<DOCUMENT>
<TYPE>EX-13.1
<SEQUENCE>2
<FILENAME>capital10kex131033106.txt
<DESCRIPTION>ANNUAL REPORT TO SHAREHOLDERS
<TEXT>

                                                                    Exhibit 13.1
                   Twelve Largest Investments - March 31, 2006

Palm Harbor Homes, Inc.                                              $98,189,000
--------------------------------------------------------------------------------

     Palm  Harbor  Homes,  Dallas,  Texas,  is an  integrated  manufacturer  and
retailer of manufactured  and modular housing  produced in 19 plants and sold in
32  states  by  116  company-owned  retail  stores  and  builder  locations  and
approximately  350 independent  dealers,  builders and  developers.  The company
provides financing through its 80% owned subsidiary,  CountryPlace Mortgage, and
sells  insurance  through  its  subsidiary,  Standard  Casualty.  Palm  Harbor's
traditional  manufactured  homes and the upscale  modular  homes are designed to
meet the need for attractive, affordable housing.

     During the year ended March 31,  2006,  Palm Harbor  reported net income of
$11,114,000 ($0.49 per share) on net sales of $710,635,000,  compared with a net
loss of  $3,823,000  ($0.17  per  share)  on net  sales of  $610,538,000  in the
previous  year.  The March 31, 2006  closing  Nasdaq bid price of Palm  Harbor's
common stock was $21.31 per share.

     At March 31, 2006,  the  $10,931,955  investment  in Palm Harbor by Capital
Southwest  and its  subsidiary  was valued at  $98,189,000  ($12.50  per share),
consisting  of  7,855,121  restricted  shares of common  stock,  representing  a
fully-diluted equity interest of 30.5%.

================================================================================
The RectorSeal Corporation                                           $87,500,000
--------------------------------------------------------------------------------

     The RectorSeal  Corporation,  Houston, Texas, with facilities in Texas, New
York and Idaho,  manufactures  specialty chemical products including pipe thread
sealants,   firestop  sealants,  plastic  cements  and  other  formulations  for
plumbing, HVAC, electrical and industrial  applications.  The company also makes
special tools for plumbers and systems for containing smoke from building fires.
RectorSeal's  subsidiary,  Jet-Lube,  Inc.,  with  plants in Texas,  England and
Canada,  produces anti-seize compounds,  specialty lubricants and other products
used in industrial and oil field  applications.  Another subsidiary produces and
sells automotive chemical products. RectorSeal owns a 20% equity interest in The
Whitmore Manufacturing Company (described on page 10).

     During the year ended  March 31,  2006,  RectorSeal  earned  $8,655,000  on
revenues of  $95,060,000,  compared  with  earnings of $7,598,000 on revenues of
$76,072,000 in the previous year.  RectorSeal's  earnings do not reflect its 20%
equity in The Whitmore Manufacturing Company.

     At March 31, 2006,  Capital  Southwest  owned 100% of  RectorSeal's  common
stock having a cost of $52,600 and a value of $87,500,000.

================================================================================
Encore Wire Corporation                                              $81,735,000
--------------------------------------------------------------------------------

     Encore Wire  Corporation,  McKinney,  Texas,  manufactures  a broad line of
copper  electrical  building  wire and cable  including  non-metallic  sheathed,
underground  feeder  and  THHN  wire  and  cable  and  also  armored  cable  for
residential,  commercial and industrial construction. Encore's products are sold
through large-volume distributors and building materials retailers.

     For the year  ended  December  31,  2005,  Encore  reported  net  income of
$50,079,000  ($2.13 per share) on net sales of  $758,089,000,  compared with net
income of  $33,360,000  ($1.42  per share) on net sales of  $603,225,000  in the
previous year. The March 31, 2006 closing market price of Encore's  common stock
was $33.88 per share.

     At March  31,  2006,  the  $5,800,000  investment  in  4,086,750  shares of
Encore's  restricted  common stock by Capital  Southwest and its  subsidiary was
valued at $81,735,000  ($20.00 per share),  representing a fully-diluted  equity
interest of 17.1%.

================================================================================
Alamo Group Inc.                                                     $45,141,000
--------------------------------------------------------------------------------

     Alamo Group Inc.,  Seguin,  Texas, is a leading designer,  manufacturer and
distributor of heavy-duty, tractor and truck mounted mowing and other vegetation
maintenance  equipment,   mobile  excavators,   street-sweeping   equipment  and
replacement  parts.  Founded in 1969,  Alamo  Group  operates  14  manufacturing
facilities and serves governmental, industrial and agricultural markets in North
America, Europe, and Australia.

     For the year ended December 31, 2005, Alamo reported  consolidated earnings
of  $11,291,000  ($1.14 per share) on net sales of  $368,110,000,  compared with
earnings of $13,396,000  ($1.36 per share) on net sales of  $342,171,000  in the
previous  year.  The March 31, 2006 closing NYSE market price of Alamo's  common
stock was $22.14 per share.

     At March 31, 2006, the $2,065,047  investment in Alamo by Capital Southwest
and its subsidiary was valued at $45,141,000  ($16.00 per share),  consisting of

<PAGE>

2,821,300 restricted shares of common stock, representing a fully-diluted equity
interest of 26.2%.

================================================================================
Lifemark Group                                                       $42,000,000
--------------------------------------------------------------------------------

     Lifemark Group (formerly Skylawn Corporation),  Hayward,  California,  owns
and operates cemeteries,  mausoleums and mortuaries.  Lifemark's operations, all
of which are in  California,  include a major cemetery in San Mateo, a mausoleum
and an adjacent mortuary in Oakland and cemeteries, mausoleums and mortuaries in
Hayward and Sacramento. The company also owns a funeral home in San Bruno and is
building a major  funeral home on the grounds of its San Mateo County  cemetery.
Its funeral and  cemetery  trusts  enable  Lifemark's  clients to make  pre-need
arrangements. The company's assets also include excess real estate holdings.

     For the fiscal year ended March 31,  2006,  Lifemark  reported  earnings of
$2,457,000 on revenues of  $27,178,000,  compared with earnings of $2,153,000 on
revenues of $24,964,000 in the previous year.

     At March 31, 2006,  Capital Southwest owned 100% of Lifemark Group's common
stock, which had a cost of $4,510,400 and was valued at $42,000,000.

================================================================================
Media Recovery, Inc.                                                 $42,000,000
--------------------------------------------------------------------------------

     Media  Recovery,  Inc.,  Graham,  Texas,  distributes  computer  and office
automation  supplies and accessories to corporate  customers  through its direct
sales force.  Its Shockwatch  division  manufactures  impact and tilt monitoring
devices used to detect mishandled  shipments and devices for monitoring material
handling equipment.  Media Recovery's subsidiary, The Damage Prevention Company,
Denver,  Colorado,  manufactures  dunnage  products  used to  prevent  damage in
trucking, rail and export container shipments.

     During the year ended  September  30,  2005,  Media  Recovery  reported net
income of $5,028,000 on net sales of  $142,574,000,  compared with net income of
$3,943,000 on net sales of $123,664,000 in the previous year.

     At March 31, 2006, the  $5,415,000  investment in Media Recovery by Capital
Southwest and its subsidiary was valued at $42,000,000,  consisting of 4,800,000
shares of Series A convertible  preferred  stock,  representing a  fully-diluted
equity interest of 87.4%.

================================================================================
Heeling, Inc.                                                        $30,000,000
--------------------------------------------------------------------------------

     Heeling,  Inc.,  Carrollton,  Texas,  manufacturers  and markets  specialty
stealth skate footwear incorporating a patented "wheel in the heel" design under
the brand name Heelys. The company  manufactures its products in Korea and China
and distributes them through domestic and  international  sporting goods chains,
department and lifestyle  stores,  specialty  footwear  retailers and on-line at
Heelys.com.

     During the year ended  December  31, 2005,  Heeling  reported net income of
$4,347,000 on net sales of $43,950,000,  compared with net income of $803,000 on
net sales of $21,309,000 in the previous year.

     At  March  31,  2006,  the  $120,000   investment  in  Heeling  by  Capital
Southwest's subsidiary was valued at $30,000,000 consisting of 436,364 shares of
Series B convertible preferred stock,  convertible into 436,364 shares of common
stock at $0.275 per share, representing a 43.0% fully-diluted equity interest.


================================================================================
The Whitmore Manufacturing Company                                   $22,000,000
--------------------------------------------------------------------------------

     The Whitmore Manufacturing Company, Rockwall, Texas, manufactures specialty
lubricants  for heavy  equipment  used in surface  mining,  railroads  and other
industries,  and produces  water-based  coatings for the  automotive and primary
metals  industries.   Whitmore's  subsidiary,   Fluid  Protection   Corporation,
manufactures  fluid  contamination  control  devices.  The company's assets also
include several commercial real estate tracts.

     During the year  ended  March 31,  2006,  Whitmore  reported  net income of
$1,776,000 on net sales of  $18,010,000,  compared with net income of $1,475,000
on net sales of  $16,469,000  in the previous  year. The company is owned 80% by
Capital  Southwest and 20% by Capital  Southwest's  subsidiary,  The  RectorSeal
Corporation (described on page 9).

     At March 31, 2006, the direct  investment in Whitmore by Capital  Southwest
was valued at $22,000,000 and had a cost of $1,600,000.


<PAGE>

Hologic, Inc.                                                        $17,513,294
--------------------------------------------------------------------------------

     Hologic, Inc., Bedford, Massachusetts, is a leading developer, manufacturer
and  supplier of bone  densitometers,  mammography  and breast  biopsy  devices,
direct-to-digital  x-ray  systems and other x-ray based imaging  systems.  These
products  are  generally  targeted  to address  women's  healthcare  and general
radiographic applications.

     For the year ended  September  24,  2005,  Hologic  reported  net income of
$28,256,000  ($0.63 per share) on net sales of  $287,684,000,  compared with net
income of  $12,164,000  ($0.29  per share) on net sales of  $228,705,000  in the
previous year.  The March 31, 2006 closing Nasdaq bid price of Hologic's  common
stock was $55.35 per share.

     At March 31, 2006,  Capital  Southwest  and its  subsidiary  owned  316,410
unrestricted  shares of common  stock,  having a cost of  $220,000  and a market
value of $17,513,294 ($55.35 per share).

================================================================================
Texas Capital Bancshares, Inc.                                       $11,697,882
--------------------------------------------------------------------------------

     Texas Capital Bancshares,  Inc. of Dallas, Texas, formed in 1998, has total
assets of approximately $3.0 billion. With banks in Austin,  Dallas, Fort Worth,
Houston,  Plano and San Antonio,  Texas Capital Bancshares conducts its business
through its  wholly-owned  subsidiary,  Texas Capital Bank,  N.A., which targets
middle market commercial and wealthy private client customers in Texas.

     For the year ended December 31, 2005,  Texas Capital reported net income of
$27,192,000  ($1.02 per share),  compared with net income of $19,560,000  ($0.75
per share) in the previous  year. The March 31, 2006 closing Nasdaq bid price of
Texas Capital's common stock was $23.89 per share.

     At March 31, 2006, Capital Southwest owned 489,656  unrestricted  shares of
common  stock,  having a cost of  $3,550,006  and a market value of  $11,697,882
($23.89 per share).

================================================================================
PETsMART, Inc.                                                        $8,439,000
--------------------------------------------------------------------------------

     PETsMART,  Inc.,  Phoenix,  Arizona,  is the largest specialty  retailer of
services and solutions for the lifetime needs of pets. The company operates more
than 825 pet  superstores  in the United States and Canada,  many of which offer
pet grooming  services and operate  PETsHOTELS.  It is also a direct marketer of
pet  products  through  its  e-commerce  site  and its pet  and  equine  catalog
businesses.

     For the year ended January 29, 2006, PETsMART,  Inc. reported net income of
$182,490,000 ($1.25 per share) on net sales of $3.760 billion, compared with net
income of  $157,453,000  ($1.05 per share) on net sales of $3.363 billion in the
previous year. The March 31, 2006 closing Nasdaq bid price of PETsMART's  common
stock was $28.13 per share.

     At March 31, 2006,  Capital  Southwest  and its  subsidiary  owned  300,000
unrestricted  shares of common stock,  having a cost of $1,318,771  and a market
value of $8,439,000 ($28.13 per share).


================================================================================
Cenveo, Inc.                                                          $8,290,000
--------------------------------------------------------------------------------

     Cenveo,  Inc.,  Englewood,  Colorado,  is one of  North  America's  largest
providers  of  visual  communication   solutions  delivered  through  print  and
electronic media. Its products include offset and digital  printing,  custom and
stock envelopes, and business documents.

