6.	EMPLOYEE STOCK OPTION PLANS

On July 20, 2009, shareholders approved our 2009 Stock Incentive Plan (the "2009 Plan"), which provides for the granting of stock options to employees and officers and authorizes the issuance of common stock upon exercise of such options for up to 140,000 shares. All options are granted at or above market price, generally expire up to ten years from the date of grant and are generally exercisable on or after the first anniversary of the date of grant in five annual installments. Options to purchase 38,750 shares at a price of $76.74 (market price at the time of the grant) were granted on October 19, 2009. Additionally, options to purchase 20,000 shares at a price of $95.79 (market price at time of the grant) were granted on March 22, 2010, options to purchase 15,000 shares at a price of $88.20 were granted on July 19, 2010 and options to purchase 10,000 shares at a price of $96.92 were granted on July 18, 2011. During the quarter ended December 31, 2012, 1,300 options were exercised, thus leaving 49,650 options outstanding and 70,250 options available for grant under the 2009 Plan.

We previously granted stock options under our 1999 Stock Option Plan (the "1999 Plan"), as approved by shareholders on July 19, 1999. The 1999 Plan expired on April 19, 2009. Options previously made under our 1999 Stock Option Plan and outstanding on July 20, 2009 continue in effect governed by provisions of the 1999 Plan. All options granted under the 1999 Plan were granted at or above market price, generally expire up to ten years from the date of grant and are generally exercisable on or after the first anniversary of the date of grant in five to ten annual installments. During the quarter ended December 31, 2012, 4,000 options were forfeited and 1,015 options were exercised, thus leaving 63,500 options outstanding under the 1999 Plan.

We recognize compensation cost over the straight-line method for all share-based payments granted on or after that date and for all awards granted to employees prior to April 1, 2006 that remain unvested on that date. The fair value of stock options are determined on the date of grant using the Black-Scholes pricing model and are expensed over the vesting period of the related stock options. Accordingly, for the quarters ended December 31, 2012 and 2011, we recognized compensation expense of $33,769 and $253,350, respectively.

As of December 31, 2012, the total remaining unrecognized compensation cost related to non-vested stock options was $1,040,698, which will be amortized over the remaining weighted average service period of approximately 1.5 years.

The following table summarizes the 2009 Plan and the 1999 Plan price per option at grant date using the Black-Scholes pricing model:

			Black-Scholes Pricing Model Assumptions
Date of Issuance	Weighted Average Fair Value		Expected Dividend Yield			Risk- Free Interest Rate			Expected Volatility			Expected Life (in years)
2009 Plan
July 18, 2011	$	33.07		0.83	%		1.45	%		40.0	%		5
July 19, 2010	$	28.58		0.91	%		1.73	%		37.5	%		5
March 22, 2010	$	32.56		0.84	%		2.43	%		37.8	%		5
October 19, 2009	$	25.36		1.04	%		2.36	%		37.6	%		5
1999 Plan
July 30, 2008	$	29.93		0.62	%		3.36	%		20.2	%		5
July 21, 2008	$	27.35		0.67	%		3.41	%		20.2	%		5
July 16, 2007	$	41.78		0.39	%		4.95	%		19.9	%		5
July 17, 2006	$	33.05		0.61	%		5.04	%		21.2	%		7
May 15, 2006	$	31.28		0.64	%		5.08	%		21.1	%		7

The following table summarizes activity in the 2009 Plan and the 1999 Plan as of December 31, 2012:

	Number of Shares			Weighted Average Exercise Price
2009 Plan
Balance at March 31, 2011		73,750		$	84.24
Granted		10,000			96.92
Exercised		–			–
Canceled / Forfeited		–			–
Balance at March 31, 2012		83,750		$	85.75
Granted		–			–
Exercised		(20,100	)		79.91
Canceled / Forfeited		(14,000	)		98.64
Balance at December 31, 2012		49,650		$	88.11

1999 Plan
Balance at March 31, 2011		96,500		$	114.78
Granted		–			–
Exercised		(1,500	)		65.70
Canceled / Forfeited		–			–
Balance at March 31, 2012		95,000		$	113.63
Granted		–			–
Exercised		(17,105	)		95.55
Canceled / Forfeited		(14,395	)		111.14
Balance at December 31, 2012		63,500		$	130.80
Combined Balance at December 31, 2012		113,150		$	112.06

