Note 2 - Stock-Based Compensation

3 Months Ended

Mar. 31, 2012

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

NOTE 2.  - STOCK-BASED COMPENSATION

Stock Options: During the three months ended March 31, 2012, the Company issued 67,000 stock options that vest over a one to four year period and expire ten years from date of grant.  The weighted average exercise price of these stock options is $4.80.  During the three months ended March 31, 2011, the Company issued 204,500 stock options that vest over a three to four year period and expire ten years from the date of grant. The weighted average exercise price of these stock options is $1.83.  Compensation expense related to these stock options was approximately $73,000 and $24,000 for the three months ended March 31, 2012 and 2011, respectively.

During the three months ended March 31, 2012, the Company also issued 448,000 stock options with performance-based vesting conditions for the years ended December 31, 2012, 2013, 2014, and 2015, the achievement of which would result in pro rata vesting per year in February 2013, 2014, 2015, and 2016, respectively. The weighted average exercise price of these stock options is $4.76.  During the three months ended March 31, 2011, the Company issued no stock options with performance-based vesting conditions.  All stock options with performance-based conditions expire ten years from date of grant.  Of the stock options outstanding at March 31, 2012, 680,300 are subject to the achievement of certain performance conditions.  The performance conditions related to approximately 14,000 of these stock options were deemed probable as of March 31, 2012.  Compensation expense related to performance-based stock options, for which vesting was deemed probable, was approximately $45,000 and $11,000 for the three months ended March 31, 2012 and 2011, respectively.  The performance conditions related to the remaining options were not deemed probable at March 31, 2012; therefore no compensation expense related to these options has been recorded.

The weighted-average remaining contractual life of stock options outstanding and exercisable at March 31, 2012 and 2011 is 3.07 years and 1.64 years, respectively.

The following table summarizes the combined stock option activity under all of the plans:

	Number of Options			Weighted Average Option Price
Balance, December 31, 2011		1,332,473		$	4.21
Granted		515,000			4.77
Exercised		(101,540	)		5.01
Canceled		(116,700	)		3.80
Balance, March 31, 2012		1,629,233		$	4.37

Option Valuation: The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with weighted-average assumptions based on the grant date.

	Three months ended
	March 31, 2012			March 31, 2011
Weighted average risk free interest rates		1.93	%		3.62	%
Weighted average life (in years)		10			10
Volatility		65.86	%		63.62	%
Expected dividend yield		-			-
Weighted average grant-date fair value per      share of options granted	$	3.47		$	1.36

Restricted Stock: The Interphase Corporation 2004 Long-Term Stock Incentive Plan provides for grants of bonus stock awards (“restricted stock”) to its directors and certain employees at no cost to the recipient.  Holders of restricted stock are entitled to cash dividends, if declared, and to vote their respective shares.  Restrictions limit the sale or transfer of these shares during a predefined vesting period, currently ranging from three to six years, and in some cases vesting is subject to the achievement of certain performance conditions. There were no shares of restricted stock issued during the three months ended March 31, 2012 or 2011.  Upon issuance of restricted stock under the plan, unearned compensation equivalent to the market value at the date of grant is recorded as a reduction to shareholders’ equity and subsequently amortized to expense over the respective restriction periods.  Compensation expense related to restricted stock was approximately $33,000 and $56,000 for the three months ended March 31, 2012 and 2011, respectively.  As of March 31, 2012, there was approximately $316,000 of total unamortized compensation cost related to unvested restricted stock remaining to be recognized. The expense is expected to be recognized over a weighted-average period of 2.7 years.  As of December 31, 2011, there was approximately $479,000 of total unamortized compensation cost related to unvested restricted stock which was expected to be recognized over a weighted-average period of 3.0 years.  The following table summarizes the restricted stock activity for the first quarter of 2012:

	Restricted Stock Shares			Weighted Average Grant Date Value
Nonvested restricted stock at December 31, 2011		225,941		$	2.67
Granted		-			-
Vested		(27,570	)		2.83
Cancelled/Forfeited		(71,665	)		1.82
Nonvested restricted stock at March 31, 2012		126,706		$	3.12