<DOCUMENT>
<TYPE>EX-13.1
<SEQUENCE>5
<FILENAME>capital10kex131033107.txt
<TEXT>


                                                                    Exhibit 13.1


                   Twelve Largest Investments - March 31, 2007


================================================================================
Heelys, Inc.                                                        $195,664,000
--------------------------------------------------------------------------------

     Heelys,  Inc.,  Carrollton,  Texas,  manufacturers  and  markets  specialty
stealth skate footwear,  equipment and apparel under the brand name Heelys.  The
company  manufactures  its  products  in China and Korea  and  distributes  them
through  domestic  and  international  sporting  goods  chains,  department  and
lifestyle stores and specialty footwear retailers.

     During the year ended  December  31,  2006,  Heelys  reported net income of
$29,174,000  ($1.16 per share) on net sales of  $188,208,000,  compared with net
income of  $4,347,000  ($0.17  per  share) on net  sales of  $43,950,000  in the
previous  year. The March 30, 2007 closing Nasdaq market price of Heely's common
stock was $29.34 per share.

     At March 31, 2007, the $102,490 investment in Heelys by Capital Southwest's
subsidiary  was  valued  at  $195,664,000  ($21.00  per  share),  consisting  of
9,317,310 restricted shares of common stock, representing a fully-diluted equity
interest of 31.8%.

================================================================================
The RectorSeal Corporation                                           $98,000,000
--------------------------------------------------------------------------------

     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 also owns a 20% equity interest
in The Whitmore Manufacturing Company (described on page 9).

     During the year ended March 31,  2007,  RectorSeal  earned  $10,381,000  on
revenues of  $103,922,000,  compared  with earnings of $8,655,000 on revenues of
$95,060,000 in the previous year.  RectorSeal's  earnings do not reflect its 20%
equity in The Whitmore Manufacturing Company.

     At March 31, 2007,  Capital  Southwest  owned 100% of  RectorSeal's  common
stock having a cost of $52,600 and a value of $98,000,000.

================================================================================
Palm Harbor Homes, Inc.                                              $70,696,000
--------------------------------------------------------------------------------

     Palm  Harbor  Homes,  Dallas,  Texas,  is an  integrated  manufacturer  and
retailer of manufactured  and modular housing  produced in 14 plants and sold in
27  states  by  107  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 its upscale  modular  homes are designed to
meet the need for attractive, affordable housing.

     During the year ended March 30,  2007,  Palm Harbor  reported a net loss of
$11,565,000  ($0.51 per share) on net sales of  $661,247,000,  compared with net
income of  $11,114,000  ($0.49  per share) on net sales of  $710,635,000  in the
previous  year.  The March 30, 2007 closing Nasdaq market price of Palm Harbor's
common stock was $14.34 per share.

     At March 31, 2007,  the  $10,931,955  investment  in Palm Harbor by Capital
Southwest  and its  subsidiary  was valued at  $70,696,000  ($9.00  per  share),
consisting  of  7,855,121  restricted  shares of common  stock,  representing  a
fully-diluted equity interest of 30.5%.

================================================================================
Encore Wire Corporation                                              $69,475,000
--------------------------------------------------------------------------------

     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.


                                       1
<PAGE>

     For the year  ended  December  31,  2006,  Encore  reported  net  income of
$115,133,000 ($4.86 per share) on net sales of $1,249,330,000, compared with net
income of  $50,079,000  ($2.13  per share) on net sales of  $758,089,000  in the
previous year.  The March 30, 2007 closing  Nasdaq bid price of Encore's  common
stock was $25.29 per share.

     At March  31,  2007,  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 $69,475,000  ($17.00 per share),  representing a fully-diluted  equity
interest of 16.9%.

================================================================================
Alamo Group Inc.                                                     $47,962,000
--------------------------------------------------------------------------------

     Alamo Group Inc.,  Sequin,  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  and snow  removal
equipment  and  replacement  parts.  Founded in 1969,  Alamo  Group  operates 16
manufacturing  facilities and serves  governmental,  industrial and agricultural
markets in North America, Europe, and Australia.

     For the year  ended  December  31,  2006,  Alamo  reported  net  income  of
$11,488,000  ($1.16 per share) on net sales of  $456,494,000,  compared with net
income of  $11,291,000  ($1.14  per share) on net sales of  $368,110,000  in the
previous  year.  The March 30, 2007 closing NYSE market price of Alamo's  common
stock was $23.21 per share.

     At March 31, 2007, the $2,065,047  investment in Alamo by Capital Southwest
and its subsidiary was valued at $47,962,000  ($17.00 per share),  consisting of
2,821,300 restricted shares of common stock, representing a fully-diluted equity
interest of 26.2%.

================================================================================
Media Recovery, Inc.                                                 $45,000,000
--------------------------------------------------------------------------------

     Media Recovery,  Inc.,  Dallas,  Texas,  provides  datacenter  supplies and
services to corporate  customers  through its direct sales force. Its Shockwatch
division manufactures 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,  2006,  Media  Recovery  reported net
income of $5,164,000 on net sales of  $137,040,000,  compared with net income of
$5,028,000 on net sales of $142,574,000 in the previous year.

     At March 31, 2007, the  $5,415,000  investment in Media Recovery by Capital
Southwest and its  subsidiary was valued at  $45,000,000,  consisting of 800,000
shares of Series A convertible  preferred  stock and 4,000,000  shares of common
stock, representing a fully-diluted equity interest of 96.5%.

================================================================================
Lifemark Group                                                       $40,000,000
--------------------------------------------------------------------------------

     Lifemark  Group,  Hayward,   California,   owns  and  operates  cemeteries,
mausoleums  and  mortuaries.   Lifemark's  operations,   all  of  which  are  in
California,  include a major cemetery and funeral home 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.  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,  2007,  Lifemark  reported  earnings of
$2,239,000 on revenues of  $28,727,000,  compared with earnings of $2,457,000 on
revenues of $27,178,000 in the previous year.

     At March 31, 2007,  Capital Southwest owned 100% of Lifemark Group's common
stock, which had a cost of $4,510,400 and was valued at $40,000,000.

================================================================================
The Whitmore Manufacturing Company                                   $26,000,000
--------------------------------------------------------------------------------

     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  Air  Sentry   division   manufactures   fluid
contamination  control  devices.  The  company's  assets  also  include  several
commercial real estate tracts.

