I'm a NJ Full Time Resident and I traveled often for my NY based employer. Therefore in years past I allocated my NY income for days not worked in NY. I left this employer in late 2010 and received severance and bonus in early 2011. I no longer work in NY. How does income allocation work if I never worked in NY during 2011?

I believe that NYS considers this payment to be from NY-source, and hence taxable. From IT-203 instructions, NY-source income includes (among other things) this bit:

"any income you received related to a business, trade, profession, or occupation previously carried on in this state, whether or not as an employee, including but not limited to, covenants not to compete and termination agreements;"

So file IT-203 as usual - reporting this income as NY-source - and take the credit on your NJ return for taxes paid to other jurisdictions.