     For the  year  ended  December  31,  2005,  Cenveo  reported  a net loss of
$135,052,000  ($2.70 per share) on net sales of $1.749 billion,  compared with a
net loss of $19,708,000  ($0.41 per share) on net sales of $1.743 billion in the
previous year.  The March 31, 2006 closing NYSE market price of Cenveo's  common
stock was $16.58 per share.

     At March 31, 2006, Capital Southwest owned 500,000  unrestricted  shares of
common stock, having a cost of $712,317 and a market value of $8,290,000 ($16.58
per share).




<PAGE>
<TABLE>
<CAPTION>

                                                 Portfolio of Investments - March 31, 2006

         Company                                     Equity (a)        Investment (b)                      Cost           Value (c)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>           <C>                                 <C>              <C>

+AT&T, INC.                                              <1%       ++20,770 shares common stock
   New York, New York                                                (acquired 3-9-99)                 $        12      $    561,621
   Global leader in local, long distance,
   Internet and transaction- based voice
   and data services.
------------------------------------------------------------------------------------------------------------------------------------

+ALAMO GROUP INC.                                      26.2%       2,821,300 shares common stock
   Seguin, Texas                                                     (acquired 4-1-73 thru 10-4-99)      2,065,047        45,141,000
   Tractor-mounted mowing and mobile excavation
   equipment for governmental, industrial and
   agricultural markets; street-sweeping
   equipment for municipalities.
------------------------------------------------------------------------------------------------------------------------------------

ALL COMPONENTS, INC.                                   56.9%       10% subordinated  note due 2008
   Addison, Texas                                                    (acquired 10-28-03 thru 10-3-05)    3,000,000         3,000,000
   Electronics contract manufacturing; distribution                150,000 shares Series A convertible
   and production of memory and other components for                 preferred stock, convertible
   computer manufacturers, retailers and value-added                 into 600,000 shares of common
   resellers; distribution of automotive accessories.                stock at $0.25 per share
                                                                     (acquired 9-16-94)                    150,000         2,000,000
                                                                                                       -----------      ------------
                                                                                                         3,150,000         5,000,000
------------------------------------------------------------------------------------------------------------------------------------

+ALLTEL CORPORATION                                      <1%       ++8,880 shares common stock
   Little Rock, Arkansas                                             (acquired 7-1-98)                     108,355           574,980
   Wireless and wireline local, long-distance,
   network access and Internet services.
------------------------------------------------------------------------------------------------------------------------------------

BALCO, INC.                                            88.5%       445,000 shares common stock and
   Wichita, Kansas                                                   60,920 shares Class B non-voting
   Specialty architectural products used                             common stock (acquired 10-25-83
   in the construction and remodeling of                             and 5-30-02)                          624,920         2,500,000
   commercial and institutional buildings
------------------------------------------------------------------------------------------------------------------------------------

BOXX TECHNOLOGIES, INC.                                15.2%       3,125,354 shares Series B
   Austin, Texas                                                     convertible preferred stock,
   Workstations for computer graphics                                convertible into 3,125,354
   imaging and design.                                               shares of common stock at
                                                                     $0.50 per share (acquired
                                                                     8-20-99 thru 8-8-01)                1,500,000                 2
------------------------------------------------------------------------------------------------------------------------------------

CMI HOLDING COMPANY, INC.                              18.5%       10% convertible subordinated
   Richardson, Texas                                                 notes, convertible into
   Owns Chase Medical, which develops                                568,182 shares of common
   and sells devices used in cardiac                                 stock at $1.32 per share,
   surgery to relieve congestive heart                               due 2007 (acquired 4-16-04
   failure; develops and supports cardiac                            thru 12-17-04)                        750,000           750,000
   imaging systems.                                                2,327,658 shares Series A
                                                                     convertible preferred stock,
                                                                     convertible into 2,327,658
                                                                     shares of common stock at
                                                                     $1.72 per share (acquired
                                                                     8-21-02 and 6-4-03)                 4,000,000         2,000,000
                                                                   Warrants to purchase 109,012
                                                                     shares of common stock at
                                                                     $1.72 per share, expiring
                                                                     2012 (acquired 4-16-04)                  --                --
                                                                                                       -----------      ------------
                                                                                                         4,750,000         2,750,000
------------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company                                            ++Unrestricted securities as defined in Note (b)


<PAGE>

         Company                                     Equity (a)        Investment (b)                      Cost           Value (c)
------------------------------------------------------------------------------------------------------------------------------------

+CENVEO, INC.                                            <1%       ++500,000 shares common
   Englewood, Colorado                                               stock (acquired 2-18-94
   Envelopes and commercial printing.                                thru 11-10-98)                    $   712,317      $  8,290,000

------------------------------------------------------------------------------------------------------------------------------------

+COMCAST CORPORATION                                     <1%       ++43,104 shares common
   Philadelphia, Pennsylvania                                        stock (acquired 11-18-02)                  21         1,127,601
   Leading provider of cable, entertainment and
   communications products and services.
------------------------------------------------------------------------------------------------------------------------------------

DENNIS TOOL COMPANY                                    67.4%       20,725 shares 5%
   Houston, Texas                                                    convertible preferred
   Polycrystalline diamond compacts (PDCs)                           stock, convertible into
   used in oil field drill bits and in                               20,725 shares of common
   mining and industrial applications.                               stock at $48.25 per share
                                                                     (acquired 8-10-98 )                   999,981           999,981
                                                                   140,137 shares common stock
                                                                     (acquired 3-7-94
                                                                     and 8-10-98)                        2,329,963                 2
                                                                                                       -----------      ------------
                                                                                                         3,329,944           999,983
------------------------------------------------------------------------------------------------------------------------------------

+DISCOVERY HOLDING COMPANY                               <1%       ++70,501 shares Series A
   Englewood, Colorado                                               common stock (acquired
   Provider of creative content, media                               7-21-05)                               20,262         1,056,810
   management and network services worldwide.
------------------------------------------------------------------------------------------------------------------------------------

+ENCORE WIRE CORPORATION                               17.1%       4,086,750 shares common stock
   McKinney, Texas                                                   (acquired 7-16-92 thru
   Electric wire and cable for residential                           10-7-98)                            5,800,000        81,735,000
   and commercial use.
------------------------------------------------------------------------------------------------------------------------------------

EXTREME INTERNATIONAL, INC.                            53.3%       12% subordinated note due 2008,
   Sugar Land, Texas                                                 $1,413,247 principal amount
   Owns Bill Young Productions, Texas Video                          (acquired 9-30-03)                    782,481         1,413,247
   and Post, and Extreme Communications, which                     39,359.18 shares Series C
   produce radio and television commercials and                      convertible preferred stock,
   corporate communications videos.                                  convertible into 157,436.72
                                                                     shares of common stock at
                                                                     $25.00 per share (acquired
                                                                     9-30-03)                            2,625,000         3,935,918
                                                                   3,750 shares 8% Series A
                                                                     convertible preferred stock,
                                                                     convertible into 15,000 shares
                                                                     of common stock at $25.00
                                                                     per share (acquired 9-30-03)          375,000           375,000
                                                                   Warrants to purchase 13,035 shares
                                                                     of common stock at $25.00 per
                                                                     share, expiring 2008 (acquired
                                                                     8-11-98 thru 9-30-03)                    --                --
                                                                                                       -----------      ------------
                                                                                                         3,782,481         5,724,165
------------------------------------------------------------------------------------------------------------------------------------

+FMC CORPORATION                                         <1%       ++6,430 shares common stock
   Chicago, Illinois                                                 (acquired 6-6-86)                      66,726           398,531
   Chemicals for agricultural, industrial and
   consumer markets.
------------------------------------------------------------------------------------------------------------------------------------

+FMC TECHNOLOGIES, INC.                                  <1%       ++11,057 shares common stock
   Chicago, Illinois                                                 (acquired 1-2-02)                      57,051           566,340
   Equipment and systems for the energy, food
   processing and air transportation industries.

------------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company                                            ++Unrestricted securities as defined in Note (b)


<PAGE>

         Company                                     Equity (a)        Investment (b)                      Cost           Value (c)
------------------------------------------------------------------------------------------------------------------------------------

HEELING, INC.                                          43.0%       436,364 shares Series B
   Carrollton, Texas                                                 convertible preferred
   Heelys stealth skate shoes sold through                           stock, convertible into
   sporting goods chains, department stores,                         436,364 shares of common
   footwear retailers and on-line at                                 stock at $0.275 per share
   Heelys.com.                                                       (acquired 5-26-00)                $   120,000      $ 30,000,000
------------------------------------------------------------------------------------------------------------------------------------

HIC-STAR CORPORATION                                   34.9%       10% subordinated note due
   (formerly AmPro Mortgage Corporation)                             2007 (acquired 10-19-04
   Dallas, Texas                                                     and 1-13-05)                          352,646           352,646
   Holding company previously engaged in                           12% subordinated notes due
   mortgage banking operations, which have                           2008 (acquired 3-25-05
   now been sold.                                                    thru 2-27-06)                         819,978           819,978
                                                                   5,000 shares Series A
                                                                     cumulative preferred stock
                                                                     (acquired 2-28-03)                  5,000,000              --
                                                                   1,500 shares Series B cumulative
                                                                     preferred stock (acquired
                                                                     3-31-04)                            1,500,000              --
                                                                   29,167 shares Series A common
                                                                     stock (acquired 2-28-03)              29,167               --
                                                                   Warrants to purchase 463,162
                                                                     shares of Series A common
                                                                     stock at $1.00 per share,
                                                                     expiring 2014 (acquired
                                                                     3-31-04 thru 1-13-05)                   --                 --
                                                                                                       -----------      ------------
                                                                                                         7,701,791         1,172,624
------------------------------------------------------------------------------------------------------------------------------------

+HOLOGIC, INC.                                           <1%       ++316,410 shares common stock
   Bedford, Massachusetts                                            (acquired 8-27-99)                    220,000        17,513,294
   Medical instruments including bone
   densitometers, mammography devices and digital
   radiography systems.
------------------------------------------------------------------------------------------------------------------------------------

+KIMBERLY-CLARK CORPORATION                              <1%       ++77,180 shares common stock
   Dallas, Texas                                                   (acquired 12-18-97)                   2,358,518         4,461,004
   Manufacturer of tissue, personal care and
   health care products.
------------------------------------------------------------------------------------------------------------------------------------

+LIBERTY GLOBAL, INC.                                    <1%       ++42,463 shares Series A common
   Englewood, Colorado                                               stock (acquired 6-15-05)              106,553           867,094
   Owns interests in broadband, distribution                       ++42,463 shares Series C common
   and content companies.                                            stock (acquired 9-6-05)               100,870           835,672
                                                                                                       -----------      ------------
                                                                                                           207,423         1,702,766
------------------------------------------------------------------------------------------------------------------------------------

+LIBERTY MEDIA CORPORATION                               <1%       ++705,010 shares Series A common
   Englewood, Colorado                                               stock (acquired 3-9-99 thru
   Holding company owning interests in electronic                    12-12-02)                             118,253         5,788,132
   retailing, media, communications and entertainment
   businesses.
------------------------------------------------------------------------------------------------------------------------------------

LIFEMARK GROUP (formerly Skylawn Corporation)         100.0%       1,449,026 shares common stock
   Hayward, California                                               (acquired 7-16-69)                  4,510,400        42,000,000
   Cemeteries, mausoleums and mortuaries located
   in northern California.
------------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company                                            ++Unrestricted securities as defined in Note (b)



<PAGE>

         Company                                     Equity (a)        Investment (b)                      Cost           Value (c)
------------------------------------------------------------------------------------------------------------------------------------

MEDIA RECOVERY, INC.                                   87.4%       4,800,000 shares Series A
   Graham, Texas                                                     convertible preferred stock,
   Computer and office automation supplies and                       convertible into 4,800,000
   accessories; impact and tilt monitoring                           shares of common stock at
   devices to detect mishandled shipments; dunnage                   $1.00 per share (acquired
   for protecting shipments.                                         11-4-97)                          $ 5,415,000      $ 42,000,000
------------------------------------------------------------------------------------------------------------------------------------

PALLETONE, INC.                                         9.7%       1,796,850 shares Series A
   Bartow, Florida                                                   preferred stock (acquired
   Wood pallet manufacturer with 14 manufacturing                    10-18-01)                           1,350,000         1,796,850
   facilities.                                                     150,000 shares common stock
                                                                     (acquired 10-18-01)                   150,000           730,000
                                                                   Warrant to purchase 15,294 shares
                                                                     of common stock at $1.00 per
                                                                     share, expiring  2011 (acquired
                                                                     2-17-06)                               45,746            59,000
                                                                                                       -----------      ------------
                                                                                                         1,545,746         2,585,850
------------------------------------------------------------------------------------------------------------------------------------