     During the year  ended  March 31,  2007,  Whitmore  reported  net income of
$2,848,000 on net sales of  $20,863,000,  compared with net income of $1,776,000
on net sales of  $18,010,000  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 8).

                                       2
<PAGE>


     At March 31,  2007,  the direct  investment  in 80% of  Whitmore by Capital
Southwest was valued at $26,000,000 and had a cost of $1,600,000.

================================================================================
Hologic, Inc.                                                        $18,228,380
--------------------------------------------------------------------------------

     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  30,  2006,  Hologic  reported  net income of
$27,423,000  ($0.56 per share) on net sales of  $462,680,000,  compared with net
income of  $28,256,000  ($0.63  per share) on net sales of  $287,684,000  in the
previous year.  The March 30, 2007 closing Nasdaq bid price of Hologic's  common
stock was $57.61 per share.

     At March 31, 2007,  Capital  Southwest  and its  subsidiary  owned  316,410
unrestricted  shares of common  stock,  having a cost of  $220,000  and a market
value of $18,228,380 ($57.61 per share).

================================================================================
Texas Capital Bancshares, Inc.                                       $10,013,465
--------------------------------------------------------------------------------

     Texas Capital Bancshares,  Inc. of Dallas, Texas, formed in 1998, has total
assets of approximately $3.7 billion. With branch banks in Austin,  Dallas, Fort
Worth,  Houston,  Plano and San Antonio,  Texas Capital Bancshares  conducts its
business through its subsidiary,  Texas Capital Bank, N.A., which targets middle
market  commercial and wealthy private client customers in Texas. In 2006, Texas
Capital  Bancshares  sponsored the formation of BankCap  Partners Fund I, a $109
million partnership organized to finance and launch other regional banks similar
to Texas Capital Bancshares.

     For the year ended December 31, 2006,  Texas Capital reported net income of
$28,924,000  ($1.09 per share),  compared with net income of $27,192,000  ($1.02
per share) in the previous  year. The March 30, 2007 closing Nasdaq bid price of
Texas Capital's common stock was $20.45 per share.

     At March 31, 2007, Capital Southwest owned 489,656  unrestricted  shares of
common  stock,  having a cost of  $3,550,006  and a market value of  $10,013,465
($20.45 per share).

================================================================================
PETsMART, Inc.                                                        $9,885,000
--------------------------------------------------------------------------------

     PETsMART,  Inc.,  Phoenix,  Arizona,  is the largest specialty  retailer of
services and solutions for the lifetime needs of pets. The company operates more
than 928 pet  superstores  in the United States and Canada,  many of which offer
pet grooming services,  operate PETsHOTELS and house veterinary  clinics.  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 28, 2007, PETsMART,  Inc. reported net income of
$185,069,000 ($1.33 per share) on net sales of $4.234 billion, compared with net
income of  $182,490,000  ($1.25 per share) on net sales of $3.760 billion in the
previous year. The March 30, 2007 closing Nasdaq bid price of PETsMART's  common
stock was $32.95 per share.

     At March 31, 2007,  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 $9,885,000 ($32.95 per share).

================================================================================
Extreme International, Inc.                                           $7,273,000
--------------------------------------------------------------------------------

     Extreme   International,   Inc.,  Sugar  Land,   Texas,   owns  Bill  Young
Productions,  Texas Video and Post,  and Extreme  Communications,  which produce
radio and television commercials and corporate communications videos.

     During the year ended  September 30, 2006,  Extreme  reported net income of
$1,202,723 on net sales of $10,342,478,  compared with net income of $817,121 on
net sales of $8,688,545 in the previous year.

     At March 31, 2007,  Capital  Southwest and its subsidiary  owned  39,359.18
shares of Series C  convertible  preferred  stock,  3,750  shares of 8% Series A
convertible  preferred  stock and warrants to purchase  13,035  shares of common
stock at $25 per  share,  having  a cost of  $3,000,000  and a  market  value of
$7,273,000, representing a fully-diluted equity interest of 53.3%.



                                       3
<PAGE>



<TABLE>
<CAPTION>

                    Portfolio of Investments - March 31, 2007

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

+AT&T, INC.                                              <1%       ++20,770 shares common stock
   San Antonio, Texas                                                (acquired 3-9-99)                 $        12      $    818,961
   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        47,962.000
   Tractor-mounted mowing and mobile excavation
   equipment for governmental, industrial and
   agricultural markets; street-sweeping
   equipment for municipalities.
------------------------------------------------------------------------------------------------------------------------------------
ALL COMPONENTS, INC.                                   57.0%       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.                                                        stock at $0.25 per share
                                                                     (acquired 9-16-94)                    150,000         1,000,000
                                                                                                       -----------      ------------
                                                                                                         3,150,000         4,000,000
------------------------------------------------------------------------------------------------------------------------------------
+ALLTEL CORPORATION                                      <1%       ++8,880 shares common stock
   Little Rock, Arkansas                                             (acquired 7-1-98)                      88,699           550,560
   Owner and operator of the nation's
   largest wireless network.
------------------------------------------------------------------------------------------------------------------------------------
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           300,000
------------------------------------------------------------------------------------------------------------------------------------
CMI HOLDING COMPANY, INC.                              18.2%       10% convertible subordinated
   Richardson, Texas                                                 notes, convertible into
   Owns Chase Medical, which develops                                720,350 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)





                                       4
<PAGE>



         Company                                     Equity (a)        Investment (b)                      Cost           Value (c)
------------------------------------------------------------------------------------------------------------------------------------
+COMCAST CORPORATION                                     <1%       ++64,656 shares common
   Philadelphia, Pennsylvania                                        stock (acquired 11-18-02)         $        21      $  1,675,884
   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         1,347,274
   management and network services worldwide.
------------------------------------------------------------------------------------------------------------------------------------
+EMBARK CORPORATION                                      <1%       ++4,500 shares common
   Overland Park, Kansas                                             stock (acquired 5-17-06)               46,532           253,575
   Local exchange carrier that provides
   voice and data services, including
   high-speed Internet.

