retirement Plan (Incorporated by reference to Exhibit 10.35 of the Company's 1996 Annual Report on Form 10-K (File No. 0-10394)).
				10.12		Amended and Restated Management Incentive Compensation Plan dated January 1, 1997 (Incorporated by reference to Exhibit 10.25 of the Company's 1997 Annual Report on Form 10-K (File No. 0-10394)).
				10.13		Amended and Restated Performance Bonus Plan dated January 1, 1997 (Incorporated by reference to Exhibit 10.26 of the Company's 1997 Annual Report on Form 10-K (File No. 0-10394)).
				10.14		Fourth Amendment to the Data I/O Tax Deferred Retirement Plan (Incorporated by reference to Exhibit 10.27 of the Company's 1997 Annual Report on Form 10-K (File No. 0-10394)).
				10.15		Fifth Amendment to the Data I/O Tax Deferred Retirement Plan (Incorporated by reference to Exhibit 10.28 of the Company's 1997 Annual Report on Form 10-K (File No. 0-10394)).

				10.16		Sixth Amendment to the Data I/O Tax Deferred Retirement Plan (Incorporated by reference to Exhibit 10.29 of the Company's 1997 Annual Report on Form 10-K (File No. 0-10394)).
				10.17		Amended and Restated Data I/O Corporation 1996 Director Fee Plan (Incorporated by reference to Exhibit 10.32 of the Company's 1997 Annual Report on Form 10-K (File No. 0-10394)).
				10.18		Amended and Restated Data I/O Corporation 1996 Director Fee Plan (Incorporated by reference to Exhibit 10.32 of the Company's 1997 Annual Report on 10-K (File No. 0-10394)
				10.19		Amended and Restated 1986 Stock Option Plan dated May 12, 1998 (Incorporated by reference to Exhibit 10.37 of the Company's 1998 Annual Report on Form 10-K (File No. 0-10394)).
				10.20		Sublease dated December 22, 1999 between Data I/O Corporation and Imandi.com, Inc. (Incorporated by reference to Exhibit 10.34 of the Company's 1999 Annual Report on Form 10-K (File No. 0-10394)).
				10.21		Letter Agreement with Fred R. Hume dated January 29, 1999. (Incorporated by reference to Exhibit 10.35 of the Company's 1999 Annual Report on Form 10-K (File No. 0-10394)).
				10.22		Letter Agreement dated May 28, 1999, among Data I/O Corporation, JTAG Technologies B.V., and JTAG Holding B.V. (Incorporated by reference to Exhibit 10.36 of the Company's 1999 Annual Report on Form 10-K (File No. 0-10394) ).
				10.23		Amended and Restated 2000 Stock Compensation Incentive Plan dated May 19, 2000. (Incorporated by reference to the Company's 2000 Proxy Statement dated March 27, 2000.)
				10.24		Amended and Restated 1982 Employee Stock Purchase Plan dated May 16, 2001 (Incorporated by reference to the Company's 2001 Proxy Statement dated March 28, 2001.)
				10.25		Letter Agreement with Irene Bjorklund dated March 13, 2001
				16.1		Letter regarding change in certifying accountant (Incorporated by reference to Exhibit 16.1 of the Company's Form 8-K filed on November 21, 2001.)
				21		Subsidiaries of the Registrant
				23.1		Consent of Grant Thornton LLP, Certified Public Accountants
				23.2		Consent of Ernst & Young LLP, Certified Public Accountants

(b): Form 8-K:

A form 8-K and a form 8-K/A were filed on November 21, 2001 and November 28, 2001 respectively, announcing the Company's dismissal of its independent auditors, Ernst & Young LLP and the retention of Grant Thorton LLP.

DATA I/O CORPORATION

SCHEDULE II—CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS

			Balance at Beginning of Period		Charged/ (Credited) to Costs and Expenses			Deductions- Describe			Balance at End of Period
			(In Thousands)
Year Ended December 30, 1999:
	Reserves and allowances deducted from asset accounts:
		Allowance for bad debts	$	445	$	44		$	(25	)(1)	$	464
		Inventory reserves	$	5,968	$	502	(3)	$	(1,901	)(2)	$	4,569
Year Ended December 28, 2000:
	Reserves and allowances deducted from asset accounts:
		Allowance for bad debts	$	464	$	24		$	(138	)(1)	$	350
		Inventory reserves	$	4,569	$	438	(3)	$	(2,420	)(2)	$	2,587
Year Ended December 31, 2001:
	Reserves and allowances deducted from asset accounts:
		Allowance for bad debts	$	350	$	64		$	(42	)(1)	$	372
		Inventory reserves	$	2,587	$	1,122		$	(1,240	)(2)	$	2,469

(1): Uncollectable accounts written off, net of recoveries.
(2): Obsolete inventories disposed of.
(3): Primarily related to products that have been discontinued as a result of the business restructuring implemented in 1998.

