Stock-Based Compensation

9 Months Ended

Sep. 30, 2011

Stock-Based Compensation [Abstract]

STOCK-BASED COMPENSATION

NOTE 2. — STOCK-BASED COMPENSATION

Stock Options: During the nine months ended September 30, 2011, the Company issued 215,000 stock options that vest over a three to four year period and expire ten years from date of grant. The weighted average exercise price of these stock options is $2.00. During the nine months ended September 30, 2010, the Company issued 198,200 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 $1.78. Compensation expense related to these stock options was approximately $44,000 and $17,000 for the three months ended September 30, 2011 and 2010, respectively. Compensation expense related to these stock options was approximately $114,000 and $21,000 for the nine months ended September 30, 2011 and 2010, respectively.

During the nine months ended September 30, 2011, the Company issued 20,000 stock options with performance-based vesting criteria through December 31, 2014 and which expire ten years from the date of grant. The weighted average exercise price of these stock options is $5.40. Of the stock options outstanding at September 30, 2011, 178,500 are subject to the achievement of certain performance conditions. The performance conditions related to 7,000 of these stock options were deemed probable at September 30, 2011. During the three months ended September 30, 2011, it was determined that performance targets related to 9,750 performance-based stock options were no longer probable of being achieved, and, as a result, the Company recognized a benefit of $7,000 related to performance-based stock options during the third quarter of 2011. Compensation expense related to performance-based stock options was approximately $8,000 for the nine months ended September 30, 2011. The Company did not recognize any compensation expense related to performance-based stock options during the three or nine months ended September 30, 2010. The performance conditions related to the remaining options were not deemed probable at September 30, 2011; therefore no compensation expense related to these options has been recorded.

The weighted-average remaining contractual life of stock options outstanding and exercisable at September 30, 2011 and 2010 is 2.07 years and 1.71 years, respectively.

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

	Number of			Weighted Average
	Options			Option Price
Balance, December 31, 2010		1,470,222		$	5.00
Granted		235,000			2.29
Exercised		(107,250	)		4.92
Canceled		(397,499	)		5.80
Balance, September 30, 2011		1,200,473		$	4.21

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						Nine months ended
	September 30,						September 30,
	2011			2010			2011			2010
Weighted average risk free interest rates		2.28	%		2.75	%		3.54	%		2.83	%
Weighted average life (in years)		10			10			10			10
Volatility		66.16	%		63.51	%		63.89	%		63.69	%
Expected dividend yield		—			—			—			—
Weighted average grant-date fair value per share of options granted	$	3.39		$	1.22		$	1.70		$	1.27

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 any, and to vote their respective shares. Restrictions limit the sale or transfer of these shares during a predefined vesting period, currently ranging from one to four years, and in some cases vesting is subject to the achievement of certain performance conditions. During the three months ended September 30, 2011, the Company issued no shares of restricted stock. During the nine months ended September 30, 2011, the Company issued 72,000 shares of restricted stock. In addition, there were no shares of restricted stock issued during 2010. 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 $44,000 and $61,000 for the three months ended September 30, 2011 and 2010, respectively. Compensation expense related to restricted stock was approximately $149,000 and $241,000 for the nine months ended September 30, 2011 and 2010, respectively. As of September 30, 2011, there is approximately $521,000 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 3.2 years. As of December 31, 2010, there was approximately $566,000 of total unamortized compensation cost related to unvested restricted stock which was expected to be recognized over a weighted-average period of 3.2 years. The following summarizes the restricted stock activity for the nine months ended September 30, 2011:

				Weighted
	Restricted Stock			Average Grant
	Shares			Date Value
Nonvested restricted stock at December 31, 2010		318,555		$	2.52
Granted		72,000			4.41
Vested		(59,274	)		4.85
Cancelled/Forfeited		(99,765	)		2.17
Nonvested restricted stock at September 30, 2011		231,516		$	2.66