INCOME TAXES

12 Months Ended

Dec. 31, 2011

Notes to Financial Statements

Note 13 - INCOME TAXES

Components of income (loss) before taxes:

	Year Ended Dec. 31,
(in thousands)	2011			2010
U.S. operations	$	(207	)	$	1,948
Foreign operations		1,503			1,338
	$	1,296		$	3,286

Income tax expense (benefit) consists of:
Current tax expense (benefit):
U.S. federal	$	20	$	3
State		22		9
Foreign		191		262
		233		274
Deferred tax expense (benefit) – U.S. federal		-		-
Total income tax expense (benefit)	$	233	$	274

A reconciliation of Data I/O’s effective income tax and the U.S. federal tax rate is as follows:

	Year Ended Dec. 31,
	2011			2010
(in thousands)
Statutory tax	$	441		$	1,117
State and foreign income tax, net of federal income tax benefit		(323	)		(446	)
Valuation allowance for deferred tax assets		115			(397	)
Total income tax expense (benefit)	$	233		$	274

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets are presented below:

	Year Ended Dec. 31,
	2011			2010
(in thousands)
Deferred income tax assets:
Allowance for doubtful accounts	$	28		$	33
Inventory and product return reserves		699			671
Compensation accruals		963			756
Accrued liabilities		29			(35	)
Book-over-tax depreciation and amortization		274			281
Foreign net operating loss carryforwards		704			771
U.S. net operating loss and credit carryforwards		6,209			6,486
		8,906			8,963
Valuation Allowance		(8,906	)		(8,963	)
Total Deferred Income Tax Assets	$	-		$	-

The valuation allowance for deferred tax assets decreased $57,000 during the year ended December 31, 2011, and decreased $314,000 during the year ended December 31, 2010. The net deferred tax assets have a full valuation allowance provided due to uncertainty regarding Data I/O’s ability to utilize such assets in future years. Although we have had recent profitable operations, this full valuation allowance evaluation is based upon our volatile history of losses and the cyclical nature of our industry and capital spending. Credit carryforwards consist primarily of research and experimental and alternative minimum tax credits. U.S. net operating loss carryforwards expire beginning in 2020 to 2031. 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.

The gross changes in uncertain tax positions resulting in unrecognized tax benefits are presented below:

	Year Ended Dec. 31,
	2011		2010
(in thousands)
Unrecognized tax benefits, opening balance	$	98	$	79
Prior period tax position increases		5		12
Additions based on tax positions related to current year		10		7
Unrecognized tax benfits, ending balance	$	113	$	98

Historically, Data I/O has not incurred any interest or penalties associated with tax matters and no interest or penalties were recognized during 2011. However, we have adopted a policy whereby amounts related to interest and penalties associated with tax matters are classified as general and administrative expense when incurred.

Tax years that remain open for examination include 2008, 2009, 2010 and 2011 in the United States of America. In addition, tax years from 2000 to 2007 may be subject to examination in the event that Data I/O utilizes the net operating losses and credit carryforwards from those years in its current or future year tax returns.