+PALM HARBOR HOMES, INC.                               30.5%       7,855,121 shares common stock
   Dallas, Texas                                                     (acquired 1-3-85 thru 7-31-95)     10,931,955        98,189,000
   Integrated manufacturing, retailing, financing
   and insuring of manufactured housing and modular
   homes.
------------------------------------------------------------------------------------------------------------------------------------

+PETSMART, INC.                                          <1%       ++300,000 shares common stock
   Phoenix, Arizona                                                  (acquired 6-1-95)                   1,318,771         8,439,000
   Retail chain of more than 825 stores selling pet
   foods,  supplies and services.
------------------------------------------------------------------------------------------------------------------------------------

PHARMAFAB, INC.                                        67.5%       6% convertible subordinated
   Grand Prairie, Texas                                              notes, $4,205,616 principal
   Contract manufacturer of branded and generic                      amount, convertible into
   pharmaceutical drugs; developer of drug delivery                  Series  A or B convertible
   technology.                                                       preferred stock, convertible
                                                                     into 560,750 shares of
                                                                     common stock at $7.50 per
                                                                     share, due 2013 (acquired
                                                                     2-28-06)                            4,000,000         4,000,000
                                                                   54,000 shares Series A
                                                                     convertible preferred stock,
                                                                     convertible into 720,000 shares
                                                                     of common stock at $7.50 per
                                                                     share (acquired 8-1-03 and
                                                                     2-24-06)                            5,400,000              --
                                                                   1,000 shares Series B
                                                                     convertible preferred stock,
                                                                     convertible into 13,334 shares
                                                                     of common stock at $7.50 per
                                                                     share (acquired 8-1-03)               100,000              --
                                                                   Warrants to purchase 16,668 shares
                                                                     of Series A or B convertible
                                                                     preferred stock at $100.00
                                                                     per share, convertible into
                                                                     111,120 shares of common
                                                                     stock at $7.50 per share,
                                                                     expiring 2012 and 2013
                                                                     (acquired 6-16-05 and 2-28-06)           --                --
                                                                                                       -----------      ------------
                                                                                                         9,500,000         4,000,000
------------------------------------------------------------------------------------------------------------------------------------

THE RECTORSEAL CORPORATION                            100.0%       27,907 shares common stock
   Houston, Texas                                                    (acquired 1-5-73 and
   Specialty chemicals for plumbing, HVAC,                           3-31-73)                               52,600        87,500,000
   electrical, construction, industrial,
   oil field and automotive applications;
   smoke containment systems for building
   fires; owns 20% of Whitmore Manufacturing
   Company.
------------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company                                            ++Unrestricted securities as defined in Note (b)


<PAGE>

         Company                                     Equity (a)        Investment (b)                      Cost           Value (c)
------------------------------------------------------------------------------------------------------------------------------------

+SPRINT NEXTEL CORPORATION                               <1%       ++90,000 shares common stock
   Westwood, Kansas                                                  (acquired 6-20-84)                $   503,645      $  2,325,600
   Diversified telecommunications company.
------------------------------------------------------------------------------------------------------------------------------------

TCI  HOLDINGS, INC.                                        -       21 shares 12% Series C
   Denver, Colorado                                                  cumulative compounding preferred
   Cable television systems and microwave                            stock (acquired 1-30-90)                 --             677,250
------------------------------------------------------------------------------------------------------------------------------------

+TEXAS CAPITAL BANCSHARES, INC.                         1.6%       ++489,656 shares common stock
   Dallas, Texas                                                     (acquired 5-1-00)                   3,550,006        11,697,882
   Regional bank holding company with banking
   operations in six Texas cities.
------------------------------------------------------------------------------------------------------------------------------------

VIA HOLDINGS, INC.                                     28.8%       9,118 shares Series B preferred
   Sparks, Nevada                                                    stock (acquired 9-19-05)            4,559,000         4,559,000
   Designer, manufacturer and distributor of
   high-quality office seating.
------------------------------------------------------------------------------------------------------------------------------------

WELLOGIX, INC.                                         19.6%       4,231,861 shares Series A-1
   Houston, Texas                                                    convertible participating
   Developer and supporter of software                               preferred stock, convertible
   used by the oil and gas Industry to control                       into 4,231,861 shares of common
   drilling and maintenance expenses.                                stock at $1.1815 per share
                                                                     (acquired 8-19-05)                  5,000,000         5,000,000
------------------------------------------------------------------------------------------------------------------------------------

THE WHITMORE MANUFACTURING COMPANY                     80.0%       80 shares common stock
   Rockwall, Texas                                                   (acquired 8-31-79)                  1,600,000        22,000,000
   Specialized mining, industrial and railroad
   lubricants; coatings for automobiles and primary
   metals; fluid contamination control devices.
------------------------------------------------------------------------------------------------------------------------------------

MISCELLANEOUS                                              -       Diamond State Ventures, L.P.
                                                                     - 1.9% limited partnership
                                                                     interest (acquired 10-12-99
                                                                     thru 8-26-05)                         210,000           210,000
                                                           -       First Capital Group of Texas III,
                                                                     L.P. - 3.3% limited partnership
                                                                     interest (acquired 12-26-00 thru
                                                                     8-12-05)                              964,604           964,604
                                                      100.0%       Humac Company - 1,041,000 shares
                                                                     common stock (acquired 1-31-75
                                                                     and 12-31-75)                            --             152,000
                                                           -       STARTech Seed Fund I - 12.1%
                                                                     limited partnership interest
                                                                     (acquired 4-17-98 thru 1-5-00)        178,066                 1
                                                           -       STARTech Seed Fund II - 3.2%
                                                                     limited partnership interest
                                                                     (acquired 4-28-00 thru 2-23-05)     1,000,000                 1
                                                           -       Sterling  Group  Partners  I, L.P.
                                                                     - 1.7% limited partnership
                                                                     interest (acquired 4-20-01 thru
                                                                     1-24-05)                            1,064,042         1,064,042
------------------------------------------------------------------------------------------------------------------------------------

TOTAL INVESTMENTS                                                                                      $88,596,956      $550,428,083
                                                                                                       ===========      ============
------------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company                                            ++Unrestricted securities as defined in Note (b)
</TABLE>








<PAGE>

                        Notes to Portfolio of Investments

(a)  The  percentages  in the  "Equity"  column  express  the  potential  equity
interests held by Capital  Southwest  Corporation and Capital  Southwest Venture
Corporation (together, the "Company") in each issuer. Each percentage represents
the amount of the  issuer's  common  stock the Company  owns or can acquire as a
percentage of the issuer's total outstanding common shares, plus shares reserved
for all warrants,  convertible securities and employee stock options. The symbol
"<1%" indicates that the Company holds a potential  equity interest of less than
one percent.

(b) Unrestricted  securities  (indicated by ++) are freely marketable securities
having readily available market quotations.  All other securities are restricted
securities  which are subject to one or more  restrictions on resale and are not
freely  marketable.   At  March  31,  2006,  restricted  securities  represented
approximately 88.3% of the value of the consolidated investment portfolio.

(c) Under the  valuation  policy of the  Company,  unrestricted  securities  are
valued at the closing sale price for listed  securities  and at the lower of the
closing bid price or the last sale price for Nasdaq  securities on the valuation
date. Restricted  securities,  including securities of publicly-owned  companies
which are  subject  to  restrictions  on  resale,  are  valued at fair  value as
determined by the Board of Directors.  Fair value is considered to be the amount
which the Company may reasonably  expect to receive for portfolio  securities if
such securities were sold on the valuation date. Valuations as of any particular
date, however, are not necessarily indicative of amounts which may ultimately be
realized as a result of future sales or other dispositions of securities.

     Among the factors  considered by the Board of Directors in determining  the
fair value of restricted  securities  are the financial  condition and operating
results of the issuer,  the  long-term  potential of the business of the issuer,
the market for and recent sales prices of the issuer's securities, the values of
similar securities issued by companies in similar businesses,  the proportion of
the issuer's securities owned by the Company,  the nature and duration of resale
restrictions  and the nature of any rights  enabling  the Company to require the
issuer to register  restricted  securities under applicable  securities laws. In
determining  the fair value of  restricted  securities,  the Board of  Directors
considers  the  inherent  value  of  such  securities   without  regard  to  the
restrictive  feature and  adjusts for any  diminution  in value  resulting  from
restrictions on resale.

(d) Agreements  between certain issuers and the Company provide that the issuers
will bear  substantially  all costs in connection with the disposition of common
stocks,  including those costs involved in registration under the Securities Act
of 1933 but excluding underwriting  discounts and commissions.  These agreements
cover  common  stocks  owned at March 31,  2006 and common  stocks  which may be
acquired  thereafter  through  exercise of warrants and conversion of debentures
and preferred stocks. They apply to restricted  securities of all issuers in the
investment  portfolio of the Company except securities of the following issuers,
which are not obligated to bear  registration  costs:  Humac  Company,  Lifemark
Group and The Whitmore Manufacturing Company.

(e) The  descriptions  of the companies and ownership  percentages  shown in the
portfolio of investments were obtained from published  reports and other sources
believed to be reliable,  are  supplemental and are not covered by the report of
independent  auditors.  Acquisition  dates  indicated  are  the  dates  specific
securities were acquired,  which may differ from the original  investment dates.
Certain  securities were received in exchange for or upon conversion or exercise
of other securities previously acquired.


<PAGE>

                        Portfolio Changes During the Year

New Investments and Additions to Previous Investments


                                                                        Amount
                                                                     -----------
All Components, Inc. .....................................           $   500,000
Diamond State Ventures, L.P. .............................                19,375
First Capital Group of Texas III, L.P. ...................               200,000
Hic-Star Corporation (formerly AmPro Mortgage Corporation)               723,923
PalletOne, Inc. ..........................................                45,746
PharmaFab, Inc. ..........................................             4,000,000
VIA Holdings, Inc. .......................................             4,559,000
Wellogix, Inc. ...........................................             5,000,000
Miscellaneous ............................................                 6,697
                                                                     -----------
                                                                     $15,054,741
                                                                     ===========


Dispositions

                                                                        Amount
                                                           Cost        Received
                                                       -----------   -----------
Cenveo, Inc. .......................................   $ 2,274,553   $15,833,234
Exopack Holding Corp. ..............................       623,790     2,054,880
Heeling, Inc. ......................................       480,000       480,000
Organized Living, Inc. .............................     6,000,000          --
Sterling Group Partners I, L.P......................       284,366     1,241,751
Tekelec ............................................        54,580        73,533
Texas Capital Bancshares, Inc.......................       725,000     2,327,408
Texas Shredder, Inc. ...............................        75,000     8,783,891
Miscellaneous ......................................         6,697         7,855
                                                       -----------   -----------
                                                       $10,523,986   $30,802,552
                                                       ===========   ===========

Repayments Received ................................                 $   480,197
                                                                     ===========




<PAGE>
<TABLE>
<CAPTION>

                 Capital Southwest Corporation and Subsidiaries
                 Consolidated Statements of Financial Condition


                                                               March 31
                                                     ---------------------------
Assets                                                   2006           2005
                                                     ------------   ------------

Investments at market or fair value
   Companies more than 25% owned
     (Cost: 2006 - $23,114,866,
     2005 - $23,114,866) ..........                  $298,481,983   $259,628,981
   Companies 5% to 25% owned
     (Cost: 2006 - $18,595,746,
     2005 - $19,050,000) ..........                    92,070,852     44,890,852
   Companies less than 5% owned
     (Cost: 2006 - $46,886,344,
     2005 - $42,381,532) ..........                   159,875,248    117,502,389
                                                     ------------   ------------

Total investments
     (Cost: 2006 - $88,596,956,
     2005 - $84,546,398) ..........                   550,428,083    422,022,222
Cash and cash equivalents .........                    11,503,866      5,104,935
Receivables .......................                       135,887        136,401
Other assets ......................                     7,300,297      7,120,043
                                                     ------------   ------------



   Totals .........................                  $569,368,133   $434,383,601
                                                     ============   ============



                                                               March 31
                                                    ------------------------------
Liabilities and Shareholders' Equity                     2006             2005
                                                    -------------    -------------
<S>                                                 <C>              <C>
Note payable to bank ............................   $   8,000,000    $   8,000,000
Note payable to portfolio company ...............            --          5,000,000
Accrued interest and other liabilities ..........       1,697,086        1,842,587
Income taxes payable ............................         982,653             --
Deferred income taxes ...........................     162,070,285      117,007,107
                                                    -------------    -------------
                    Total liabilities ...........     172,750,024      131,849,694
                                                    -------------    -------------

