SHARE-BASED COMPENSATION

12 Months Ended

Dec. 31, 2011

Notes to Financial Statements

Note 12 - SHARE-BASED COMPENSATION

For share-based awards granted, we have recognized compensation expense based on the estimated grant date fair value method. For these awards we have recognized compensation expense using a straight-line amortization method and reduced for estimated forfeitures. The impact on our results of operations of recording share-based compensation for the year ended December 31, 2011 and 2010 was as follows:

	Year Ended Dec. 31,
	2011			2010
(in thousands)
Cost of goods sold	$	45		$	33
Research and development		84			29
Selling, general and administrative		348			257
Total share-based compensation	$	477		$	319
Impact on net income per share:
Basic and diluted	$	(0.05	)	$	(0.04	)

Approximately $10,000 and $7,000 of share-based compensation was capitalized into inventory for the years ended December 31, 2011 and 2010, respectively.

The fair values of share-based awards for employee stock option awards were estimated at the date of grant using the Black-Scholes valuation model. The volatility and expected life of the options used in calculating the fair value of share-based awards may exclude certain periods of historical data that we considered atypical and not likely to occur in future periods. The following weighted average assumptions were used to calculate the fair value of options granted during the years ended December 31:

	Employee Stock
	Options
	2011			2010
Risk-free interest rates		1.39	%		1.66	%
Volatility factors		0.55			0.56
Expected life of the option in years		4.00			4.00
Expected dividend yield	None			None

The risk-free interest rate used in the Black-Scholes valuation method is based on the implied yield currently available in U.S. Treasury securities at maturity with an equivalent term. We have not recently declared or paid any dividends and do not currently expect to do so in the future. The expected term of options represents the period that our stock-based awards are expected to be outstanding and was determined based on historical weighted average holding periods and projected holding periods for the remaining unexercised shares. Consideration was given to the contractual terms of our stock-based awards, vesting schedules and expectations of future employee behavior. Expected volatility is based on the annualized daily historical volatility of Data I/O’s stock over a representative period.

The weighted average grant date fair value of options granted under our stock option plans for the twelve month period ending December 31, 2011 and 2010 was $2.61 and $1.88, respectively. The following table summarizes stock option activity under our stock option plans for the twelve months ended December 31:

	2011							2010
	Options			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Life in Years		Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life in Years
Outstanding at beginning of year		833,841		$	3.94				737,308		$	3.63
Granted		324,500			6.02				225,000			4.34
Exercised		(111,893	)		2.55				(120,717	)		2.85
Cancelled, Expired or Forfeited		(8,437	)		4.62				(7,750	)		3.21
Outstanding at end of year		1,038,011		$	4.74		3.64		833,841		$	3.94		3.44
Vested or expected to vest at the end of the period		948,096		$	4.68		2.65		764,398		$	3.94		2.43
Exercisable at end of year		551,000		$	4.36		2.65		471,319		$	3.80		2.43

The aggregate intrinsic value of outstanding options is $110,254. This represents the total pretax intrinsic value, based on the Data I/O’s closing stock price of $3.74 at December 31, 2011, which would have been received by award holders had all award holders exercised their stock options that were in-the-money as of that date. The aggregate intrinsic value of awards exercised during the twelve month period ended December 31, 2011 was $377,416.

Restricted stock award including performance-based stock award activity under our share-based compensation plan was as follows:

	2011					2010
	Awards			Weighted - Average Grant Date Fair Value		Awards			Weighted - Average Grant Date Fair Value
Outstanding at beginning of year		25,235		$	4.27		24,711		$	4.23
Granted		15,200			6.02		12,500			4.30
Vested		(9,485	)		4.35		(9,066	)		4.25
Cancelled		(572	)		5.16		(2,910	)		4.14
Outstanding at end of year		30,378		$	5.10		25,235		$	4.27

As of December 31, 2011 and 2010, there were $1,181,876 and $737,104, respectively, of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under our stock option plans. That cost is expected to be recognized over a weighted average period 2.65 and 2.58 years as of December 31, 2011 and 2010, respectively.