------------------------------------------------------------------------------------------------------------------------------------
+ENCORE WIRE CORPORATION                               16.9%       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        69,475,000
   and commercial use.
------------------------------------------------------------------------------------------------------------------------------------
EXTREME INTERNATIONAL, INC.                            53.3%       39,359.18 shares Series C
   Sugar Land, Texas                                                 convertible preferred stock,
   Owns Bill Young Productions, Texas Video                          convertible into 157,436.72
   and Post, and Extreme Communications, which                       shares of common stock at
   produce radio and television commercials and                      $25.00 per share (acquired
   corporate communications videos.                                  9-30-03)                            2,625,000         6,449,000
                                                                   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           614,000
                                                                   Warrants to purchase 13,035 shares
                                                                     of common stock at $25.00 per
                                                                     share, expiring 2008 (acquired
                                                                     8-11-98 thru 9-30-03)                    --             210,000
                                                                                                       -----------      ------------
                                                                                                         3,000,000         7,273,000

------------------------------------------------------------------------------------------------------------------------------------
+FMC CORPORATION                                         <1%       ++6,430 shares common stock
   Philadelphia, Pennsylvania                                        (acquired 6-6-86)                      66,726           485,015
   Chemicals for agricultural, industrial and
   consumer markets.
------------------------------------------------------------------------------------------------------------------------------------
+FMC TECHNOLOGIES, INC.                                  <1%       ++11,057 shares common stock
   Houston, Texas                                                    (acquired 1-2-02)                      57,051           771,336
   Equipment and systems for the energy, food
   processing and air transportation industries.

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





                                       5
<PAGE>



         Company                                     Equity (a)        Investment (b)                      Cost           Value (c)
------------------------------------------------------------------------------------------------------------------------------------
+HEELYS, INC.                                          31.8%       9,317,310 shares common             $   102,490     $ 195,664,000
   Carrollton, Texas                                               stock (acquire 5-26-00)
   Heelys stealth skate shoes, equipment
   and apparel sold through sporting
   goods chains, department stores and
   footwear retailers

------------------------------------------------------------------------------------------------------------------------------------
HIC-STAR CORPORATION                                   34.9%       10% subordinated note due
   Dallas,Texas                                                     2007 (acquired 10-19-04
   Holding company previously engaged in                            and 1-13-05)                          352,646              --
   mortgage banking operations, which have                         12% subordinated notes due
   now been sold.                                                    2008 (acquired 3-25-05
                                                                     thru 2-27-06)                         717,523           354,738
                                                                   12% demand note (acquired 12-15-06)       4,500             4,500
                                                                   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)                   --                 --
                                                                                                       -----------      ------------
                                                                                                        1,074,669            359,238
------------------------------------------------------------------------------------------------------------------------------------
+HOLOGIC, INC.                                           <1%       ++316,410 shares common stock
   Bedford, Massachusetts                                            (acquired 8-27-99)                    220,000        18,228,380
   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         5,286,058
   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         1,397,033
   Owns interests in broadband, distribution                       ++42,463 shares Series C common
   and content companies.                                            stock (acquired 9-6-05)               100,870         1,299,368
                                                                                                       -----------      ------------
                                                                                                           207,423         2,696,401
------------------------------------------------------------------------------------------------------------------------------------
+LIBERTY MEDIA CORPORATION                               <1%       ++35,250 shares Liberty Capital
   Englewood, Colorado                                               Series A common stock
   Holding company owning interests in electronic                    (acquired 5-9-06)                      51,829         3,897,593
   retailing, media, communications and entertainment              ++176,252 share Liberty Interactive
   businesses.                                                       Series A common stock
                                                                     (acquired 5-9-06)                      66,424         4,196,560
                                                                                                       -----------      ------------
                                                                                                           118,253         8,094,153
------------------------------------------------------------------------------------------------------------------------------------
LIFEMARK GROUP                                        100.0%       1,449,026 shares common stock
   Hayward, California                                               (acquired 7-16-69)                  4,510,400        40,000,000
   Cemeteries, mausoleums and mortuaries located
   in northern California.
------------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company                                            ++Unrestricted securities as defined in Note (b)






                                       6
<PAGE>



         Company                                     Equity (a)        Investment (b)                      Cost           Value (c)
------------------------------------------------------------------------------------------------------------------------------------
MEDIA RECOVERY, INC.                                   96.5%        800,000 shares Series A
   Dallas, Texas                                                     convertible preferred stock,
   Computer datacenter and office automation supplies                convertible into 800,000
   and accessories; impact, tilt monitoring and                      shares of common stock at
   temperature sensing devices to detect mishandled                  $1.00 per share (acquired
   shipments; dunnage for protecting shipments.                      11-4-97)                          $   800,000      $  7,500,000
                                                                    4,000,000 shares common stock
                                                                     (acquired 11-4-97)                  4,615,000        37,500,000
                                                                                                       -----------      ------------
                                                                                                         5,415,000        45,000,000
------------------------------------------------------------------------------------------------------------------------------------
PALLETONE, INC.                                         8.8%       12.3% senior subordinated notes
   Bartow, Florida                                                   due 2012 (acquired 9-25-06)         1,553,150         2,000,000
   Manufacturer fo wooden pallets and                                150,000 shares common stock
   pressure-treated lumber.                                          (acquired 10-18-01)                   150,000         1,714,000
                                                                   Warrant to purchase 15,294 shares
                                                                     of common stock at $1.00 per
                                                                     share, expiring  2011 (acquired
                                                                     2-17-06)                               45,746           159,000
                                                                                                       -----------      ------------
                                                                                                         1,748,896         3,873,000

------------------------------------------------------------------------------------------------------------------------------------
+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        70,696,000
   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         9,885,000
   Retail chain of more than 928 stores selling pet
   foods, supplies and services.
------------------------------------------------------------------------------------------------------------------------------------
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        98,000,000
   electrical, construction, industrial,
   oil field and automotive applications;
   smoke containment systems for building
   fires; owns 20% of The Whitmore Manufacturing
   Company.
------------------------------------------------------------------------------------------------------------------------------------
+SPRINT NEXTEL CORPORATION                               <1%       ++90,000 shares common stock
   Reston, Virginai                                                  (acquired 6-20-84)                    457,113         1,706,400
   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
   relay systems.
------------------------------------------------------------------------------------------------------------------------------------
+TEXAS CAPITAL BANCSHARES, INC.                         1.6%       ++489,656 shares common stock
   Dallas, Texas                                                     (acquired 5-1-00)                   3,550,006        10,013,465
   Regional bank holding company with banking
   operations in six Texas cities.
------------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company                                            ++Unrestricted securities as defined in Note (b)