Shareholders' equity
   Common stock, $1 par value: authorized,
     5,000,000 shares; issued, 4,297,616
     shares at March 31, 2006 and 4,294,416
     shares at March 31, 2005 ...................       4,297,616        4,294,416
   Additional capital ...........................       8,109,797        7,904,997
   Undistributed net investment
     income .....................................       3,744,830        3,669,805
   Undistributed net realized gain on
     investments ................................      86,432,040       73,316,166
   Unrealized appreciation of investments -
     net of deferred income taxes ...............     301,067,128      220,381,825
   Treasury stock - at cost
     (437,365 shares) ...........................      (7,033,302)      (7,033,302)
                                                    -------------    -------------
   Net assets at market or fair value, equivalent
     to $102.74 per share at March 31, 2006 on
     the 3,860,251 shares outstanding and
     $78.44 per share at March 31, 2005 on the
     3,857,051 shares outstanding ...............     396,618,109      302,533,907
                                                    -------------    -------------

   Totals .......................................   $ 569,368,133    $ 434,383,601
                                                    =============    =============
</TABLE>

                 See Notes to Consolidated Financial Statements

<PAGE>
<TABLE>
<CAPTION>

                 Capital Southwest Corporation and Subsidiaries
                      Consolidated Statements of Operations

                                                                                       Years Ended March 31
                                                                         -----------------------------------------------
                                                                              2006             2005             2004
                                                                         -------------    -------------    -------------
<S>                                                                      <C>              <C>              <C>
Investment income:
   Interest ..........................................................   $     505,536    $     437,753    $     213,987
   Dividends .........................................................       3,485,430        3,778,190        3,860,937
   Management and directors' fees ....................................         848,070          637,000          632,864
                                                                         -------------    -------------    -------------
                                                                             4,839,036        4,852,943        4,707,788
                                                                         -------------    -------------    -------------
Operating expenses:
   Salaries ..........................................................       1,211,584        1,132,510          997,079
   Net pension benefit ...............................................        (116,747)        (254,872)        (272,912)
   Other operating expenses ..........................................         859,702        1,068,313          775,847
                                                                         -------------    -------------    -------------
                                                                             1,954,539        1,945,951        1,500,014
                                                                         -------------    -------------    -------------
Income before interest expense and income taxes ......................       2,884,497        2,906,992        3,207,774
Interest expense .....................................................         436,021          420,351          531,068
                                                                         -------------    -------------    -------------
Income before income taxes ...........................................       2,448,476        2,486,641        2,676,706
Income tax expense ...................................................          59,220           80,693           89,646
                                                                         -------------    -------------    -------------
Net investment income ................................................   $   2,389,256    $   2,405,948    $   2,587,060
                                                                         =============    =============    =============
Proceeds from disposition of investments .............................   $  30,802,552    $   4,565,232    $  16,486,067
Cost of investments sold .............................................      10,523,986       14,677,252        3,883,188
                                                                         -------------    -------------    -------------
Realized gain (loss) on investments before income taxes ..............      20,278,566      (10,112,020)      12,602,879
Income tax expense (benefit) .........................................       7,162,692       (4,046,206)       4,411,007
                                                                         -------------    -------------    -------------
Net realized gain (loss) on investments ..............................      13,115,874       (6,065,814)       8,191,872
                                                                         -------------    -------------    -------------
Increase in unrealized appreciation of investments before income taxes     124,355,303       27,809,654      114,067,574
Increase in deferred income taxes on appreciation of investments .....      43,670,000        9,925,000       39,379,000
                                                                         -------------    -------------    -------------
Net increase in unrealized appreciation of investments ...............      80,685,303       17,884,654       74,688,574
                                                                         -------------    -------------    -------------

Net realized and unrealized gain on investments ......................   $  93,801,177    $  11,818,840    $  82,880,446
                                                                         =============    =============    =============

Increase in net assets from operations ...............................   $  96,190,433    $  14,224,788    $  85,467,506
                                                                         =============    =============    =============
</TABLE>


                 See Notes to Consolidated Financial Statements


<PAGE>
<TABLE>
<CAPTION>

                 Capital Southwest Corporation and Subsidiaries
                Consolidated Statements of Changes in Net Assets

                                                                         Years Ended March 31
                                                           -----------------------------------------------
                                                                2006             2005             2004
                                                           -------------    -------------    -------------
<S>                                                        <C>              <C>              <C>
Operations
  Net investment income ................................   $   2,389,256    $   2,405,948    $   2,587,060
  Net realized gain (loss) on investments ..............      13,115,874       (6,065,814)       8,191,872
  Net increase in unrealized appreciation of investments      80,685,303       17,884,654       74,688,574
                                                           -------------    -------------    -------------
  Increase in net assets from operations ...............      96,190,433       14,224,788       85,467,506

Distributions from:
  Undistributed net investment income ..................      (2,314,231)      (2,314,231)      (2,308,631)

Capital share transactions
  Exercise of employee stock options ...................         208,000             --            997,500
                                                           -------------    -------------    -------------

  Increase in net assets ...............................      94,084,202       11,910,557       84,156,375
Net assets, beginning of year ..........................     302,533,907      290,623,350      206,466,975
                                                           -------------    -------------    -------------

Net assets, end of year ................................   $ 396,618,109    $ 302,533,907    $ 290,623,350
                                                           =============    =============    =============
</TABLE>




                 See Notes to Consolidated Financial Statements


<PAGE>
<TABLE>
<CAPTION>

                 Capital Southwest Corporation and Subsidiaries
                      Consolidated Statements of Cash Flows


                                                                                 Years Ended March 31
                                                                     --------------------------------------------
                                                                         2006            2005            2004
                                                                     ------------    ------------    ------------
<S>                                                                  <C>             <C>             <C>
Cash flows from operating activities
Increase in net assets from operations ...........................   $ 96,190,433    $ 14,224,788    $ 85,467,506
Adjustments to reconcile increase in net assets from operations
   to net cash provided by operating activities:
     Proceeds from disposition of investments ....................     30,802,552       4,510,652      16,486,067
     Purchases of securities .....................................    (15,054,741)     (2,280,690)    (12,458,840)
     Maturities of securities ....................................        480,197         394,269       2,754,845
     Depreciation and amortization ...............................         16,136          17,597          19,089
     Net pension benefit .........................................       (116,747)       (254,872)       (272,912)
     Realized (gain) loss on investments before income taxes .....    (20,278,566)     10,112,020     (12,602,879)
     Deferred taxes on realized (gain) loss on investments .......      2,335,031      (4,046,206)      4,411,007
     Net increase in unrealized appreciation of investments ......    (80,685,303)    (17,884,654)    (74,688,574)
     (Increase) decrease in receivables ..........................            514         (59,924)        221,187
     (Increase) decrease in other assets .........................         (3,226)        (10,477)          5,023
     Increase (decrease) in accrued interest and other liabilities        (67,245)        121,196          41,701
     Decrease in accrued pension cost ............................       (154,673)       (164,129)       (167,281)
     Deferred income taxes .......................................         40,800          88,800          95,600
                                                                     ------------    ------------    ------------
Net cash provided by operating activities ........................     13,505,162       4,768,370       9,311,539
                                                                     ------------    ------------    ------------
Cash flows from financing activities
Decrease in note payable to bank .................................           --        (7,500,000)           --
Decrease in notes payable to portfolio company ...................     (5,000,000)           --        (2,500,000)
Distributions from undistributed net investment income ...........     (2,314,231)     (2,314,231)     (2,308,631)
Proceeds from exercise of employee stock options .................        208,000            --           997,500
                                                                     ------------    ------------    ------------
Net cash used in financing activities ............................     (7,106,231)     (9,814,231)     (3,811,131)
                                                                     ------------    ------------    ------------
Net increase (decrease) in cash and cash equivalents .............      6,398,931      (5,045,861)      5,500,408
Cash and cash equivalents at beginning of year ...................      5,104,935      10,150,796       4,650,388
                                                                     ------------    ------------    ------------
Cash and cash equivalents at end of year .........................   $ 11,503,866    $  5,104,935    $ 10,150,796
                                                                     ============    ============    ============
Supplemental disclosure of cash flow information:
Cash paid during the year for: Interest ..........................   $    436,920    $    420,446    $    531,194
                               Income taxes ......................   $  4,846,081    $       --      $       --
</TABLE>



                 See Notes to Consolidated Financial Statements



<PAGE>

                   Notes to Consolidated Financial Statements


1.   Summary of Significant Accounting Policies

     Capital Southwest  Corporation  ("CSC") is a business  development  company
subject  to  regulation  under  the  Investment  Company  Act of  1940.  Capital
Southwest Venture Corporation  ("CSVC"), a wholly-owned  subsidiary of CSC, is a
Federal  licensee  under  the Small  Business  Investment  Act of 1958.  Capital
Southwest Management Corporation ("CSMC"), a wholly-owned  subsidiary of CSC, is
the  management  company  for  CSC and  CSVC.  The  following  is a  summary  of
significant  accounting policies followed in the preparation of the consolidated
financial statements of CSC, CSVC and CSMC (together, the "Company"):

     Principles of  Consolidation.  The consolidated  financial  statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America for investment  companies.  Under rules and regulations
applicable to investment  companies,  we are precluded  from  consolidating  any
entity  other than  another  investment  company.  An  exception to this general
principle  occurs if the  investment  company has an  investment in an operating
company that  provides  services to the  investment  company.  Our  consolidated
financial statements include our management company, CSMC.

     Cash and Cash Equivalents. All temporary cash investments having a maturity
of three months or less when purchased are considered to be cash equivalents.

     Investments.  Investments are stated at market or fair value  determined by
the Board of Directors as described in the Notes to Portfolio of Investments and
Note 2 below. The average cost method is used in determining cost of investments
sold.  Investments are recorded on a trade date basis.  Dividends are recognized
on the ex-dividend date and interest income is accrued daily.

     Segment  Information.  The Company  operates  and manages its business in a
singular  segment.  As an investment  company,  the Company invests in portfolio
companies  in  various  industries  and  geographic  areas as  presented  in the
portfolio of investments.

     Use of Estimates.  The  preparation  of financial  statements in conformity
with accounting  principles  generally  accepted in the United States of America
requires  management to make estimates and  assumptions  that affect the amounts
reported in the financial  statements  and  accompanying  notes.  Actual results
could differ from those estimates.

     Stock-Based Compensation.  Effective April 1, 2003, the Company adopted the
fair value method of recording compensation expense related to all stock options
granted after March 31, 2003, in accordance with Financial  Accounting Standards
("FASB")  Statement  Nos.  123 and 148.  Accordingly,  the  fair  value of stock
options as determined on the date of grant using the Black-Scholes pricing model
will be expensed over the vesting period of the related stock  options.  On July
19, 2004,  7,500 stock  options were granted to a new  investment  associate who
resigned on December 31, 2004 with no options vested.

     The following table illustrates the effect on net asset value and net asset
value per share if the Company had applied the fair value recognition provisions
of FASB Statement No. 123 to stock-based  compensation for options granted prior
to the implementation of FASB Statement No. 123.



<PAGE>

                                                  Years Ended March 31
                                      ------------------------------------------
                                          2006           2005           2004
                                      ------------   ------------   ------------

Net asset value, as reported          $396,618,109   $302,533,907   $290,623,350
Deduct: Total fair value computed
  stock-based compensation                 150,936        160,764        179,440
                                      ------------   ------------   ------------
Pro forma net asset value             $396,467,173   $302,373,143   $290,443,910
                                      ============   ============   ============

Net asset value per share:
  Basic - as reported                      $102.74         $78.44         $75.35
                                           =======         ======         ======
  Basic - pro forma                        $102.71         $78.39         $75.30
                                           =======         ======         ======

  Diluted - as reported                    $102.49         $78.38         $75.32
                                           =======         ======         ======
  Diluted- pro forma                       $102.45         $78.34         $75.27
                                           =======         ======         ======

     The  diluted  net asset  value per share  calculation  assumes  all  vested
outstanding  options for which the market price exceeds the exercise  price have
been exercised.

     In December 2004, the FASB issued SFAS No. 123 (revised 2004),  Share-Based
Payment ("SFAS 123R)",  which revises SFAS 123. SFAS 123R also supersedes APB 25
and amends  SFAS No. 95,  Statement  of Cash  Flows.  SFAS 123R  eliminates  the
alternative  to account for employee stock options under APB 25 and requires the
fair value of all share-based payments to employees, including the fair value of
grants of  employee  stock  options,  be  recognized  in the  income  statement,
generally over the vesting period.

