Data I/O’s President and CEO, Fred Hume, Answers Some of Your Questions

Shortly after I joined Data I/O in 1999, I asked Mikio Ishimaru, a former colleague at Fluke to help us rebuild the company’s intellectual property portfolio.  Mikio had been chief patent counsel at AMD and had subsequently formed his own patent law firm.  Working with Mikio and with Tom Hogan, our corporate counsel, our engineers developed a base of intellectual property around our RoadRunner product line that was in development at the time.  Our strategy was to create a portfolio of patents that were both broad in coverage and deep in the sense that we would have several patents in each area.  We have followed the same guiding principle in building the IP portfolio for our key new products.   In the case of RoadRunner, what emerged was a strong portfolio of patents that we are exploiting in our field of use.  This patent portfolio also has broad application outside of our field of use. 

For some time, we have been looking to exploit the unrealized value in the patents and so monetize this intangible asset for our shareholders. This goal was met by the patent sale agreement announced today. We retain a non exclusive royalty free license to practice these patents and retain our know-how, as there is no technology transfer assistance as a part of this sale.  We also retain ownership of all RoadRunner design patents. We do not expect to see an adverse impact of this sale on our RoadRunner business and are continuing to invest in the development of new technology related to our RoadRunner product line and expect that business to grow. 

Why did Data I/O sell these patents now?

Patents have a finite life so their value declines over time.  Some of these patents were nearing the end of their useful life to us and would have been abandoned to avoid future maintenance fees as the combined magnitude of these fees was starting to outweigh the protective benefit.

Is this patent sale likely to create new competitors for RoadRunner?

We do not think it’s likely that this sale will create new competition for us.   While it’s theoretically possible for the acquirer to license these patents to any third party,[the acquirer would have to pay us additional money if they license the technology to certain third parties.]   Meanwhile we continue to invest in new technology that should build a barrier against potential competitors.  That new technology is not included in the sale.

Does the sale of these patents indicate that the RoadRunner product line is at the end of its product life cycle?

Not at all!  It is likely that 2007 will be the biggest year ever for RoadRunner sales.  We continue to invest in this product line by extending its capability and by developing versions to operate with the latest SMT assembly machines.  Our RoadRunner customers are some of our most loyal.  Once they adopt this solution, they keep coming back for more.

Can you comment on the $1.2 million in costs associated with this transaction?

The primary cost will be a brokerage fee that was contingent upon successful completion of a sale.  This is standard practice in the technology licensing field and we believe our fees were comparable to the fees paid on similar transactions.  A small amount of legal and due-diligence expenses are also included in the costs.

How will the sale of the patents affect the company’s value?

Patents are intangible assets that are seldom assigned a value on the company’s books unless acquired as part of an acquisition.  Through the sale of these patents we are acquiring cash that is a tangible asset and does appear on the balance sheet.  This transaction makes the company’s invisible assets visible and thus increases the value to shareholders.

How will this sale affect the company’s future value?

This sale strengthens our ability to further develop our RoadRunner product line and provides immediate cash to fund further investment in related technology that should increase the company’s future value.  The new technology that will be created as part of that investment is not included in this sale. 

What does this sale imply with respect to Data I/O’s strategy for developing and exploiting its intellectual property?

This sale pertains primarily to technology that was developed a number of years back.  Since then, we have been continuing to build our intellectual property portfolio related to our new products and particularly with respect to software.  At the same time, it is expensive to maintain a robust patent portfolio and defend it in the case of infringement.  By selling or licensing its IP, the company is able to defray patent maintenance expenses while funding further investments and securing its technological leadership.  So, the development of valuable intellectual property and fully exploiting its worth remains an important plank of our corporate strategy.

Sincerely,

Fred Hume

President and CEO of Data I/O Corporation