SIGNATURES

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

	DATA I/O CORPORATION (REGISTRANT)

DATED: MARCH 26, 2002	BY:	/S/ FREDERICK R. HUME Frederick R. Hume President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 26, 2002 by the following persons on behalf of the Registrant and in the capacities indicated.

Name		Title

By:	/s/ FREDERICK R. HUME Frederick R. Hume	President and Chief Executive Officer (Principal Executive Officer)
By:	/s/ JOEL S. HATLEN Joel S. Hatlen	Chief Financial Officer Vice President of Finance Secretary, Treasurer (Principal Financial and Accounting Officer)
By:	/s/ GLEN F. CEILEY Glen F. Ceiley	Director
By:	/s/ PAUL A. GARY Paul A. Gary	Director
By:	/s/ EDWARD D. LAZOWSKA Edward D. Lazowska	Director
By:	/s/ DANIEL A. DILEO Daniel A. DiLeo	Director
By:	/s/ STEVEN M. QUIST Steven M. Quist	Director

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DATA I/O CORPORATION FORM 10-K For the Fiscal Year Ended December 31, 2001 INDEX
PART I

Item 1. Business

Item 2. Properties

Item 3. Legal Proceedings

Item 4. Submission of Matters to a Vote of Shareholders

PART II

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

Item 6. Selected Five-Year Financial Data

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

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

Item 8. Financial Statements and Supplementary Data

REPORT OF MANAGEMENT
DATA I/O CORPORATION CONSOLIDATED BALANCE SHEETS
DATA I/O CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS
DATA I/O CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS

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

PART III

Item 10. Directors and Executive Officers of the Registrant

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management

Item 13. Certain Relationships and Related Transactions

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

DATA I/O CORPORATION SCHEDULE II—CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
SIGNATURES
EX-3.2 3 a2073908zex-3_2.htm EX 3.2
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EXHIBIT 3.2

AMENDED AND RESTATED

BYLAWS

DATA I/O CORPORATION

As of March 22, 2002

ARTICLE I

Offices

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

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

ARTICLE II

Shareholders' Meetings

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

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

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

(4) Notice:

(a) Notice of the time and place of the annual meeting of shareholders shall be given by delivering personally or by mailing a written or printed notice of the same, at least ten days, and not more than sixty days, prior to the meeting to each shareholder of record entitled to vote at such meeting.

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

(c) Notice of a shareholders' meeting at which the shareholders will be called to act on an amendment to the articles of incorporation, a plan of merger or share exchange, a proposed sale

of assets other than in the regular course of business or the dissolution of the Corporation shall be given not fewer than twenty days and not more than sixty days before the meeting date.

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

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

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

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

(7) Voting of Shares:

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

(b) If a quorum exists, action on a matter, other than the election of directors, is approved by a voting group if the votes cast within the voting group favoring the action exceed the votes cast within the voting group opposing the action, unless the question is one which by express provision of law, of the Articles of Incorporation or of these Bylaws a greater number of affirmative votes is required.

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

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

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

(10) Action by Shareholders without a Meeting: Any action required or which may be taken at a meeting of shareholders of the corporation may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the shareholders entitled to vote with respect to the subject matter thereof, and delivered to the Corporation for inclusion in the minutes or filing

with the Corporation's records. Such consent shall have the same force and effect as a unanimous vote of shareholders. Action taken in accordance with this section shall be effective when all written consents are in the possession of the Corporation unless the consent specifies a later effective date.

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

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

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

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

(14) Shareholder Proposals at Annual Meeting: Business may be properly brought before an annual meeting by a shareholder only upon the shareholder's timely notice thereof in writing to the

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

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

ARTICLE III

Stock

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

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

At a minimum each certificate of stock shall state:

(a) the name of the Corporation;

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

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

(e) if the Corporation is authorized to issue different classes of shares or different series within a class, the designations, relative rights, preferences and limitations applicable to each class and the variations in rights, preferences and limitations determined for each series, and the authority of the Board of Directors to determine variations for future series, must be summarized either on the front or back of the certificate. Alternatively, the certificate may state conspicuously

on its front or back that the Corporation will furnish the shareholder this information without charge on request in writing.

(3) Transfers:

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

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

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

(a) The classification of shareholder who may certify;

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

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

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

Upon receipt by the corporation of a certification complying with the procedure, the persons specified in the certification shall be deemed, for the purpose or purposes set forth in the certification, to be the holders of record of the number of shares specified in place of the shareholder making the certification.

