SecProbe.io

CORRESP
1
filename1.htm

        February 1,
        2008

        Brian Cascio

        Division of Corporate Finance

        Securities and Exchange Commission

        450 Fifth Street, N.W.

        Washington, D.C. 20549-0360

                        Re:

                        Responses to the Securities and Exchange
                        Commission

        Staff Comments dated December 18, 2007, regarding Data I/O
        Corporation

        Form 10-K for the year ended December 31, 2006, Filed April 2,
        2007

        Forms 10-Q for the period ended June 30, 2007 File No. 000-10394

        Dear Mr.
        Cascio:

        This
        letter responds to the staff’s comments set forth in the letter of December 18, 2007
        regarding the above-referenced reports. For your convenience, we have included the
        staff’s comments below and have numbered our responses accordingly.

        In some
        of the responses, Data I/O has agreed to change or supplement the disclosures in its future
        filings for periods ending after December 31, 2007. It is doing so in the spirit of
        cooperation with the staff of the Securities and Exchange Commission, and not because Data
        I/O believes its prior filing is materially deficient or inaccurate. Data I/O has also
        indicated in some responses that it believes no change in disclosure is appropriate, and
        has explained why.

        We have
        discussed the staff’s comments with Data I/O, and Data I/O has requested that we
        convey its responses to you as follows:

        Form
        10-K for the year ended December 31, 2006

        Consolidated Statement of Cash Flows, page 29

        Staff
        Comment No. 1.

        We note your response to prior comment 2 in our letter dated September 11,
        2007. In future filings, please provide additional disclosure of your accounting for sales
        of equipment that had previously been used internally, similar to your response.

        The
        Company’s Response:

                        Future filings will include
                        this disclosure.

        Note
        15. Share-Based Compensation, page 40

        Staff
        Comment No. 2.

        We reference your response to prior comment 7 in our letter dated September
        11, 2007. We see that beginning in the fourth quarter of 2005 you excluded periods of
        historical data in calculating volatility due to decreasing revenue related to the dot com
        and telecom industry collapse from 2000 to 2002. SAB 107 and SFAS 123(R) explain that
        certain instances where it may be appropriate to adjust historical volatility are those
        such

        Brian
        Cascio, Division of Finance, S.E.C.

        February 1,
        2008

        Page
        2

        as a discreet one-time event that it is specific to the reporting company,
        under management’s control and not expected to recur during the expected term of the
        options being granted. Section D.1, question 2 of SAB 107 indicates that such exclusions
        would be rare. It does not appear that events affecting the broader market should be
        excluded from your analysis of historical volatility. Please further explain why you
        believe that your calculation of historical volatility is in compliance with SAB 107 and
        SFAS123(R).

        The
        Company’s Response:

        We believe that our estimate of the volatility factor calculated by
        excluding a period represented the best estimate of our future volatility. The period was
        not excluded due to the dot com and telecom industry collapse (although those events set
        the stage for management’s actions). The period was primarily excluded due to
        extraordinary measures taken to change the company which radically altered the
        company’s target market focus, operations and business focus. These actions were
        specific to our company and under the control of management. These actions to radically
        restructure the company, change the market focus of our business, change the geographic
        focus of our business, and change the product direction of our business (especially
        accompanied by a disproportionately large investment in R&D) all occurred at this same
        time, and were clearly a corporate survival event. This transformation changes event was
        not of the combined type, scope, quantity and magnitude that would be expected to be
        repeated during an option term. We believed this event and its volatility impact to be
        rare, and the transition volatility while transforming from the “old” to the
        “new” Data I/O was not representative of future expected volatility, which
        caused us to conclude that the period should be excluded.

        The review of SAB 107 and SFAS 123(R)’s application to our evaluation
        of the volatility factor started with looking at the historic volatility and then we
        considered how it may differ in the future. SFAS 123(R) and Staff guidance called for using
        good faith efforts to identify and use sufficient information in determining whether taking
        historical volatility, implied volatility or a combination of both into account will result
        in the best estimate of expected volatility. When circumstances indicate the availability
        of new or different information that would be useful in estimating expected volatility, a
        company should incorporate that information. We evaluated the unusual changes in and
        influences on our volatility factor as well as comparing it with other companies and
        discovered that our factor appeared to be out of line with other companies, causing our
        further analysis of the volatility data.

        We discovered that the period relating to our transformation had a
        volatility that was not representative of our business before or after the change period as
        well as in comparison to other industry companies. We evaluated it to be a discreet
        one-time type of transformation event that was not expected to recur during the term of
        options and it was specifically done under management’s control and specific to our
        company as we believed was set forth in D.1 question 2 of SAB107. Preparing calculations of
        volatility excluding the periods in question resulted in our calculations showing a
        historic .65 volatility factor. We looked back and analyzed additional years equal to and
        before the excluded period which had a calculated .6 volatility factor. Leaving the
        transformation period in and just extending the period resulted in a .89 volatility factor.
        We examined

        Brian
        Cascio, Division of Finance, S.E.C.

        February 1,
        2008

        Page
        3

        volatility disclosures of other companies and determined that an adjusted
        historic .65 factor was at the high end of the range of factors disclosed, which given our
        size, industry niche, life stage, and financial leverage seemed to be confirmed as
        appropriate and our best estimate of the future volatility factor. The difference between
        the use of a .65 and a .89 volatility factor for 2006 was calculated to have an effect of
        approximately $12,000 on expense.

        Form
        10-Q for the period ended September 30, 2007

        Item 4.
        Controls and Procedures

        (a)
        Evaluation of disclosure controls and procedures.

        Staff
        Comment No. 3.

        We note your statement that disclosure controls are controls and procedures
        designed to reasonably assure that information required to be disclosed in our reports
        filed under the Exchange Act is recorded, processed, summarized, and reported within the
        time periods specified in the SEC’s rules and forms and that disclosure controls are
        also designed to reasonably assure that such information is accumulated and communicated to
        our management, including the CEO and CFO, as appropriate to allow timely decisions
        regarding disclosure. Please revise future filings to state that your principal executive
        officer and principal financial officer concluded that your disclosure controls and
        procedures are effective at the reasonable level of assurance
        level. Please refer to Section II.F.4 of Management’s
        Reports on Internal Control Over Financial Reporting and Certification of Disclosure in
        Exchange Act Periodic Reports, SEC Release No. 33-8238, available on our website at
        http://www.sec.gov/rules/final/33-8238.htm
        .

        The
        Company’s response:

                        Future filings will include
                        this disclosure.

        We
        acknowledge that:

                        •

                        the company is responsible for the adequacy and accuracy of
                        the disclosure in the filing;

                        •

                        staff comments or changes to disclosures in response to
                        staff comments do not foreclose the Commission from taking any action with
                        respect to the filing; and

                        •

                        the company may not assert staff comments as a defense in
                        any proceeding initiated by the Commission or any person under the federal
                        securities laws of the United States.

        Thank you
        for your review of our response letter. If you should have any questions regarding our
        response letter, please do not hesitate to contact me at (206) 903-8803 or Joel Hatlen
        (chief financial officer) at 425 881-6444 ext. 6816.

        Brian
        Cascio, Division of Finance, S.E.C.

        February 1,
        2008

        Page
        4

        Sincerely,

        /s/ Kimberley R. Anderson

        Kimberley R. Anderson

                        cc:

                        Joel Hatlen, Data I/O Corporation

        Scott Davison, Grant Thornton LLP