                                       7
<PAGE>




         Company                                     Equity (a)        Investment (b)                      Cost           Value (c)
------------------------------------------------------------------------------------------------------------------------------------
VIA HOLDINGS, INC.                                     28.2%       9,118 shares Series B preferred
   Sparks, Nevada                                                    stock (acquired 9-19-05)          $ 4,559,000      $          2
   Designer, manufacturer and distributor of
   high-quality office seating.
------------------------------------------------------------------------------------------------------------------------------------
WELLOGIX, INC.                                         19.3%       4,478,673 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 4,478,673 shares of common
   drilling and maintenance expenses.                                stock at $1.1164 per share
                                                                     (acquired 8-19-05 thru 9-15-06)     5,000,000                 2
------------------------------------------------------------------------------------------------------------------------------------
THE WHITMORE MANUFACTURING COMPANY                     80.0%       80 shares common stock
   Rockwall, Texas                                                   (acquired 8-31-79)                  1,600,000        26,000,000
   Specialized mining, railroad and industrial
   lubricants; coatings for automobiles and primary
   metals; fluid contamination control devices.
------------------------------------------------------------------------------------------------------------------------------------
+WINDSTREAM CORPORATION                                  <1%      ++9,181 shares common stock
   Little Rock, Arkansas                                             (acquired 7-17-06)                     19,656           134,869
   Provider of voice, broadband and
   entertainment services.

------------------------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS                                              -       BankCap Partners Fund, L.P.
                                                                     -6.0% limited partnership
                                                                     interest (acquired 7-14-06
                                                                     and 1/8-07)                           565,619           595,619
                                                           -       Diamond State Ventures, L.P.
                                                                     - 1.9% limited partnership
                                                                     interest (acquired 10-12-99
                                                                     thru 8-26-05)                         146,000           146,000
                                                           -       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)                            --             172,000
                                                           -       PharmaFab, Inc. - contingent
                                                                     payment agreement (acquired
                                                                     2-15-07)                                    2                 2
                                                           -       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)       950,000                 1
                                                           -       Sterling  Group  Partners  I, L.P.
                                                                     - 1.7% limited partnership
                                                                     interest (acquired 4-20-01 thru
                                                                     1-24-05)                            1,064,042         1,800,000
------------------------------------------------------------------------------------------------------------------------------------

TOTAL INVESTMENTS                                                                                      $71,642,297      $681,155,033
                                                                                                       ===========      ============
------------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company                                            ++Unrestricted securities as defined in Note (b)
</TABLE>







                                       8
<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,  2007,  restricted  securities  represented
approximately 90.9% 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,  2007 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  registered public accounting firm.  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.



                                       9
<PAGE>


                        Portfolio Changes During the Year


New Investments and Additions to Previous Investments


                                                                Amount
                                                                ------
BankCap Partners Fund I, L.P..............................    $595,619
Hic-Star Corporation......................................       4,500
PalletOne, Inc............................................     203,150
                                                             ---------
                                                              $803,269
                                                              ========
Dispositions

                                                              Amount
                                               Cost          Received
                                               ----          --------
Cenveo, Inc. ...........................  $   712,318     $ 9,597,254
Diamond State Ventures, L.P.............       64,000          64,000
Exopack, Inc............................            -         230,035
Heelys, Inc.............................       17,510      31,087,659
Hic-Star Corporation....................    6,529,167               -
PharmaFab, Inc..........................    9,499,998               -
StarTech Seed Fund II...................       50,000          50,000
Sterling Group Partners I, L.P..........            -         601,081
Texas Shredder, Inc.....................            -       1,289,959
                                           ----------      -------------
                                          $16,872,993     $42,919,988
                                          ===========     ==============
Repayments Received.....................                     $884,935
                                                             ========









                                       10
<PAGE>



                 Capital Southwest Corporation and Subsidiaries
                 Consolidated Statements of Financial Condition


                                                       March 31
Assets                                           2007          2006
                                            ------------   ------------

Investments at market or fair value
   Companies more than 25% owned
     (Cost: 2007 - $28,632,356,
     2006 - $23,114,866)................... $526,993,983   $298,481,983
   Companies 5% to 25% owned
     (Cost: 2007 - $18,798,896,
     2006 - $18,595,746)...................   76,398,002     92,070,852
   Companies less than 5% owned
     (Cost: 2007 - $24,211,045,
     2006 - $46,886,344)...................    7,763,048    159,875,248
                                           -------------- -------------

Total investments
     (Cost: 2007 - $71,642,297,
     2006 - $88,596,956)...................  681,155,033    550,428,083
Cash and cash equivalents..................   38,844,203     11,503,866
Receivables................................      337,892        135,887
Other assets...............................    9,170,185      7,300,297
                                           -------------  -------------




   Totals..................................  $729,507,313  $569,368,133
                                             ============  ============




                                                       March 31
Liabilities and Shareholders' Equity             2007          2006
                                            ------------   ------------

Note payable to bank.......................  $         -   $  8,000,000
Other liabilities..........................    1,457,847      1,697,086
Income taxes payable.......................      231,274        982,653
Deferred income taxes......................  213,474,680    162,070,285
                                            ------------  -------------
                    Total liabilities .....  215,163,801    172,750,024
                                            ------------  -------------

Shareholders' equity
   Common stock, $1 par value: authorized,
     5,000,000 shares; issued, 4,323,416
     shares at March 31, 2007 and 4,297,616
     shares at March 31, 2006..............    4,323,416      4,297,616
   Additional capital......................   11,221,601      8,109,797
   Undistributed net investment
     income................................    5,655,020      3,744,830
   Undistributed net realized gain on
     investments...........................  102,766,040     86,432,040
   Unrealized appreciation of investments -
     net of deferred income taxes..........  397,410,737    301,067,128
   Treasury stock - at cost
     (437,365 shares)......................   (7,033,302)    (7,033,302)
                                           --------------  ---------------
   Net assets at market or fair value, equivalent
     to $132.36 per share at March 31, 2007 on
     the 3,886,051 shares outstanding and
     $102.74 per share at March 31, 2006 on the
     3,860,251 shares outstanding..........  514,343,512    396,618,109
                                           -------------  -------------


