notes to consolidated financial statements Diodes Incorporated and Subsidiaries Note 1 – Summary of Operations and Significant  Accounting Policies (continued) 34 Stock-based compensation – The Company maintains  stock-based compensation plans for its board of direc- tors, officers, and key employees, which provide for  non-qualified and incentive stock options. The plans  are described more fully in Note 9. With the issuance  in mid-December 2004 by FASB of SFAS No. 123(R),  “Share-Based Payments,”  which is a revision to SFAS No.  123,  “Accounting for Stock-Based Compensation,”  which  was issued in 1995, the Company will begin reporting  the fair value of stock-based compensation as an expense  in its financial statements beginning in 2005 (see discus- sion in “Recently Issued Accounting Pronouncements  and Proposed Accounting Changes” below). Prior to  implementation of this new standard, the Company  accounted for those plans under the recognition and  measurement principles of APB Opinion No. 25,  “Accounting for Stock Issued to Employees,”  and related  Interpretations. No compensation cost was reflected  in net income for stock options, as all options granted  under those plans have an exercise price equal to  or greater than the market value of the underlying  common stock on the date of the grant. As required  by SFAS No. 148,  “Accounting for Stock-Based  Compensation – Transition and Disclosure, an amendment  of FASB Statement No. 123,”  the following table illus- trates the effect on net income and earnings per com- mon share as if the Company had applied the fair value  recognition provisions of SFAS No. 123 to stock-based  compensation for each period presented: The pro forma information recognizes as compensa- tion the value of stock options granted using the Black- Scholes option pricing model which takes into account as  of the grant date, the exercise price and expected life of  the option, the current price of underlying stock and its expected volatility, expected dividends on the stock, expected forfeitures and the risk-free interest rate for the term of the option. The following is the weighted  average of the data used to calculate the estimated fair  value: input of highly subjective assumptions, including the  expected stock price volatility and expected life of the  option. Because the Company’s stock options have charac- teristics significantly different from those of freely traded  options, and changes in the subjective input assumptions  can materially affect the Company’s fair value estimate  The Company’s valuations are based upon a single  option valuation approach using the Black-Scholes option  valuation model. The Black-Scholes option valuation  model was developed for use in estimating the fair value  of traded options, which have no vesting restrictions and  are fully transferable and negotiable in a free trading  market. In addition, option valuation models require the For the years ended December 31, Amounts Per Share  Amounts Per Share  Amounts Per Share 2002  Basic Diluted  2003  Basic  Diluted  2004  Basic  Diluted Net income  $ 5,802,000  $ 0.47 $ 0.44  $10,095,000  $ 0.79  $ 0.70  $25,551,000  $ 1.91  $ 1.65 Deduct: stock-based compensation expense determined under fair value method, net of tax  (1,918,000)  (0.15)  (0.15)  (1,397,000)  (0.11)  (0.10)  (1,642,000)  (0.13)  (0.10) Pro forma net income  $ 3,884,000  $ 0.32 $ 0.29  $ 8,698,000  $ 0.68  $ 0.60  $23,909,000  $ 1.78  $ 1.55 Risk-free  December 31,  interest rate  Expected life  Expected volatility  Expected forfeitures  Expected dividends 2004 3.64%  5.0 years  68.36%  2.64%  0% 2003 3.31%  5.0 years  66.18%  2.77%  0% 2002 4.03%  5.0 years  75.61%  2.77%  0%