     In  March  2005,  the  Securities  and  Exchange  Commission  issued  Staff
Accounting  Bulletin ("SAB") No. 107, which provides  additional  implementation
guidance  for SFAS 123R.  Among  other  things,  SAB 107  provides  guidance  on
share-based   payment   valuations,    income   statement   classification   and
presentation, capitalization of costs and related income tax accounting.

     SFAS 123R provides for adoption  using either the modified  prospective  or
modified  retrospective  transition  method. The Company will adopt SFAS 123R on
April  1,  2006  using  the  modified  prospective  transition  method  in which
compensation  cost is  recognized  beginning  April 1, 2006 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  Company  will
continue to use the  Black-Scholes  pricing model to determine the fair value of
stock option awards.

     The future impact of SFAS 123R on results of operations cannot be predicted
at this time because it will depend on levels of share-based  payments  granted.
However,  had SFAS 123R been  adopted in prior  periods,  the effect  would have
approximated  the SFAS 123 pro  forma net  asset  value and net asset  value per
share disclosures as shown above.

     SFAS  123R  also  requires  the  benefits  of tax  deductions  in excess of
recognized  compensation  cost to be reported as a financing  cash flow,  rather
than as an  operating  cash flow as  currently  required,  thereby  reducing net
operating  cash flows and  increasing  net financing cash flows in periods after
adoption.  Those amounts  cannot be estimated for future  periods  (because they
depend on, among other things,  when  employees  will exercise the stock options
and the market price of the Company's common stock at the time of exercise).

2.   Valuation of Investments

     The consolidated financial statements as of March 31, 2006 and 2005 include
securities  valued  at  $485,924,522  (88.3%  of the  value of the  consolidated
investment  portfolio) and $364,732,932  (86.4% of the value of the consolidated
investment  portfolio),  respectively,  whose values have been determined by the
Board of  Directors  in the  absence of  readily  ascertainable  market  values.
Because  of the  inherent  uncertainty  of  valuation,  these  values may differ
significantly  from the values that would have been used had a ready  market for
the securities existed, and the differences could be material.

3.   Income Taxes

     For the tax years ended  December  31,  2005,  2004 and 2003,  CSC and CSVC
qualified  to  be  taxed  as  regulated   investment  companies  ("RICs")  under
applicable  provisions of the Internal  Revenue Code. As RICs, CSC and CSVC must
distribute  at least 90% of their  taxable  net  investment  income  (investment
company  taxable  income) and may either  distribute or retain their taxable net
realized gain on investments  (capital gains).  Both CSC and CSVC intend to meet
the  applicable  qualifications  to be taxed as RICs in future  years;  however,
either company's ability to meet certain portfolio diversification  requirements
of RICs in future years may not be controllable by such company.


<PAGE>

     For the year  ended  December  31,  2005,  CSC and CSVC had net  investment
income for book and tax purposes of $2,314,231 and $574,794,  respectively,  all
of which has been distributed.  During 2005, CSC and CSVC had a net capital gain
for book purposes of $12,625,800 and $6,958,957, respectively, and a net capital
gain for tax purposes of $16,783,112 and $6,958,957, respectively.

     The aggregate  cost of  investments  for federal  income tax purposes as of
March 31, 2006 was $91,104,094.  Such investments had unrealized appreciation of
$480,868,317  and unrealized  depreciation of $19,037,190 for book purposes,  or
net unrealized appreciation of $461,831,127. They had unrealized appreciation of
$478,614,873 and unrealized depreciation of $19,290,884 for tax purposes, or net
unrealized  appreciation  of  $459,323,989  at March 31,  2006.  The  difference
between book basis and tax basis net  unrealized  appreciation  is  attributable
primarily to interest income that was accrued for tax purposes, but not for book
purposes.

     CSC and CSVC may not qualify or elect to be taxed as RICs in future  years.
Therefore,  consolidated  deferred  Federal  income  taxes of  $160,764,000  and
$117,094,000 have been provided on net unrealized appreciation of investments of
$461,831,127  and  $337,475,824 at March 31, 2006 and 2005,  respectively.  Such
appreciation is not included in taxable income until  realized.  Deferred income
taxes on net unrealized  appreciation  of investments  have been provided at the
then currently  effective maximum Federal corporate tax rate on capital gains of
35% at March 31, 2006 and 2005.

4.   Notes Payable

     The note  payable to bank at March 31, 2006 and 2005 was from an  unsecured
revolving line of credit of  $25,000,000  of which  $8,000,000 had been drawn at
March 31, 2006 and 2005.  The  revolving  line of credit  bears  interest at the
bank's base rate less .50% or LIBOR plus 1.25% and matures on August 31, 2007.

     The note  payable to  portfolio  company  was a demand  promissory  note to
Lifemark  Group  (formerly  Skylawn  Corporation)  with interest  payable at the
greater of prime minus 2.0% or the  Applicable  Federal Rate  established by the
Internal  Revenue Service.  Interest expense on this portfolio  company note was
$32,329 in 2006 and $134,542 in 2005.


5.   Employee Stock Option Plan

     Under the 1984 Incentive  Stock Option Plan,  28,000 options were exercised
in 2004. The 1984 Incentive Stock Option Plan expired in 1994.

     On July  19,  1999,  shareholders  approved  the  1999  Stock  Option  Plan
("Plan"),  which  provides  for the granting of stock  options to employees  and
officers of the Company and  authorizes  the  issuance of common  stock upon the
exercise of such options for up to 140,000  shares of common stock.  All options
are granted at or above  market  price and  generally  expire 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.

     At March 31, 2006,  there were 91,500 shares  available for grant under the
Plan. The per share  weighted-average fair value of stock options granted during
2005 was  $23.53 on the date of grant  using the  Black  Scholes  option-pricing
model with the following assumptions: expected dividend yield of .79%, risk-free
interest rate of 4.07%,  expected  volatility  of 22.6%,  and expected life of 7
years.

     The following  summarizes  activity in the stock option plans for the years
ended March 31, 2006, 2005 and 2004:

                                               Number    Weighted Average
                                              of shares   Exercise Price
                                              ---------   --------------
Balance at April 1, 2003                        82,500       $58.336
     Granted                                      --            --
     Exercised                                 (28,000)       35.625
     Canceled                                     --            --
                                               -------       -------
Balance at March 31, 2004                       54,500        70.004
     Granted                                     7,500        76.000
     Exercised                                    --            --
     Canceled                                  (13,500)       79.870
                                               -------       -------
Balance at March 31, 2005                       48,500        68.186
     Granted                                      --            --
     Exercised                                  (3,200)       65.000
     Canceled                                     --            --
                                               -------       -------
Balance at March 31, 2006                       45,300       $68.411
                                               =======       =======

     At March  31,  2006,  the range of  exercise  prices  and  weighted-average
remaining  contractual life of outstanding  options was $65.00 - $77.00 and 4.81
years, respectively.

<PAGE>
<TABLE>
<CAPTION>

     At March 31, 2006,  2005 and 2004,  the number of options  exercisable  was
29,500, 25,650 and 24,200,  respectively and the weighted-average exercise price
of those options was $69.01, $68.98 and $73.24, respectively.

6.   Employee Stock Ownership Plan

     The  Company  and one of its  wholly-owned  portfolio  companies  sponsor a
qualified  employee  stock  ownership  plan ("ESOP") in which certain  employees
participate. Contributions to the plan, which are invested in Company stock, are
made at the discretion of the Board of Directors.  A  participant's  interest in
contributions to the ESOP fully vests after five years of active service. During
the three years ended March 31,  2006,  the Company  made  contributions  to the
ESOP,  which were charged  against net  investment  income,  of $99,167 in 2006,
$93,588 in 2005 and $88,937 in 2004.

7.   Retirement Plans

     The Company sponsors a qualified  defined benefit pension plan which covers
its employees and employees of certain of its wholly-owned  portfolio companies.
The following  information  about the plan  represents  amounts and  information
related to the  Company's  participation  in the plan and is presented as though
the Company  sponsored a  single-employer  plan.  Benefits are based on years of
service and an average of the highest  five  consecutive  years of  compensation
during the last ten years of  employment.  The funding  policy of the plan is to
contribute  annual  amounts  that are  currently  deductible  for tax  reporting
purposes.  No  contribution  was made to the plan  during the three  years ended
March 31, 2006.

     The following tables set forth the qualified plan's benefit obligations and
fair value of plan assets at March 31, 2006, 2005 and 2004:

                                                      Years Ended March 31
                                         --------------------------------------------
                                             2006            2005            2004
                                         ------------    ------------    ------------
<S>                                      <C>             <C>             <C>
Change in benefit obligation
Benefit obligation at beginning
     of  year ........................   $  3,833,411    $  3,799,113    $  3,676,599
Service cost .........................         95,590          92,434          81,309
Interest cost ........................        223,374         214,076         215,511
Actuarial loss .......................        228,122          94,812         189,566
Benefits paid ........................       (376,480)       (367,024)       (363,872)
                                         ------------    ------------    ------------
Benefit obligation at end of year ....   $  4,004,017    $  3,833,411    $  3,799,113
                                         ============    ============    ============

Change in plan assets
Fair value of plan assets at beginning
     of  year ........................   $  9,326,254    $ 10,030,763    $  6,881,723
Actual return on plan assets .........      2,690,919        (337,485)      3,512,912
Benefits paid ........................       (376,480)       (367,024)       (363,872)
                                         ------------    ------------    ------------
Fair value of plan assets at end of
     year ............................   $ 11,640,693    $  9,326,254    $ 10,030,763
                                         ============    ============    ============
</TABLE>

     The  following  table sets forth the  qualified  plan's  funded  status and
amounts  recognized  in  the  Company's  consolidated  statements  of  financial
condition:
                                                              March 31
                                                     --------------------------
                                                         2006           2005
                                                     -----------    -----------
Actuarial present value of benefit obligations:
     Accumulated benefit obligation ................ $(3,475,899)   $(3,392,308)
                                                     ===========    ===========
Projected benefit obligation for service rendered to
     date .......................................... $(4,004,017)   $(3,833,411)
Plan assets
     at fair value* ................................  11,640,693      9,326,254
                                                     -----------    -----------
Excess of plan assets over
     the projected benefit obligation ..............   7,636,676      5,492,843
Unrecognized net (gain) loss from past experience
     different from that assumed and effects of
     changes in assumptions ........................    (670,478)     1,272,655
Unrecognized prior service costs ...................     195,281        202,816
                                                     -----------    -----------
Prepaid pension cost included in other assets ...... $ 7,161,479    $ 6,968,314
                                                     ===========    ===========
--------------------
*Primarily  equities and bonds including  approximately  28,000 shares of common
stock of the Company.

<PAGE>

   Components of net pension benefit related to the qualified plan include the
following:

                                                    Years Ended March 31
                                            -----------------------------------
                                               2006         2005         2004
                                            ---------    ---------    ---------
Service cost - benefits earned during
     the year .........................     $  95,590    $  92,434    $  81,309
Interest cost on projected benefit
     obligation .......................       223,374      214,076      215,511
Expected return on assets .............      (551,026)    (564,627)    (576,020)
Net amortization and deferral .........        38,897      (66,280)     (66,296)
                                            ---------    ---------    ---------
Net pension benefit from qualified plan     $(193,165)   $(324,397)   $(345,496)
                                            =========    =========    =========

     The Company also sponsors an unfunded Retirement Restoration Plan, which is
a  nonqualified  plan that  provides for the payment,  upon  retirement,  of the
difference  between the maximum annual payment  permissible  under the qualified
retirement  plan  pursuant  to Federal  limitations  and the amount  which would
otherwise have been payable under the qualified plan.