   Totals.................................. $729,507,313   $569,368,133
                                            ============   ============



                 See Notes to Consolidated Financial Statements




                                       11
<PAGE>
<TABLE>
<CAPTION>

                 Capital Southwest Corporation and Subsidiaries
                      Consolidated Statements of Operations

                                                                                                Years Ended March 31
                                                                                 --------------------------------------------
                                                                                     2007             2006           2005
                                                                                 ------------    ------------   -------------
<S>                                                                              <C>             <C>            <C>
Investment income:
   Interest.....................................................................$   2,308,660  $      505,536  $      437,753
   Dividends....................................................................    3,954,875       3,485,430       3,778,190
   Management and directors' fees...............................................      708,900         848,070         637,000
                                                                                --------------  -------------   -------------
                                                                                    6,972,435     4,839,036         4,852,943
                                                                                --------------  -------------   -------------
Operating expenses:
   Salaries.....................................................................    1,356,062       1,211,584       1,132,510
   Net pension benefit..........................................................     (144,945)       (116,747)       (254,872)
   Other operating expenses.....................................................    1,014,255         859,702       1,068,313
                                                                                --------------  -------------   -------------
                                                                                    2,225,372       1,954,539       1,945,951
                                                                                --------------  -------------   -------------
Income before interest expense and income taxes.................................    4,747,063       2,884,497       2,906,992
Interest expense................................................................      460,399         436,021         420,351
                                                                                --------------  -------------   -------------
Income before income taxes......................................................    4,286,664       2,448,476       2,486,641
Income tax expense..............................................................       53,324          59,220          80,693
                                                                                --------------  -------------   -------------
Net investment income ..........................................................$   4,233,340   $   2,389,256   $   2,405,948
                                                                                ==============  =============   =============
Proceeds from disposition of investments........................................$  42,919,988   $  30,802,552   $   4,565,232
Cost of investments sold........................................................   16,872,993      10,523,986      14,677,252
                                                                                --------------  -------------   -------------
Realized gain (loss) on investments before income taxes.........................   26,046,995      20,278,566     (10,112,020)
Income tax expense (benefit) ...................................................    9,712,995       7,162,692      (4,046,206)
                                                                                --------------  -------------   -------------
Net realized gain (loss) on investments.........................................   16,334,000      13,115,874      (6,065,814)
                                                                                --------------  -------------   -------------
Increase in unrealized appreciation of investments before income taxes..........  147,681,609     124,355,303      27,809,654
Increase in deferred income taxes on appreciation of investments................   51,338,000      43,670,000       9,925,000
                                                                                --------------  -------------   -------------
Net increase in unrealized appreciation of investments..........................   96,343,609      80,685,303      17,884,654
                                                                                --------------  -------------   -------------

Net realized and unrealized gain on investments.................................$ 112,677,609   $  93,801,177    $ 11,818,840
                                                                                 ============    ============    ============

Increase in net assets from operations..........................................$ 116,910,949   $  96,190,433    $ 14,224,788
                                                                                 ============    ============    ============
</TABLE>


                 See Notes to Consolidated Financial Statements




                                       12
<PAGE>
<TABLE>
<CAPTION>

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



                                                                                      Years Ended March 31
                                                                        ---------------------------------------------
                                                                            2007             2006            2005
                                                                        -------------- --------------  --------------
<S>                                                                     <C>            <C>             <C>

Operations:
  Net investment income................................................. $  4,233,340   $  2,389,256    $  2,405,948
  Net realized gain (loss) on investments...............................   16,334,000     13,115,874      (6,065,814)
  Net increase in unrealized appreciation of investments................   96,343,609     80,685,303      17,884,654
                                                                        -------------- --------------  --------------
  Increase in net assets from operations................................  116,910,949     96,190,433      14,224,788

Distributions from:
  Undistributed net investment income...................................   (2,323,150)    (2,314,231)     (2,314,231)

Capital share transactions:
  Exercise of employee stock options....................................    1,794,850        208,000               -
  Adjustment to initially apply FASB No. 158, net of tax                    1,173,751              -               -
  Stock option expense..................................................      169,003              -               -
                                                                        -------------- --------------  --------------
  Increase in net assets...............................................   117,725,403     94,084,202      11,910,557
Net assets, beginning of year...........................................  396,618,109    302,533,907     290,623,350
                                                                        -------------- --------------  --------------

Net assets, end of year ................................................ $514,343,512   $396,618,109    $302,533,907
                                                                         ============   =============   =============
</TABLE>




                 See Notes to Consolidated Financial Statements



                                       13
<PAGE>
<TABLE>
<CAPTION>

                 Capital Southwest Corporation and Subsidiaries
                      Consolidated Statements of Cash Flows


                                                                                 Years Ended March 31
                                                                  -----------------------------------------------
                                                                       2007              2006             2005
                                                                  -------------    -------------    -------------
<S>                                                               <C>              <C>              <C>

