NOTE 2. -

STOCK-BASED COMPENSATION

Stock Options

The Interphase Corporation 2014 Long-Term Stock Incentive Plan has been adopted by the Company’s Board of Directors and approved by its shareholders. Awards granted subsequent to May 5, 2014 have been made under this plan. All other awards granted before May 5, 2014 were made under the Interphase Corporation 2004 Long-Term Stock Incentive Plan, which expired on May 5, 2014 (so that no new awards could be made or granted under the Interphase Corporation 2004 Long-Term Stock Incentive Plan).

During the six months ended June 30, 2015, the Company issued 20,000 stock options without performance-based vesting; these options vest over a three year period and expire ten years from date of grant. The weighted average exercise price of these stock options is $0.67. During the six months ended June 30, 2014, the Company issued no stock options without performance-based vesting conditions. Compensation expense related to stock options without performance-based vesting conditions was $13,000 and $36,000 for the three months ended June 30, 2015 and 2014, respectively. Compensation expense related to stock options without performance-based vesting conditions was $45,000 and $91,000 for the six months ended June 30, 2015 and 2014, respectively.

During the six months ended June 30, 2015, the Company issued 197,000 stock options with performance-based vesting conditions related to product revenue objectives, the achievement of which would result in vesting in two equal parts upon the achievement of separate performance-based targets. The weighted average exercise price of these stock options is $0.75. During the six months ended June 30, 2014, the Company issued 116,000 stock options with performance-based vesting conditions for the years ended December 31, 2014, 2015, and 2016, the achievement of which would result in pro rata vesting per year in March 2015, 2016, and 2017, respectively. The weighted average exercise price of these stock options is $5.75. All stock options with performance-based conditions expire ten years from date of grant. Of the unvested stock options outstanding at June 30, 2015, 696,092 are subject to the achievement of certain performance conditions. The performance conditions related to approximately 24,828 and 45,000 of these stock options were deemed probable as of June 30, 2015 and 2014, respectively. The Company recorded a net reduction in compensation expense related to performance-based stock options of $2,000 for the three months ended June 30, 2015. Compensation expense related to performance-based stock options, for which vesting was deemed probable, was $67,000 for the three months ended June 30, 2014. Compensation expense related to performance-based stock options, for which vesting was deemed probable, was $113,000 and $120,000 for the six months ended June 30, 2015 and 2014, respectively. The performance conditions related to the remaining options were not deemed probable at June 30, 2015; 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, 2015 and 2014 was 6.26 years and 6.95 years, respectively.

As of June 30, 2015, there were 755,092 unvested stock options expected to vest over a weighted-average period of 8.6 years. As of December 31, 2014, there were 1,166,200 unvested stock options expected to vest over a weighted-average period of 8.3 years.

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

	Number of Options			Weighted Average Option Price
Balance, December 31, 2014		1,782,749		$	3.79
Granted		217,000			0.74
Exercised		-			-
Cancelled/Expired		(509,821	)		4.22
Balance, June 30, 2015		1,489,928		$	3.20

Option Valuation

The fair value of each stock 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,
	2015			2014	2015			2014
Risk free interest rate range	2.19	-	2.37%	2.70%	2.19	-	2.37%	2.70
Weighted average life (in years)		10		10		10		10
Weighted average volatility		74.00%		65.30%		74.00%		65.30
Volatility range	70.35	-	74.37%	65.30%	70.35	-	74.37%	65.30
Expected dividend yield		-		-		-		-
Weighted average grant-date fair value per share of options granted		$0.59		$4.31		$0.59		$4.31

Restricted Stock

Each of the Interphase Corporation 2014 Long-Term Stock Incentive Plan and the Interphase Corporation 2004 Long-Term Stock Incentive Plan provides for grants of bonus stock awards (“restricted stock”) to the Company’s directors and certain employees at no cost to the recipient. The total amount of restricted stock with respect to which awards may be granted under the current (2014) plan is 75,000 shares. Holders of restricted stock are entitled to cash dividends, if any, and to vote their respective shares.

Restrictions limit the sale or transfer of these shares during a predefined vesting period 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, 2015 or 2014. Upon issuance of restricted stock under a 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 previously granted restricted stock was

$44,000 and $15,000 for the three months ended June 30, 2015 and 2014, respectively. Compensation expense related to previously granted restricted stock was

$61,000 and $30,000 for the six months ended June 30, 2015 and 2014, respectively. As of June 30

, 2015, there was no unamortized compensation cost related to unvested restricted stock remaining to be recognized. As of December 31, 2014, there was $61,000 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 less than 1 year. The following table summarizes the restricted stock activity for the six months ended

June 30, 2015:

	Restricted Stock Shares			Weighted Average Grant Date Value
Nonvested restricted stock at December 31, 2014		29,155		$	3.29
Granted		-			-
Vested		(29,155	)		3.29
Cancelled/Forfeited		-			-
Nonvested restricted stock at June 30, 2015		-		$	-