December 31, 2012	Weighted Average Aggregate Intrinsic Remaining Contractual Term	Value
Outstanding	1.5 years	$	3,534,415
Exercisable	1.0 years	$	2,263,512

At December 31, 2012, the range of exercise prices and weighted-average remaining contractual life of outstanding options was $76.74 to $152.98 and 1.0 year, respectively. The total number of options exercisable under both the 2009 Plan and the 1999 Plan at December 31, 2012 and 2011, was 68,150 shares with a weighted-average exercise price of $124.39 and 83,590 with a weighted-average exercise price of $113.04, respectively. During the nine months ended December 31, 2012, 28,395 options were forfeited, 37,205 options were exercised. There were 1,500 options exercised and new shares issued for $98,550 in cash during the nine months ended December 31, 2011.

Stock Awards

Pursuant to the Capital Southwest Corporation 2010 Restricted Stock Award Plan, our Board of Directors has reserved for issuance 47,000 shares of restricted stock to certain key employees. A restricted stock award is an award of shares of our common stock (which have full voting and dividend rights but are restricted with regard to sale or transfer), the restrictions on which lapse ratably over a specified period of time (generally five years). Restricted stock awards are independent of stock option grants and are subject to forfeit if employment terminates prior to these restrictions lapsing. These shares vest over a five-year period from the grant date and are expensed over the five-year service period starting on the grant date. On January 16, 2012, the Board of Directors granted 9,650 shares of restricted stock to key employees of the Company. During the nine months ended December 31, 2012, 3,000 shares of restricted stock were forfeited. The following table summarizes the restricted stock available for issuance as of December 31, 2012:

Restricted stock available for issuance as of March 31, 2012	37,350
Less restricted stock forfeited during the year	(3,000	)
Restricted stock available for issuance as of December 31, 2012	40,350

We expense the cost of the restricted stock awards, which is determined to equal the fair value of the restricted stock award at the date of the grant on a straight-line basis over the vesting period in which the restrictions on these stock awards lapse. For these purposes, the fair value of the restricted stock award is determined based on the closing price of our common stock on the date of grant. For the quarter ended December 31, 2012, we recognized total share based compensation expense of $27,797 related to the restricted stock issued to our employees and officers. For the quarter ended December 31, 2011, no restricted stock had been issued.

As of December 31, 2012, the total remaining unrecognized compensation cost related to non-vested restricted stock awards was $444,752, which will be amortized over the weighted-average service period of approximately 4.1 years.

The following table represents a summary of the activity for our restricted stock awards for the fiscal year ended December 31, 2012:

Restricted Stock Awards	Number of Shares			Weighted Average Fair Value Per Share		Weighted Average Remaining Vesting Term (in Years)
Unvested at March 31, 2012		9,650		$	83.60		4.8
Granted		−			−		−
Vested		−			−		−
Forfeited or expired		(3,000	)	$	83.60		−
Unvested at December 31, 2012		6,650		$	83.60		4.1

Phantom Stock Plan

On January 16, 2012, our Board of Directors approved the issuance of 26,000 phantom stock options pursuant to the Capital Southwest Corporation Phantom Stock Option Plan to provide deferred compensation to certain key employees. Under the plan, awards vest on the fifth anniversary of the award date. Upon exercise of the phantom option, a cash payment in an amount for each phantom share equal to estimated fair market value minus the phantom option exercise price will be distributed to plan participants. The exercise price of each phantom share is $146.95 (Net Asset Value at December 31, 2011), and the estimated liability for phantom stock awards is $541,865 as of December 31, 2012.

The following table represents a summary of the activity for our phantom stock plan for the fiscal year ended December 31, 2012:

Phantom Stock Awards	Number of Shares			Exercise Price Per Share		Weighted Average Remaining Vesting Term (in Years)
Unvested at March 31, 2012		26,000		$	146.95		4.8
Granted		−			−		−
Vested		−			−		−
Forfeited or expired		(7,500	)	$	146.95		−
Unvested at December 31, 2012		18,500		$	146.95		4.1