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

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

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

ARTICLE IV

Board of Directors

(1) Number and Powers: The management of all the affairs, property and interest of the corporation shall be vested in a Board of Directors consisting of seven (7) persons, who shall be elected for a term of one year, and shall hold office until their successors are elected and qualified. Directors need not be shareholders or residents of the State of Washington. In addition to the powers and authorities by these Bylaws and the Articles of Incorporation expressly conferred upon it, the Board of Directors may exercise all such powers of the corporation and do all such lawful acts and things as are not prohibited by statute or by the Articles of Incorporation or by these Bylaws or as directed or required to be exercised or done by the shareholders.

(2) Change of Number: The number of directors may at any time be increased or decreased by amendment of these Bylaws, but no decrease shall have the effect of shortening the term of any incumbent directors, except as provided in Sections 5 and 6 of this Article IV.

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

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

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

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

(7) Special Meetings:

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

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

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

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

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

(11) Executive and Other Committees: The Board of Directors, by resolution adopted by a majority of the full Board of Directors, may designate from among its members an Executive Committee and one or more other standing or special committees. The Executive Committee shall have and may exercise all the authority of the Board of Directors, and other standing or special committees may be invested with such powers, subject to such conditions, as the Board of Directors shall see fit; provided that, notwithstanding the above, no committee of the Board of Directors shall have the authority to: (1) Declare dividends or distributions, except at a rate or in periodic amount determined by the Board of Directors; (2) approve or recommend to shareholders actions or proposals required by law to be approved by shareholders; (3) fill vacancies on the Board of Directors or any committee thereof; (4) adopt, amend, or repeal the Bylaws; (5) authorize or approve the reacquisition of shares unless pursuant to general formula or method specified by the Board of Directors; (6) fix compensation of any director for serving on the Board of Directors or on any committee thereof; (7) approve a plan of merger, consolidation, or exchange of shares not requiring shareholder approval; (8) reduce earned or capital surplus; or (9) appoint other committees of the Board of Directors or the members thereof. All committees so appointed shall keep regular minutes of their meetings and shall cause them to be recorded in books kept for that purpose in the office of the corporation. The designation of any such committee and the delegation of authority thereto shall not relieve the Board of Directors, or any member thereof, of any responsibility imposed by law.

(12) Remuneration: No stated salary shall be paid directors, as such, for their service, but by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, may be allowed for attendance at each regular or special meeting of such Board; provided, that nothing herein

contained shall be construed to preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of standing or special committees may be allowed like compensation for attending committee meetings.

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

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

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

ARTICLE V

Officers

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ARTICLE VI

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

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

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

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

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

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

(b) In the case of any other distribution:

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

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

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

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

ARTICLE VII

Notices

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

ARTICLE VIII

Seal

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

ARTICLE IX

Indemnification

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

(2) Right of Claimant to Bring Suit: If a claim under Section 1 of this Article is not paid in full by the corporation within sixty days after a written claim has been received by the corporation, except in the case of a claim for expenses incurred in defending a proceeding in advance of its final disposition, in which case the applicable period shall be twenty days, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, to the extent successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. The claimant shall be presumed to be entitled to indemnification under this Article upon submission of a written claim (and, in an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition, where the required undertaking has been tendered to the corporation) and thereafter the corporation shall have the burden of proof to overcome the presumption that the claimant is not so entitled. Neither the failure of the corporation (including its Board of Directors, independent legal counsel or its shareholders) to have made a determination prior to the commencement of such action that indemnification of or reimbursement or advancement of expenses to the claimant is proper in the circumstances nor an actual determination by the corporation (including its Board of Directors, independent legal counsel or its shareholders) that the claimant is not entitled to indemnification or to the reimbursement or advancement of expenses shall be a defense to the action or create a presumption that the claimant is not so entitled.

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

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

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

ARTICLE X

Books and Records

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

ARTICLE XI

Amendments

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

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

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

Most recently amended by resolution of the corporation's Board of Directors on March 12, 2001.

Joel S. Hatlen, Secretary

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ARTICLE III Stock
EX-10.25 4 a2073908zex-10_25.htm EX 10.25

EXHIBIT 10.25

Data I/O Corporation
10525 Willows Road, NE
Redmond, WA 98053

March 13, 2001

Ms. Irene Bjorklund
519 Lake Washington Blvd.
Seattle, WA 98122

Dear Irene:

On behalf of the officers and directors of Data I/O Corporation, I am pleased to welcome you as the newest member of our management team and to extend the following offer of employment. I am thrilled to have you with us and am personally looking forward to having your help as Vice President of Sales and Marketing. Data I/O will do well under the leadership that you will bring to the selling process.