     The following  table sets forth the Retirement  Restoration  Plan's benefit
obligations at March 31, 2006, 2005 and 2004:

                                                   Years Ended March 31
                                         --------------------------------------
                                            2006          2005          2004
                                         ----------    ----------    ----------
Change in benefit obligation
Benefit obligation at beginning
     of  year ...................        $1,302,368    $1,414,091    $1,353,386
Service cost ....................            19,094        10,380         5,464
Interest cost ...................            72,886        74,711        82,683
Actuarial (gain) loss ...........            40,867       (32,685)      139,839
Benefits paid ...................          (154,673)     (164,129)     (167,281)
                                         ----------    ----------    ----------
Benefit obligation at end of year        $1,280,542    $1,302,368    $1,414,091
                                         ==========    ==========    ==========

     The  following  table sets forth the status of the  Retirement  Restoration
Plan and the amounts  recognized  in the  consolidated  statements  of financial
condition:

                                                              March 31
                                                     --------------------------
                                                         2006           2005
                                                     -----------    -----------

Projected benefit obligation .....................   $(1,280,542)   $(1,302,368)
Unrecognized net loss from past ex-
     perience different from that assumed
     and effects of changes in assumptions........        93,049         52,182
Unrecognized prior service costs .................      (239,573)      (255,136)
                                                     -----------    -----------
Accrued pension cost included in other liabilities   $(1,427,066)   $(1,505,322)
                                                     ===========    ===========

     The Retirement  Restoration Plan expenses recognized during the years ended
March 31, 2006, 2005 and 2004 of $76,417, $69,528 and $72,584, respectively, are
offset against the net pension benefit from the qualified plan.

     The following  assumptions  were used in estimating  the actuarial  present
value of the projected benefit obligations:

                                                       Years Ended March 31
                                                --------------------------------
                                                  2006        2005        2004
                                                --------    --------    --------

Discount rate ......................             5.75%       5.75%       5.75%
Rate of compensation increases......              5.0%        5.0%        5.0%

     The  following  assumptions  were  used  in  estimating  the  net  periodic
(income)/expense:

                                                       Years Ended March 31
                                                --------------------------------
                                                  2006        2005        2004
                                                --------    --------    --------
Discount rate.......................             5.75%       5.75%        6.0%
Expected return on plan assets......              6.0%        6.0%        6.0%
Rate of compensation increases......              5.0%        5.0%        5.0%


<PAGE>

     The expected rate of return on assets  assumption was  determined  based on
the anticipated performance of the various asset classes in the plan's portfolio
and the allocation of assets to each class.  The anticipated  asset class return
is  developed  using   historical  and  predicted   asset  return   performance,
considering the investments  underlying each asset class and expected investment
performance  based on forecasts of inflation,  interest rates and market indices
for fixed income and equity securities.

     The Company's pension plan asset allocations are as follows:

                                                       Percentage of plan assets
                                                             at March 31
                                                       -------------------------
Asset Category                                           2006             2005
-----------------                                      --------         --------

Equity securities.........                               83.6%            78.6%
Debt securities...........                               12.9%            16.2%
Cash .....................                                3.5%             5.2%
                                                        ------           ------
                                                        100.0%           100.0%
                                                        ======           ======

     The Company's pension plan is administered by a  board-appointed  committee
that has fiduciary responsibility for the plan's management.  The trustee of the
plan is JPMorgan Asset Management. Currently approximately 20% of the assets are
selected and managed by the trustee and the  remainder of the assets are managed
by the committee, invested mostly in equity securities,  including the Company's
stock.

     Following are the expected  benefit payments for the next five years and in
the aggregate for the years 2012-2016:

                                             Years Ended March 31
                             ---------------------------------------------------
                                                                           2012-
(In Thousands)                2007     2008     2009     2010     2011     2016
                             ------   ------   ------   ------   ------   ------
                             $  352   $  334   $  316   $  296   $  276   $1,132

8.   Commitments

     The  Company  has agreed,  subject to certain  conditions,  to invest up to
$1,191,154 in three portfolio companies.

     The Company  leases  office space under an operating  lease which  requires
base annual rentals of  approximately  $80,000 through  February,  2008. For the
three years ended March 31, total rental  expense  charged to investment  income
was $76,877 in 2006, $75,248 in 2005 and $74,122 in 2004.

9.   Sources of Income

     Income was derived from the following sources:

                                     Investment  Income           Realized Gain
Years Ended                  ---------------------------------      (Loss) on
March 31                                                           Investments
--------                                                Other     Before Income
2006                         Interest     Dividends    Income         Taxes
----                         ---------------------------------    -------------
Companies more than
   25% owned .........       $   --      $2,926,964   $642,500    $        --
Companies 5% to 25%
   owned .............        (55,236)      188,233     10,000             --
Companies less than
   5% owned ..........        302,622       370,233    195,570       20,278,566
Other sources,
   including temporary
   investments .......        258,150          --         --               --
                             --------------------------------------------------
                             $505,536    $3,485,430   $848,070    $  20,278,566
                             ==================================================
2005
----
Companies more than
   25% owned .........       $   --      $3,361,345   $637,000    $        --
Companies 5% to 25%
   owned .............         55,236        80,858       --        (12,097,124)
Companies less than
   5% owned ..........        346,396       335,987       --          1,985,104
Other sources,
   including temporary
   investments .......         36,121          --         --               --
                             --------------------------------------------------
                             $437,753    $3,778,190   $637,000    $ (10,112,020)
                             ==================================================

<PAGE>

                                     Investment  Income           Realized Gain
Years Ended                  ---------------------------------      (Loss) on
March 31                                                           Investments
--------                                                Other     Before Income
2004                         Interest     Dividends    Income         Taxes
----                         ---------------------------------    -------------
Companies more than
   25% owned .........       $   --      $3,577,800   $629,000    $        --
Companies 5% to 25
   owned .............           --            --        3,864         (188,900)
Companies less than
   5% owned ..........        203,304       283,137       --         12,791,779
Other sources,
   including temporary
   investments .......         10,683          --         --               --
                             --------------------------------------------------
                             $213,987    $3,860,937   $632,864    $  12,602,879
                             ==================================================














<PAGE>
<TABLE>
<CAPTION>

                       Selected Per Share Data and Ratios

                                                                                          Years Ended March
                                                                   -------------------------------------------------------------
Per Share Data                                                        2006         2005         2004         2003         2002
                                                                   -------------------------------------------------------------
<S>                                                                <C>          <C>          <C>          <C>          <C>
Investment income ..............................................   $    1.25    $    1.26    $    1.22    $    1.06    $    1.08
Operating expenses .............................................        (.51)        (.51)        (.39)        (.30)        (.27)
Interest expense ...............................................        (.11)        (.11)        (.14)        (.12)        (.24)
Income taxes ...................................................        (.01)        (.02)        (.02)        (.04)        (.04)
                                                                   -------------------------------------------------------------
Net investment income ..........................................         .62          .62          .67          .60          .53
Distributions from undistributed net investment income .........        (.60)        (.60)        (.60)        (.60)        (.60)
Net realized gain (loss) on investments ........................        3.40        (1.57)        2.13          .35         (.14)
Net increase (decrease) in unrealized appreciation of
    investments after deferred taxes ...........................       20.90         4.64        19.37       (11.85)        6.31
Exercise of employee stock options* ............................        (.02)        --           (.14)        --           (.08)
                                                                    -------------------------------------------------------------

Increase (decrease) in net asset value .........................       24.30         3.09        21.43       (11.50)        6.02
Net asset value
  Beginning of year ............................................       78.44        75.35        53.92        65.42        59.40
                                                                   -------------------------------------------------------------
  End of year ..................................................   $  102.74    $   78.44    $   75.35    $   53.92    $   65.42
                                                                   =============================================================

Increase (decrease) in deferred taxes on unrealized appreciation   $   11.29    $    2.57    $   10.09    $   (6.35)   $    3.26
Deferred taxes on unrealized appreciation:
  Beginning of year ............................................       30.36        27.79        17.70        24.05        20.79
                                                                   -------------------------------------------------------------
  End of year ..................................................   $   41.65    $   30.36    $   27.79    $   17.70    $   24.05
                                                                   =============================================================

Ratios and Supplemental Data
Ratio of operating expenses to average net assets ..............         .58%         .67%         .63%         .52%         .42%
Ratio of operating expenses to average net assets plus average
    deferred taxes on unrealized appreciation ..................         .42%         .49%         .47%         .39%         .31%
Ratio of net investment income to average net assets ...........         .71%         .83%        1.09%        1.04%         .85%
Portfolio turnover rate ........................................        2.36%         .56%        3.74%        1.53%
                                                                                                                            1.05%

Net asset value total return ...................................       33.69%        4.90%       41.16%      (16.75)%      11.18%

Shares outstanding at end of period (000s omitted) .............       3,860        3,857        3,857        3,829        3,829
</TABLE>
------------
* Net decrease is due to the exercise of employee  stock  options at prices less
than beginning of period net asset value.


<PAGE>

Management's Report on Internal Control Over Financial Reporting


     Management  is  responsible  for  establishing  and  maintaining   adequate
internal  control  over  financial  reporting,  as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company's
internal  control over  financial  reporting  is designed to provide  reasonable
assurance  regarding the reliability of financial  reporting and the preparation
of financial  statements  for external  purposes in accordance  with  accounting
principles generally accepted in the United States.

     Because of its  inherent  limitations,  internal  controls  over  financial
reporting  may not prevent or detect  misstatements.  Also,  projections  of any
evaluation of  effectiveness to future periods are subject to risk that controls
may become  inadequate  because of changes in conditions,  or that the degree of
compliance with the policies or procedures may deteriorate.

     The Company has assessed  the  effectiveness  of its internal  control over
financial reporting as of March 31, 2006. In making this assessment, it used the
criteria  described in  "Internal  Control-Integrated  Framework"  issued by the
Committee of Sponsoring  Organizations of the Treadway Commission (COSO).  Based
on this  assessment,  management  believes  that,  as of  March  31,  2006,  the
Company's internal control over financial reporting was effective.

     Grant  Thornton  LLP has  issued  its  attestation  report on  management's
assessment  and on the  effectiveness  of the  Company's  internal  control over
financial reporting. That report appears on the next page.

Date:    May 24, 2006

/s/ William R. Thomas
---------------------
William R. Thomas
President & Chairman of the Board


/s/ Susan K. Hodgson
---------------------
Susan K. Hodgson
Secretary-Treasurer
(chief financial/accounting officer)


<PAGE>

To the Board of Directors and Shareholders of
Capital Southwest Corporation

     We have audited management's assessment, included in Management's Report on
Internal Control Over Financial  Reporting,  that Capital Southwest  Corporation
and  subsidiaries  (the "Company")  maintained  effective  internal control over
financial  reporting  as of March 31,  2006,  based on criteria  established  in
Internal  Control-Integrated  Framework  issued by the  Committee of  Sponsoring
Organizations of the Treadway  Commission  (COSO).  The Company's  management is
responsible for maintaining  effective internal control over financial reporting
and for its assessment of the  effectiveness  of internal control over financial
reporting.   Our  responsibility  is  to  express  an  opinion  on  management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.

     We  conducted  our audit in  accordance  with the  standards  of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and  perform  the audit to obtain  reasonable  assurance  about  whether
effective  internal  control over  financial  reporting  was  maintained  in all
material  respects.  Our audit included  obtaining an  understanding of internal
control over financial reporting,  evaluating management's  assessment,  testing
and evaluating the design and operating  effectiveness of internal control,  and
performing   such  other   procedures   as  we   considered   necessary  in  the
circumstances.  We believe that our audit  provides a  reasonable  basis for our
opinions.

     A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial  statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial  reporting  includes those policies and procedures that (1) pertain to
the  maintenance  of records that, in reasonable  detail,  accurately and fairly
reflect the  transactions  and  dispositions  of the assets of the company;  (2)
provide  reasonable  assurance  that  transactions  are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting  principles,  and that receipts and  expenditures  of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of  unauthorized  acquisition,  use, or  disposition  of the company's
assets that could have a material effect on the financial statements.

     Because  of its  inherent  limitations,  internal  control  over  financial
reporting  may not prevent or detect  misstatements.  Also,  projections  of any
evaluation  of  effectiveness  to future  periods  are  subject to the risk that
controls may become  inadequate  because of changes in  conditions,  or that the
degree of compliance with the policies or procedures may deteriorate.

     In our opinion,  management's assessment that Capital Southwest Corporation
and subsidiaries  maintained effective internal control over financial reporting
as of March 31,  2006,  is fairly  stated,  in all material  respects,  based on
criteria  established  in Internal  Control-Integrated  Framework  issued by the
Committee of Sponsoring  Organizations of the Treadway Commission (COSO).  Also,
in our opinion,  Capital Southwest Corporation and subsidiaries  maintained,  in
all material respects, effective internal control over financial reporting as of
March 31, 2006,  based on criteria  established  in Internal  Control-Integrated
Framework  issued by the Committee of Sponsoring  Organizations  of the Treadway
Commission (COSO).

