Note 2 - Stock-Based Compensation

6 Months Ended

Jun. 30, 2013

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

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

NOTE 2. - STOCK-BASED COMPENSATION

Stock Options

During the six months ended June 30, 2013, the Company issued 11,000 stock options that vest over a four year period and expire ten years from date of grant. The weighted average exercise price of these stock options is $2.47. During the six months ended June 30, 2012, the Company issued 136,000 stock options that vest over a one to four year period and expire ten years from the date of grant. The weighted average exercise price of these stock options is $5.27. Compensation expense related to stock options without performance-based vesting conditions was $85,000 and $104,000 for the three months ended June 30, 2013 and 2012, respectively. Compensation expense related to stock options without performance-based vesting conditions was $203,000 and $177,000 for the six months ended June 30, 2013 and 2012, respectively.

During the six months ended June 30, 2013, the Company issued no stock options with performance-based vesting conditions. During the six months ended June 30, 2012, the Company 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. All stock options with performance-based conditions expire ten years from date of grant. Of the unvested stock options outstanding at June 30, 2013, 863,050 are subject to the achievement of certain performance conditions. The performance conditions related to approximately 42,000 of these stock options were deemed probable as of June 30, 2013. Compensation expense related to performance-based stock options, for which vesting was deemed probable, was approximately $56,000 and $40,000 for the three months ended June 30, 2013 and 2012, respectively. Compensation expense related to performance-based stock options, for which vesting was deemed probable, was approximately $112,000 and $85,000 for the six months ended June 30, 2013 and 2012, respectively. The performance conditions related to the remaining options were not deemed probable at June 30, 2013; therefore no compensation expense related to these options has been recorded.

The weighted-average remaining contractual life of stock options outstanding and exercisable at June 30, 2013 and 2012 was 5.77 years and 3.28 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, 2012		2,052,783		$	4.06
Granted		11,000			2.47
Exercised		-			-
Cancelled		(397,054	)		4.71
Balance, June 30, 2013		1,666,729		$	3.90

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 June 30,						Six months ended June 30,
	2013			2012			2013			2012
Weighted average risk free interest rates		1.86	%		1.96	%		2.00	%		1.93	%
Weighted average life (in years)		10			10			10			10
Volatility		66.10	%		66.19	%		66.23	%		65.90	%
Expected dividend yield		-			-			-			-
Weighted average grant-date fair value per share of options granted	$	1.80		$	4.18		$	1.80		$	3.56

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 four 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 six months ended June 30, 2013. During the six months ended June 30, 2012, the Company issued 9,000 shares of restricted stock. 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 $25,000 and $36,000 for the three months ended June 30, 2013 and 2012, respectively. Compensation expense related to restricted stock was $56,000 and $69,000 for the six months ended June 30, 2013 and 2012, respectively. As of June 30, 2013, there was $171,000 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 1.7 years. As of December 31, 2012, there was $261,000 of total unamortized compensation cost related to unvested restricted stock which was expected to be recognized over a weighted-average period of 2.1 years. The following table summarizes the restricted stock activity for the six months ended June 30, 2013:

	Restricted Stock Shares			Weighted Average Grant Date Value
Nonvested restricted stock at December 31, 2012		112,015		$	3.17
Granted		-			-
Vested		(40,195	)		3.08
Cancelled/Forfeited		(10,164	)		3.35
Nonvested restricted stock at June 30, 2013		61,656		$	3.21