In this capacity, as Vice President of Sales and Marketing, you will report directly to me. I would like to set the start date for your employment as of March 20, 2001. Please confirm your acceptance of our offer and the start date by signing and returning the enclosed copy of this letter to our office as soon as possible.

The total cash compensation for this position is comprised of two major elements. The first is an annual base salary of $200,000 per year (or $16,666 per month). The second is an incentive bonus (prorated from your start date for year 2001) at 40% of your base salary ($38,500,000 bookings for Q2-Q4)and calculated as follows:

Percent of Plan	Incentive		Total Compensation
80%	$	64,000	$	264,000
90%	$	72,000	$	272,000
100%	$	80,000	$	280,000
110%	$	96,000	$	296,000
120%	$	112,000	$	312,000
130%	$	128,000	$	328,000
150%	$	160,000	$	360,000
200%	$	240,000	$	440,000

In addition, an award of 30,000 shares of stock options is proposed, subject to the approval of the Board of Directors. These options are priced at the average Fair Market Value of our stock at the later of the board approval date or your start date, with a 4 year quarterly vesting (6.25% per quarter).

You will be eligible for all company benefit programs as outlined in our Team Member Handbook. Your medical, dental, vision, and life insurance benefits are effective on your first day of employment. You have 30 days after you begin work to choose the type of coverage you would like. In order for us to expedite the benefits enrollment process, please complete the attached documents and return them to Human Resources with your acceptance of this offer.

Your employment is conditional upon execution of our Employment Agreement (See Attached) and completion of an I-9 Form. In order to comply with the Immigration Reform and Control Act of 1986, we must make sure that all new team members have the right to legally work in the United States. Please provide our Human Resources staff with sufficient documents to complete the I-9 Form by your first day of employment (e.g.: (1) passport (2) drivers license and social security card, or (3) drivers license and original birth certificate).

While this offer does not express or imply an employment contract between you and Data I/O for any specific period of time, we believe that the relationship will be productive and mutually beneficial.

Your signature below indicates acceptance of this offer. The terms and conditions outlined above are all of the terms and conditions of this offer. Please return one copy of this letter by March 20, 2001. The second copy is provided for your records. If you have any questions concerning this offer, please contact John Vicklund, VP Human Resources at 425-867-6817.

Sincerely,

Fred Hume
President and CEO

I am accepting this position based solely on the terms and conditions of employment described in this letter

Accepted:

/s/ IRENE BJORKLUND	03/13/01	March 20, 2001

Signature	Date Signed	Preferred Start Date

Enclosures

EX-21 5 a2073908zex-21.htm EX 21
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EXHIBIT 21

DATA I/O CORPORATION
SUBSIDIARIES OF THE REGISTRANT

The following table indicates the name, jurisdiction of incorporation and basis of ownership of each of the Company's subsidiaries:

Name of Subsidiary	State or Jurisdiction of Organization	Percentage of Voting Securities Owned
Data I/O International, Inc.	Washington	100%
Data I/O FSC International, Inc.	Territory of Guam	100%
Data I/O Canada Corporation	Canada	100%
Data I/O China, Ltd	China	100%
Data I/O GmbH	Germany	100%
RTD, Inc. (formerly Reel-Tech, Inc.)	Washington	100%

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DATA I/O CORPORATION SUBSIDIARIES OF THE REGISTRANT
EX-23.1 6 a2073908zex-23_1.htm EX 23.1
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EXHIBIT 23.1

Consent of Grant Thornton LLP, Independent Certified Public Accountants

We have issued our report dated February 8, 2002, accompanying the consolidated financial statements and schedule included in the Annual Report of Data I/O Corporation on Form 10-K for the year ended December 31, 2001. We hereby consent to the incorporation by reference of said report in the Registration Statement of Data I/O on Form S-8 (File No. 333-20657 and No. 33-66824) pertaining to the Company's 1982 Employee Stock Purchase Plan and Director Fee Plan, and Registration Statements Forms S-8 (File No. 33-95608, No. 33-54422, No. 333-55911, No. 33-02254, and No. 33-03958) pertaining to the 1986 Stock Option Plan.

/s/ GRANT THORNTON LLP

Seattle, Washington
March 25, 2002

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EXHIBIT 23.1
EX-23.2 7 a2073908zex-23_2.htm EX 23.2

EXHIBIT 23.2

C O N S E N T O F E R N S T & Y O U N G L L P, I N D E P E N D E N T A U D I T O R S

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

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

/s/ ERNST & YOUNG LLP

ERNST & YOUNG LLP

Seattle, Washington
March 26, 2002

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