Cash flows from operating activities
Increase in net assets from operations.........................   $ 116,910,949    $  96,190,433    $  14,224,788
Adjustments to reconcile increase in net assets from operations
   to net cash provided by operating activities:
     Proceeds from disposition of investments..................      42,919,988       30,802,552        4,510,652
     Purchases of securities...................................        (803,269)     (15,054,741)      (2,280,690)
     Maturities of securities..................................         884,935          480,197          394,269
     Depreciation and amortization.............................          16,808           16,136           17,597
     Net pension benefit.......................................        (144,945)        (116,747)        (254,872)
     Realized (gain) loss on investments before income taxes...     (26,046,995)     (20,278,566)      10,112,020
     Deferred taxes on realized (gain) loss on investments.....      (1,367,704)       2,335,031       (4,046,206)
     Net increase in unrealized appreciation of investments....     (96,343,609)     (80,685,303)     (17,884,654)
     Stock option expense......................................         169,003             --               --
     (Increase) decrease in receivables........................        (202,005)             514          (59,924)
     Increase in other assets..................................         (39,982)          (3,226)         (10,477)
     Increase (decrease) in other liabilities..................           8,934          (67,245)         121,196
     Decrease in accrued pension cost..........................        (144,171)        (154,673)        (164,129)
     Deferred income taxes.....................................          50,700           40,800           88,800
                                                                  -------------    -------------    -------------
Net cash provided by operating activities......................      35,868,637       13,505,162        4,768,370
                                                                  -------------    -------------    -------------
Cash flows from financing activities
Decrease in note payable to bank...............................      (8,000,000)            --         (7,500,000)
Decrease in note payable to portfolio company..................            --         (5,000,000)            --
Distributions from undistributed net investment income.........      (2,323,150)      (2,314,231)      (2,314,231)
Proceeds from exercise of employee stock options...............       1,794,850          208,000             --
                                                                  -------------    -------------    -------------
Net cash used in financing activities..........................      (8,528,300)      (7,106,231)      (9,814,231)
                                                                  -------------    -------------    -------------
Net increase (decrease) in cash and cash equivalents...........      27,340,337        6,398,931       (5,045,861)
Cash and cash equivalents at beginning of year.................      11,503,866        5,104,935       10,150,796
                                                                  -------------    -------------    -------------
Cash and cash equivalents at end of year.......................   $  38,844,203    $  11,503,866    $   5,104,935
                                                                  =============    =============    =============
Supplemental disclosure of cash flow information:
Cash paid during the year for: Interest........................   $     460,399    $     436,920    $     420,446
                               Income taxes....................   $  11,100,699    $   4,846,081    $         --

</TABLE>


                 See Notes to Consolidated Financial Statements


                                       14
<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.

     Federal Income Taxes.  CSC and CSVC intend to comply with the  requirements
of the  Internal  Revenue  Code  necessary  to qualify as  regulated  investment
companies. By meeting these requirements,  they will not be subject to corporate
federal income taxes on ordinary income distributed to shareholders.  Therefore,
CSC and CSVC made no provision for federal income taxes on net investment income
in their financial statements. The Company's policy is to retain and pay the 35%
corporate  tax on realized  long-term  capital  gains.  Therefore,  CSC and CSVC
provide in their  financial  statements  for taxes on such gain. See page 39 for
more detail.

     Stock-Based  Compensation.  In  December  2004,  the  Financial  Accounting
Standards Board (FASB) issued SFAS No. 123 (revised 2004),  Share-Based  Payment
(SFAS 123R), which revised 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.

     Effective  April 1, 2006, the Company  adopted SFAS 123R using the modified
prospective transition method. The Company recognizes compensation cost over the
straight-line  method for all share-based payments granted on or after that date
and for all  awards  granted  to  employees  prior to April 1, 2006 that  remain
unvested on that date.  The fair value of stock


                                       15
<PAGE>


options  are  determined  on the date of grant using the  Black-Scholes  pricing
model and are expensed  over the vesting  period of the related  stock  options.
Accordingly,  for  the  year  ended  March  31,  2007,  the  Company  recognized
compensation expense of $169,003.

     The following table illustrates the effect on net asset value and net asset
value per share for the years  ended  March 31, 2006 and 2005 if the Company had
applied the fair value  recognition  provisions to stock-based  compensation for
options.

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

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

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


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

     As of March 31, 2007, the total remaining  unrecognized  compensation  cost
related to non-vested  stock options was $1,171,452 which will be amortized over
the weighted-average service period of approximately 7.53 years.

Defined Pension Benefits and Other Postretirement Plans

     Effective  March 31,  2007,  the Company  adopted  Statement  of  Financial
Accounting  Standards (SFAS) No. 158, Employers'  Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB Statements Nos. 87,
88, 106 and 132R (SFAS 158). SFAS 158 is required to be adopted on a prospective
basis and prior  year  financial  statements  and  related  disclosures  are not
permitted to be restated.  SFAS 158  requires an employer  that  sponsors one or
more postretirement defined benefit plan(s) to:

     o    Recognize the funded status of postretirement  defined benefit plans -
          measured as the  difference  between the fair value of plan assets and
          the benefit obligations - in its balance sheet.

     o    Recognize  changes  in the  funded  status of  postretirement  defined
          benefit plans in shareholder's equity in the year in which the changes
          occur.

     o    Measure  postretirement defined benefit plan assets and obligations as
          of the date of the employer's  fiscal year-end.  The Company presently
          uses March 31 as the  measurement  date for all of its  postretirement
          defined benefit plans.

Recent Accounting Pronouncements

     In June 2006,  the  Financial  Accounting  Standards  Board  (FASB)  issued
Interpretation No. 48 (FIN48), which clarifies the accounting for uncertainty in
income taxes recognized in an entity's  financial  statements in accordance with
FASB  Statement  109,  "Accounting  for  Income  Taxes".  FIN  48  prescribes  a
recognition  threshold and  measurement  attribute  for the financial  statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return.  FIN 48 is effective for our Company April 1, 2007.  The Company has
evaluated  the  positions  in the tax  returns it has filed and does not believe
that FIN 48 will have a material impact on the Company's financial statements.

     The State of Texas  recently  passed House Bill 3 (HB3),  which revises the
existing  franchise  tax  system  to  create a new tax on  virtually  all  Texas
businesses.  Starting in the fiscal year 2007,  HB3  changes the  franchise  tax
base,  lowers the tax rate and extends coverage to active  businesses  receiving
state law  liability  protection.  The Company has been subject to an immaterial
amount of Texas  franchise taxes and expects the future effect of HB3 to also be
immaterial.

     In  September  2006,  the FASB issued  Statement  of  Financial  Accounting
Standard No. 157, "Fair Value  Measurements"  (SFAS 157).  The standard  defines
fair  value,  outlines a framework  for  measuring  fair value,  and details the
required  disclosures about fair value  measurements.  The standard is effective

                                       16
<PAGE>

for years  beginning  after November 15, 2007,  therefore the Company will adopt
SFAS 157 effective  April 1, 2008.  The Company is evaluating the impact of SFAS
157.