     We have also  audited,  in  accordance  with the  standards  of the  Public
Company Accounting Oversight Board (United States), the consolidated  statements
of financial  condition of Capital Southwest  Corporation and subsidiaries as of
March 31, 2006 and 2005,  including the portfolio of investments as of March 31,
2006, on pages 12-17, and the related  statements of operations,  changes in net
assets,  and cash flows,  and the  selected per share data and ratios on page 29
for each of the two years in the period  ended  March 31,  2006,  and our report
dated  May  26,  2006  expressed  an  unqualified  opinion  on  those  financial
statements and per share data and ratios.


/s/Grant Thornton LLP

Dallas, Texas
May 26, 2006


<PAGE>

Report of Independent Registered Public Accounting Firm


To the Board of Directors and Shareholders of
Capital Southwest Corporation


     We have  audited the  accompanying  consolidated  statements  of  financial
condition  of  Capital   Southwest   Corporation  (a  Texas   Corporation)   and
subsidiaries  as of  March  31,  2006  and  2005,  including  the  portfolio  of
investments as of March 31, 2006, on pages 12-17,  and the related  consolidated
statements  of  operations,  changes  in net  assets,  and cash  flows,  and the
selected  per share data and ratios on page 29, for each of the two years in the
period ended March 31, 2006.  These financial  statements and per share data and
ratios are the responsibility of the Company's management. Our responsibility is
to  express  an opinion  on these  financial  statements  and per share data and
ratios based on our audits.

     We  conducted  our audits in  accordance  with the  standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain  reasonable  assurance about whether the
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the financial statements. Our procedures included verification by examination of
securities held by the custodian as of March 31, 2006 and 2005, and confirmation
of securities not held by the custodian by correspondence  with others. An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.

     In our opinion, the consolidated  financial statements and the selected per
share data and ratios  referred to above  present  fairly,  in all  material re-
spects, the consolidated financial position of Capital Southwest Corporation and
subsidiaries  as of March 31,  2006 and 2005,  and the  consolidated  results of
operations,  changes in net assets,  and cash flows,  and the selected per share
data and  ratios  for the  years  then  ended,  in  conformity  with  accounting
principles generally accepted in the United States of America.

     We have also  audited,  in  accordance  with the  standards  of the  Public
Company Accounting Oversight Board (United States), the effectiveness of Capital
Southwest   Corporation  and  subsidiaries'   internal  control  over  financial
reporting  as of March  31,  2006 and 2005,  based on  criteria  established  in
Internal  Control-Integrated  Framework  issued by the  Committee of  Sponsoring
Organizations of the Treadway  Commission  (COSO),  and our accompanying  report
dated May 26, 2006 expressed an unqualified  opinion on management's  assessment
of,  and  the  effective   operation  of  Capital   Southwest   Corporation  and
subsidiaries' internal control over financial reporting.



/S/GRANT THORNTON LLP

Dallas, Texas
May 26, 2006


<PAGE>

Report of Independent Registered Public Accounting Firm


The Board of Directors and Shareholders
   Capital Southwest Corporation:



     We have audited the  accompanying  consolidated  statements of  operations,
changes  in net  assets,  and cash flows of Capital  Southwest  Corporation  and
subsidiaries  for the year ended March 31, 2004, and the selected per share data
and ratios for the year then ended.  These  financial  statements  and per share
data  and  ratios  are  the  responsibility  of the  Company's  management.  Our
responsibility  is to express an opinion on these  financial  statements and per
share data and ratios based on our audit.

     We  conducted  our audit in  accordance  with the  standards  of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain  reasonable  assurance about whether the
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the financial statements. Our procedures included verification by examination of
securities  held by the  custodian  as of March  31,  2004 and  confirmation  of
securities  not held by the custodian by  correspondence  with others.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audit  provides a  reasonable  basis for our
opinion.

     In our opinion,  the  consolidated  financial  statements  and selected per
share  data  and  ratios  referred  to above  present  fairly,  in all  material
respects, the consolidated results of operations,  and the changes in net assets
and cash flows for the year ended March 31,  2004,  and the  selected  per share
data and ratios for the year then ended,  of Capital  Southwest  Corporation and
subsidiaries in conformity with U.S. generally accepted accounting principles.




                                                               ERNST & YOUNG LLP
Dallas, Texas
May 12, 2004


<PAGE>

                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations


Results of Operations


     The  composite  measure  of  the  Company's  financial  performance  in the
Consolidated  Statements of Operations is captioned "Increase in net assets from
operations"  and  consists  of three  elements.  The  first  is "Net  investment
income",  which is the  difference  between the Company's  income from interest,
dividends  and fees and its combined  operating  and interest  expenses,  net of
applicable  income  taxes.  The second  element is "Net  realized gain (loss) on
investments",  which  is the  difference  between  the  proceeds  received  from
disposition  of portfolio  securities  and their stated cost,  net of applicable
income tax  expense  or  benefit.  The third  element  is the "Net  increase  in
unrealized  appreciation of investments",  which is the net change in the market
or fair value of the Company's investment portfolio,  compared with stated cost,
net of an increase in deferred  income taxes which would  become  payable if the
unrealized  appreciation  were realized through the sale or other disposition of
the investment portfolio.  It should be noted that the "Net realized gain (loss)
on investments" and "Net increase in unrealized appreciation of investments" are
directly  related  in that when an  appreciated  portfolio  security  is sold to
realize a gain, a corresponding  decrease in net unrealized  appreciation occurs
by transferring the gain associated with the transaction from being "unrealized"
to  being  "realized."  Conversely,  when a loss is  realized  on a  depreciated
portfolio security, an increase in net unrealized appreciation occurs.

Net Investment Income

     The  Company's  principal  objective  is to achieve  capital  appreciation.
Therefore,  a significant  portion of the investment  portfolio is structured to
maximize the potential  return from equity  participation  and provides  minimal
current  yield in the form of interest  or  dividends.  The  Company  also earns
interest  income from the  short-term  investment of cash funds,  and the annual
amount of such  income  varies  based upon the average  level of funds  invested
during the year and fluctuations in short-term  interest rates. During the three
years  ended  March 31, the Company had  interest  income  from  temporary  cash
investments  of  $257,374  in 2006,  $35,048 in 2005 and  $10,247  in 2004.  The
Company also receives management fees primarily from its wholly-owned  portfolio
companies  which  aggregated  $792,570  in 2006 and  $597,000  in 2005 and 2004.
During the three years  ended March 31,  2006,  the  Company  recorded  dividend
income from the following sources:

                                                   Years Ended March 31
                                            ------------------------------------
                                               2006         2005         2004
                                            ----------   ----------   ----------
Alamo Group Inc. ...................        $  677,112   $  677,112   $  677,112
Balco, Inc. ........................           252,960      252,960      252,960
Dennis Tool Company ................            49,999       25,000       49,999
Kimberly-Clark Corporation .........           142,011      127,347      109,596
Lifemark Group .....................           600,000      600,000      950,000
PalletOne, Inc. ....................           179,685       80,858         --
The RectorSeal Corporation .........         1,106,893      960,000    1,407,729
Sprint Nextel Corporation ..........            18,000       45,000       36,000
TCI Holdings, Inc. .................            81,270       81,270       81,270
The Whitmore Manufacturing Company             240,000      846,273      240,000
Other ..............................           137,500       82,370       56,271
                                            ----------   ----------   ----------
                                            $3,485,430   $3,778,190   $3,860,937
                                            ==========   ==========   ==========

     Total operating expenses, excluding interest expense, increased by $445,937
or 29.7%  during  the year  ended  March  31,  2005.  Due to the  nature  of its
business,  the  majority  of the  Company's  operating  expenses  are related to
employee and director compensation,  office expenses,  legal and accounting fees
and the net pension benefit.  Interest expense  decreased by $110,717 during the
year ended March 31, 2005 primarily due to a decrease in notes payable.

Net Realized Gain (Loss) on Investments

     Net realized gain on investments was $13,115,874  (after income tax expense
of  $7,162,692)  during the year ended March 31, 2006,  compared  with a loss of
$6,065,814  (after income tax benefit of  $4,046,206)  during 2005 and a gain of
$8,191,872 (after income tax expense of $4,411,007) during 2004. Management does
not attempt to maintain a comparable  level of realized gains from year to year,
but instead attempts to maximize total investment portfolio  appreciation.  This
strategy often dictates the long-term holding of portfolio securities in pursuit
of increased values and increased unrealized appreciation,  but may at opportune
times  dictate  realizing  gains or losses  through the  disposition  of certain
portfolio investments.



<PAGE>

Net Increase  in Unrealized Appreciation of Investments

     For the three years  ended  March 31, the  Company  recorded an increase in
unrealized  appreciation  of  investments  before income taxes of  $124,355,303,
$27,809,654 and $114,067,574 in 2006, 2005 and 2004, respectively.  As explained
in the first paragraph of this discussion and analysis, the realization of gains
or  losses  results  in a  corresponding  decrease  or  increase  in  unrealized
appreciation  of  investments.   Set  forth  in  the  following  table  are  the
significant  increases  and  decreases in  unrealized  appreciation  (before the
related  change in deferred  income taxes and  excluding  the effect of gains or
losses realized during the year) by portfolio company for securities held at the
end of each year.

                                                  Years Ended March 31
                                    --------------------------------------------
                                        2006            2005            2004
                                    ------------    ------------    ------------

Alamo Group Inc. .........          $ (5,642,000)   $ 19,749,000    $  8,464,000
Encore Wire Corporation ..            49,041,000     (27,245,000)     46,316,000
Heeling, Inc. ............            27,000,000       1,400,000       1,480,000
Hologic, Inc. ............            12,472,883       1,836,760       1,833,596
Media Recovery, Inc. .....            15,744,000       9,256,000       7,000,000
Palm Harbor Homes, Inc. ..            27,493,000     (15,710,000)     15,710,000
The RectorSeal Corporation            15,000,000      12,500,000       5,000,000

     As shown in the above table,  the three  investments  achieving the largest
increases  in value  during  the year  ended  March 31,  2006 were  Encore  Wire
Corporation,  Palm Harbor Homes,  Inc. and Heeling,  Inc. The major  increase in
Encore's value was attributable to significant increases in gross profit margins
as copper prices soared to record  levels.  The increase in Palm Harbor's  value
reflected  the improved  condition of the markets for  manufactured  housing and
modular  homes.  The other major  increase in value was  experienced by Heeling,
Inc. as sales of its Heelys  skate shoes  doubled in 2005 and its order  backlog
reached a record high level.

     A description of the investments listed above and other material components
of the  investment  portfolio  is included  elsewhere  in this report  under the
caption "Portfolio of Investments - March 31, 2006."

Deferred Taxes on Unrealized Appreciation of Investments

     The Company  provides for deferred  Federal  income taxes on net unrealized
appreciation  of  investments.  Such taxes would become  payable at such time as
unrealized  appreciation  is realized  through the sale or other  disposition of
those  components  of the  investment  portfolio  which would  result in taxable
transactions.  At March 31, 2006  consolidated  deferred Federal income taxes of
$160,764,000  were provided on net  unrealized  appreciation  of  investments of
$461,831,127  compared with deferred  taxes of  $117,094,000  on net  unrealized
appreciation of  $337,475,824 at March 31, 2005.  Deferred income taxes at March
31, 2006 and 2005 were provided at the then currently  effective maximum Federal
corporate tax rate on capital gains of 35%.

Portfolio Investments

     During the year ended March 31, 2006, the Company  invested  $15,054,741 in
various  portfolio  securities listed elsewhere in this report under the caption
"Portfolio  Changes During the Year," which also lists dispositions of portfolio
securities.  During the 2005 and 2004 fiscal years, the Company invested a total
of $2,280,690 and $12,458,840, respectively.

Financial Liquidity and Capital Resources

     At  March  31,  2006,  the  Company  had  cash  and  cash   equivalents  of
approximately $11.5 million.  Pursuant to Small Business  Administration ("SBA")
regulations,  cash and cash  equivalents of $0.3 million held by CSVC may not be
transferred or advanced to CSC without the consent of the SBA. Under current SBA
regulations and subject to SBA's approval of its credit application,  CSVC would
be entitled to borrow up to $72.0  million.  The Company  also has an  unsecured
$25.0 million  revolving  line of credit from a commercial  bank, of which $17.0
million was  available at March 31, 2006.  With the  exception of a capital gain
distribution  made in the form of a  distribution  of the  stock of a  portfolio
company in the fiscal  year ended  March 31,  1996,  the  Company has elected to
retain all gains realized during the past 38 years. Retention of future gains is
viewed as an  important  source of funds to  sustain  the  Company's  investment
activity.  Approximately $64.5 million of the Company's  investment portfolio is
represented by unrestricted publicly-traded securities and represent a source of
liquidity.