     In  September  2006,  the SEC issued  Staff  Accounting  Bulletin  No. 108,
"Considering   the  Effects  of  Prior  Year   Misstatements   when  Quantifying
Misstatements in Current Year Financial Statements" (SAB 108). SAB 108 clarifies
the SEC staff's beliefs regarding the process of quantifying financial statement
misstatements  and is effective for fiscal years ending after November 15, 2006.
The Company  applied  SAB 108 during the year and was not  required to record an
adjustment as a result of the application of SAB 108.

     In February  2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial  Assets  and  Financial  Liabilities"  (SFAS  159).  SFAS 159  permits
entities to choose to measure many financial instruments and certain other items
at fair value and establishes  presentation and disclosure requirements designed
to facilitate  comparisons  between entities that choose  different  measurement
attributes  for similar types of assets and  liabilities.  SFAS 159 is effective
for our Company  beginning April 1, 2008. The impact,  if any, from the adoption
of SFAS 159 has not been determined.

2.   Valuation of Investments

     The consolidated financial statements as of March 31, 2007 and 2006 include
restricted  securities  valued  at  $619,207,702  (90.9%  of  the  value  of the
consolidated  investment  portfolio) and $485,924,522 (88.3% 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.
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.

3.   Income Taxes

     For the tax years ended  December  31,  2006,  2005 and 2004,  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.

     For the year  ended  December  31,  2006,  CSC and CSVC had net  investment
income for book and tax purposes of $2,323,150 and $394,124,  respectively,  all
of which has been distributed.  During 2006, CSC and CSVC had a net capital gain
for book  purposes  of  $31,932,775  and  $28,697,723,  respectively,  and a net
capital gain for tax purposes of $31,659,140 and $28,697,723, respectively.

     The aggregate  cost of  investments  for federal  income tax purposes as of
March 31, 2007 was $75,147,983.  Such investments had unrealized appreciation of
$626,445,188  and unrealized  depreciation of $16,932,452 for book purposes,  or
net unrealized appreciation of $609,512,736. They had unrealized appreciation of
$623,584,608 and unrealized depreciation of $17,577,558 for tax purposes, or net
unrealized  appreciation  of  $606,007,050  at March 31,  2007.  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  $212,102,000  and
$160,764,000 have been provided on net unrealized appreciation of investments of
$609,512,736  and  $461,831,127 at March 31, 2007 and 2006,  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, 2007 and 2006.

4.   Note Payable

     The note  payable to bank at March 31, 2007 and 2006 was from an  unsecured
revolving  line of credit of  $25,000,000  of which $0 and  $8,000,000  had been
drawn at March 31, 2007 and 2006,  respectively.  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 average  interest rates during the years ended March 31,
2007 and 2006 were 6.46% and 5.05% respectively.



                                       17
<PAGE>

5.   Employee Stock Option Plan

     On July  19,  1999,  shareholders  approved  the  1999  Stock  Option  Plan
("Plan"),  which  provided  for the granting of stock  options to employees  and
officers  of the  Company  and  authorized  the  issuance  of common  stock upon
exercise of such options for up to 140,000 shares. All options are granted at or
above market  price,  generally  expire 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, 2007,  there were 58,500 shares  available for grant under the
Plan. The per share  weighted-average fair value of the stock options granted on
May 15, 2006 was $31.276 per option using the  Black-Scholes  pricing model with
the following assumptions:  expected dividend yield of 0.64%, risk-free interest
rate of 5.08%,  expected  volatility of 21.1%, and expected life of 7 years. The
per share  weighted-average  fair value of the stock options granted on July 17,
2006 was  $33.045  per option  using the  Black-Scholes  pricing  model with the
following assumptions: expected dividend yield of 0.61%, risk-free interest rate
of 5.04%, expected volatility of 21.2%, and expected life of 7 years.

     The following  summarizes  activity in the stock option plans for the years
ended March 31, 2007, 2006 and 2005:

                                     Number         Weighted Average
                                    of shares        Exercise Price
                                    -------            --------
Balance at April 1, 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
     Granted                         57,500              94.136
     Exercised                      (25,800)             69.568
     Canceled                       (24,500)             89.482
                                    --------           --------
Balance at March 31, 2007            52,500             $86.184
                                     ======             =======

     At March  31,  2007,  the range of  exercise  prices  and  weighted-average
remaining  contractual life of outstanding options was $65.00 to $98.44 and 7.78
years,  respectively.  The total intrinsic value of options exercised during the
year ended March 31, 2007 was $571,565,  with the exercise  prices  ranging from
$65.00 to $77.00  per share.  New shares  were  issued for the  $1,794,850  cash
received from option exercises for the year ended March 31, 2007.

     At March 31, 2007,  2006 and 2005,  the number of options  exercisable  was
8,515, 29,500 and 25,650,  respectively and the weighted-average  exercise price
of those options was $69.15, $69.01 and $68.98, 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.
Effective  April 1, 2007,  the vesting  period will be three  years.  During the
three years ended March 31, 2007,  the Company made  contributions  to the ESOP,
which were charged against net investment income, of $84,488 in 2007, $99,167 in
2006 and $93,588 in 2005.

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, 2007.

     The following tables set forth the qualified plan's benefit obligations and
fair value of plan assets at March 31, 2007, 2006 and 2005:



                                       18
<PAGE>



                                                  Years Ended March 31
                                                  --------------------
                                            2007         2006         2005
                                        -----------  -----------   -----------
Change in benefit obligation

Benefit obligation at beginning
     of  year...................       $ 4,004,017  $  3,833,411  $ 3,799,113
Service cost....................           103,342        95,590       92,434
Interest cost...................           230,711       223,374      214,076
Actuarial loss..................            68,854       228,122       94,812
Benefits paid...................          (386,982)     (376,480)    (367,024)
Plan change.....................           (54,842)            -            -
                                       -----------  ------------  -----------
Benefit obligation at end of year      $ 3,965,100  $  4,004,017  $ 3,833,411
                                       ===========  ============  ===========

Change in plan assets

Fair value of plan assets at beginning
     of  year....................      $11,640,693  $  9,326,254  $10,030,763
Actual return on plan assets.....        1,719,581     2,690,919     (337,485)
Benefits paid....................         (386,982)     (376,480)    (367,024)
                                       -----------  ------------  -----------
Fair value of plan assets at end of
     year........................      $12,973,292   $11,640,693  $ 9,326,254
                                       ===========   ===========  ===========