     Funds to be used by the Company for operating or investment purposes may be
transferred  in the form of  dividends,  management  fees or loans from Lifemark
Group  (formerly  Skylawn  Corporation),  The  RectorSeal  Corporation  and  The
Whitmore Manufacturing Company, wholly-owned portfolio companies of the Company,
to the extent of their available cash reserves and borrowing capacities.

<PAGE>
<TABLE>
<CAPTION>

     Management  believes that the Company's cash and cash  equivalents and cash
available from other sources  described  above are adequate to meet its expected
requirements.  Consistent  with  the  long-term  strategy  of the  Company,  the
disposition of investments  from time to time may also be an important source of
funds for future investment activities.

Contractual Obligations

     As shown below, the Company had the following contractual obligations as of
March  31,  2006.  For  further  information  see  Note  4  and  Note  8 of  the
Consolidated Financial Statements.

                                      Payments Due By Period ($ in Thousands)
                                      ---------------------------------------
                                          Less than                        More Than
Contractual Obligations          Total      1 Year   1-3 Years  3-5 Years   5 Years
-----------------------------------------------------------------------------------
<S>                             <C>        <C>       <C>        <C>        <C>
Long-term debt obligations      $8,000       --       $8,000       --         --
Capital  lease obligations        --         --         --         --         --
Operating lease obligations         80       --       $   80       --         --
Purchase obligations              --         --         --         --         --
Other long-term liabilities
   reflected on the Company's
   balance sheet under GAAP       --         --         --         --         --
                                ---------------------------------------------------
Total                           $8,080       --       $8,080       --         --
                                ---------------------------------------------------
</TABLE>

Critical Accounting Policies

Valuation of Investments

     In  accordance  with the  Investment  Company Act of 1940,  investments  in
unrestricted  securities (freely marketable  securities having readily available
market quotations) are valued at market and investments in restricted securities
(securities subject to one or more resale restrictions) are valued at fair value
determined  in good  faith  by the  Company's  Board  of  Directors.  Under  the
valuation  policy of the  Company,  unrestricted  securities  are  valued at the
closing  sale price for listed  securities  and at the lower of the  closing bid
price or the last sale  price  for  Nasdaq  securities  on the  valuation  date.
Restricted  securities,  including securities of publicly-owned  companies which
are  subject to  restrictions  on resale,  are  valued at fair  value,  which is
considered to be the amount the Company may reasonably expect to receive if such
securities  were sold on the valuation  date.  Valuations  as of any  particular
date, however, are not necessarily indicative of amounts which may ultimately be
realized as a result of future sales or other dispositions of securities.

     Among the factors  considered by the Board of Directors in determining  the
fair value of restricted  securities  are the financial  condition and operating
results of the issuer,  the  long-term  potential of the business of the issuer,
the market for and recent sales prices of the issuer's securities, the values of
similar securities issued by companies in similar businesses,  the proportion of
the issuer's securities owned by the Company,  the nature and duration of resale
restrictions  and the nature of any rights  enabling  the Company to require the
issuer to register restricted securities under applicable securities laws.

Deferred Income Taxes

     In future  years,  the  Company  may not  qualify or elect to be taxed as a
regulated investment company ("RIC") under applicable provisions of the Internal
Revenue Code. Therefore, deferred Federal income taxes have been provided on net
unrealized appreciation of investments at the then currently effective corporate
tax rate on capital gains.

Impact of Inflation

     The Company does not believe that its  business is  materially  affected by
inflation,  other than the impact  which  inflation  may have on the  securities
markets,  the valuations of business  enterprises  and the  relationship of such
valuations to underlying earnings,  all of which will influence the value of the
Company's investments.


Risks

     Pursuant to Section  64(b)(1)  of the  Investment  Company  Act of 1940,  a
business  development  company is required to describe the risk factors involved
in an  investment  in the  securities  of such  company due to the nature of the
company's investment portfolio. Accordingly the Company states that:

<PAGE>
<TABLE>
<CAPTION>

     The  Company's  objective  is  to  achieve  capital   appreciation  through
investments in businesses  believed to have  favorable  growth  potential.  Such
businesses are often  undercapitalized  small  companies  which lack  management
depth and have not yet attained profitability. The Company's venture investments
often  include  securities  which do not yield  interest  or  dividends  and are
subject  to legal or  contractual  restrictions  on resale,  which  restrictions
adversely affect the liquidity and marketability of such securities.

     Because of the speculative nature of the Company's investments and the lack
of any market for the securities initially purchased by the Company,  there is a
significantly greater risk of loss than is the case with traditional  investment
securities. The high-risk,  long-term nature of the Company's venture investment
activities  may  prevent  shareholders  of  the  Company  from  achieving  price
appreciation and dividend distributions.






















<PAGE>

                      Selected Consolidated Financial Data
                (all figures in thousands except per share data)


                                                 1996        1997        1998        1999        2000        2001
-------------------------------------------------------------------------------------------------------------------
<S>                                            <C>         <C>         <C>         <C>         <C>         <C>
Financial Position (as of March 31)
Investments at cost ........................   $ 58,544    $ 59,908    $ 61,154    $ 73,580    $ 85,002    $ 87,602
Unrealized appreciation ....................    198,386     233,383     340,132     276,698     238,627     228,316
                                               --------    --------    --------    --------    --------    --------
Investments at market or
   fair value ..............................    256,930     293,291     401,286     350,278     323,629     315,918
Total assets ...............................    326,972     310,760     522,324     360,786     392,586     322,668
Notes payable * ............................     11,000       5,000       5,000       5,000      10,000      16,000

Deferred taxes on
   unrealized appreciation .................     69,121      81,313     118,674      96,473      83,151      79,310
Net assets .................................    189,048     218,972     296,023     256,232     236,876     226,609
Shares outstanding .........................      3,767       3,767       3,788       3,815       3,815       3,815
-------------------------------------------------------------------------------------------------------------------

Changes in Net Assets (years ended March 31)
Net investment income ......................   $  2,855    $  2,574    $  2,726    $  1,762    $  1,663    $  1,723
Net realized gain (loss) on
   investments .............................     11,174       6,806       6,485         995       6,020      (3,231)
Net increase (decrease) in
   unrealized appreciation
   before distributions ....................     38,746      22,804      69,388     (41,233)    (24,750)     (6,470)
                                               --------    --------    --------    --------    --------    --------
Increase (decrease) in net
   assets from operations
   before distributions ....................     52,775      32,184      78,599     (38,476)    (17,067)     (7,978)
Cash dividends paid ........................     (2,270)     (2,260)     (2,268)     (2,280)     (2,289)     (2,289)
Securities distributed .....................     (9,402)       --          --          --          --          --
Employee stock options
   exercised ...............................        575        --           720         965        --          --
                                               --------    --------    --------    --------    --------    --------

Increase (decrease) in net assets ..........     41,678      29,924      77,051     (39,791)    (19,356)    (10,267)
-------------------------------------------------------------------------------------------------------------------

Per Share Data (as of March 31)
Deferred taxes on
   unrealized appreciation .................   $  18.35    $  21.59    $  31.33    $  25.29    $  21.80    $  20.79
Net assets .................................      50.18       58.13       78.15       67.16       62.09       59.40
Closing market price .......................      60.00      67.875       94.00       73.00       54.75       65.00

Cash dividends paid ........................        .60         .60         .60         .60         .60         .60
Securities distributed .....................       2.50        --          --          --          --          --

o Excludes quarter-end borrowing which is repaid on the first business day after
year end.


<PAGE>

                Selected Consolidated Financial Data (continued)
                (all figures in thousands except per share data)




                                                 2002        2003        2004        2005        2006
-------------------------------------------------------------------------------------------------------
Financial Position (as of March 31)
Investments at cost ........................   $ 82,194    $ 91,462    $ 97,283    $ 84,546    $ 88,597
Unrealized appreciation ....................    265,287     195,598     309,666     337,476     461,831
                                               --------    --------    --------    --------    --------
Investments at market or
   fair value ..............................    347,481     287,060     406,949     422,022     550,428
Total assets ...............................    357,183     298,490     423,979     434,384     569,368
Notes payable * ............................     14,000      23,000      20,500      13,000       8,000

Deferred taxes on
   unrealized appreciation .................     92,107      67,790     107,169     117,094     160,764
Net assets .................................    250,491     206,467     290,623     302,534     396,618
Shares outstanding .........................      3,829       3,829       3,857       3,857       3,860
-------------------------------------------------------------------------------------------------------

Changes in Net Assets (years ended March 31)
Net investment income ......................   $  2,042    $  2,299    $  2,587    $  2,406       2,389
Net realized gain (loss) on
   investments .............................       (538)      1,346       8,192      (6,066)     13,116
Net increase (decrease) in
   unrealized appreciation
   before distributions ....................     24,174     (45,372)     74,689      17,885      80,685
                                               --------    --------    --------    --------    --------
Increase (decrease) in net
   assets from operations
   before distributions ....................     25,678     (41,727)     85,468      14,225      96,190
Cash dividends paid ........................     (2,295)     (2,297)     (2,309)     (2,314)     (2,314)
Securities distributed .....................       --          --          --          --          --
Employee stock options
   exercised ...............................        499        --           997        --           208
                                               --------    --------    --------    --------    --------

Increase (decrease) in net assets ..........     23,882     (44,024)     84,156      11,911      94,084
-------------------------------------------------------------------------------------------------------

Per Share Data (as of March 31)
Deferred taxes on
   unrealized appreciation .................   $  24.05    $  17.70    $  27.79    $  30.36    $  41.65
Net assets .................................      65.42       53.92       75.35       78.44      102.74
Closing market price .......................      68.75       48.15       75.47       79.10       95.50

Cash dividends paid ........................        .60         .60         .60         .60         .60
Securities distributed .....................       --          --          --          --          --
</TABLE>


<PAGE>

                             Shareholder Information




Stock Transfer Agent

     American Stock Transfer & Trust Company, 59 Maiden Lane, New York, NY 10038
(telephone  800-937-5449)  serves as  transfer  agent for the  Company's  common
stock.  Certificates to be transferred should be mailed directly to the transfer
agent, preferably by registered mail.

Shareholders

     The Company had  approximately  700 record  holders of its common  stock at
March 31, 2006. This total does not include an estimated 3,000 shareholders with
shares held under beneficial  ownership in nominee name or within  clearinghouse
positions of brokerage firms or banks.

Market Prices

     The  Company's  common  stock  trades on The Nasdaq  Stock Market under the
symbol CSWC.  The  following  high and low selling  prices for the shares during
each quarter of the last two fiscal years were taken from quotations provided to
the Company by Nasdaq:

Quarter Ended                                                    High      Low
--------------------------------------------------------------------------------
June 30, 2004....................................               $84.28    $72.68
September 30, 2004...............................                81.40     69.55
December 31, 2004................................                80.44     73.00
March 31, 2005...................................                79.87     74.25

Quarter Ended                                                    High      Low
--------------------------------------------------------------------------------
June 30, 2005....................................               $89.68    $74.98
September 30, 2005...............................                95.18     81.84
December 31, 2005...............................                 92.71     82.10
March 31, 2006...................................                99.01     89.24


Dividends

     The payment  dates and amounts of cash  dividends  per share since April 1,
2004 are as follows:

Payment Date                                                       Cash Dividend
--------------------------------------------------------------------------------
May 28, 2004..............................................             $0.20
November 30, 2004.........................................              0.40
May 31, 2005..............................................              0.20
November 30, 2005.........................................              0.40
May 31, 2006..............................................              0.20

     The  amounts  and timing of cash  dividend  payments  have  generally  been
dictated by requirements of the Internal Revenue Code regarding the distribution
of taxable net  investment  income  (ordinary  income) of  regulated  investment
companies.   Instead  of  distributing   realized  long-term  capital  gains  to
shareholders,  the Company has  ordinarily  elected to retain such gains to fund
future investments.

Automatic Dividend Reinvestment and Optional Cash Contribution Plan

     As a service to its shareholders,  the Company offers an Automatic Dividend
Reinvestment and Optional Cash  Contribution Plan for shareholders of record who
own a minimum of 25 shares.  The Company pays all costs of administration of the
Plan except brokerage  transaction  fees. Upon request,  shareholders may obtain
information on the Plan from the Company, 12900 Preston Road, Suite 700, Dallas,
Texas 75230. Telephone (972) 233-8242.

Annual Meeting

     The Annual Meeting of Shareholders of Capital Southwest Corporation will be
held on Monday,  July 17,  2006,  at 10:00 a.m.  in the North  Dallas Bank Tower
Meeting Room (second floor), 12900 Preston Road, Dallas, Texas.

</TEXT>
</DOCUMENT>