     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
                                                              --------
                                                         2007         2006
                                                      ----------   ----------
Actuarial present value of benefit obligations:
     Accumulated benefit obligation.........         $(3,435,396) $(3,475,899)
                                                     ===========  ===========
Projected benefit obligation for service
     rendered todate.........................        $(3,965,100) $(4,004,017)
Plan assets at fair value*................            12,973,292   11,640,693
                                                      ----------   ----------
Funded status.............................             9,008,192    7,636,676
Unrecognized net (gain)loss from past experience
     different from that assumed and effects of
     changes in assumptions...............            (1,761,054)    (670,478)
Unrecognized prior service costs............             132,904      195,281
Additional asset, FAS 158...................           1,628,150            -
                                                     ----------    ----------
Prepaid pension cost included in other assets        $ 9,008,192  $ 7,161,479
                                                     ===========  ===========
-------------
*Primarily  equities and bonds including  approximately  25,000 shares of common
stock of the Company.

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

                                                   Years Ended March 31
                                                   --------------------
                                             2007          2006         2005
                                          ---------     ----------   ----------
Service cost - benefits earned during
     the year....................          $103,342    $   95,590   $   92,434
Interest cost on projected benefit
     obligation..................           230,711       223,374      214,076
Expected return on assets........          (580,104)     (551,026)    (564,627)
Net amortization.................            27,487        38,897      (66,280)
                                         -----------   -----------  -----------
Net pension benefit from qualified plan   $(218,564)    $(193,165)   $(324,397)
                                          =========     =========    =========

     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.



                                       19
<PAGE>


     The following  table sets forth the Retirement  Restoration  Plan's benefit
obligations at March 31, 2007, 2006 and 2005:

                                               Years Ended March 31
                                               --------------------
                                         2007          2006         2005

Change in benefit obligation

Benefit obligation at beginning
     of  year....................     $1,280,542    $1,302,368   $1,414,091
Service cost.....................         20,245        19,094       10,380
Interest cost....................         68,937        72,886       74,711
Actuarial (gain) loss...........         (36,529)       40,867      (32,685)
Benefits paid....................       (144,170)     (154,673)    (164,129)
Plan change......................        (10,134)            -            -
                                      ----------    ----------   ----------
Benefit obligation at end of year     $1,178,891    $1,280,542   $1,302,368
                                      ==========    ==========   ==========

   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
                                                          --------
                                                     2007          2006
                                                  -----------   ------------

Projected benefit obligation.................    $(1,178,891)  $(1,280,542)
Unrecognized net loss from past ex-
     perience different from that assumed
     and effects of changes in assumptions            56,523        93,049
Unrecognized prior service costs.............       (234,144)     (239,573)
Additional asset, FAS 158....................        177,621             -
Accrued pension cost included in                  -----------  ------------
     other liabilities.......................    $(1,178,891)  $(1,427,066)
                                                  ===========  ============

     The Retirement  Restoration Plan expenses recognized during the years ended
March 31, 2007, 2006 and 2005 of $73,619, $76,417 and $69,528, 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
                                             --------------------
                                        2007         2006         2005
                                      ---------    ----------   ----------

Discount rate......................     6.0%         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
                                             --------------------
                                        2007         2006         2005
                                     ---------    ----------   ----------
Discount rate......................    5.75%         5.75%        5.75%
Expected return on plan assets.....     6.0%          6.0%         6.0%
Rate of compensation increases.....     5.0%          5.0%         5.0%

     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                                    2007              2006
--------------                                ----------        ----------

Equity securities...........................      79.1%             83.6%
Debt securities.............................      11.4%             12.9%
Cash .......................................       9.5%              3.5%
                                               --------          --------
                                                 100.0%            100.0%
                                               ========          ========

                                       20
<PAGE>

     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 18% 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 2013-2017:

                                  Years Ended March 31
                                  --------------------
                                                                 2013-
(In Thousands)   2008     2009     2010      2011      2012      2017
                 ----     ----     ----      ----      ----      ----
                 $357     $337     $316      $294      $281     $1,136


     Incremental  effect of applying FASB  Statement No. 158 on individual  line
items in the Statement of Financial Condition:

                                               March 31, 2007
                                               --------------
                               Before Application              After application
                               Of Statement 158    Adjustments  of Statement 158
                               ----------------    -----------  ----------------

Other assets...................     $  7,542,035    $1,628,150 $      9,170,185
Other liabilities..............        1,635,468      (177,621)       1,457,847
Deferred income taxes..........      212,842,660       632,020      213,474,680
Additional capital.............       10,047,850     1,173,751       11,221,601
Net assets at market or fair value   513,169,761     1,173,751      514,343,512

8.   Commitments

     The  Company  has agreed,  subject to certain  conditions,  to invest up to
$9,891,281 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 $79,979 in 2007, $76,877 in 2006 and $75,248 in 2005.

9.   Sources of Income

     Income was derived from the following sources:



                               Investment  Income          Realized Gain
                                                             (Loss) on
Years Ended                                                 Investments
March 31                                         Other     Before Income
2007                    Interest    Dividends    Income        Taxes
----                    -------------------------------------------------
Companies more than
   25% owned........   $       -   $3,449,558   $659,500   $31,070,149
Companies 5% to 25%
   owned............     125,733      171,578     20,000             -
Companies less than
   5% owned.........     938,761      333,739     29,400    (5,023,154)
Other sources,
   including temporary
   investments......   1,244,166            -          -             -
                      ------------------------------------------------
                      $2,308,660   $3,954,875   $708,900   $26,046,995
                      ================================================




2006
----
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
                        ==============================================

                                       21
<PAGE>

<TABLE>
<CAPTION>

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)
                       ================================================


                       Selected Per Share Data and Ratios


                                                                                       Years Ended March
                                                                    -------------------------------------------------------
   Per Share Data                                                         2007       2006       2005       2004       2003
                                                                    -------------------------------------------------------
<S>                                                                 <C>            <C>         <C>        <C>        <C>

Investment income..............................................    $     1.79  $     1.25  $    1.26  $    1.22  $    1.06
Operating expenses.............................................          (.57)       (.51)      (.51)      (.39)      (.30)
Interest expense...............................................          (.12)       (.11)      (.11)      (.14)      (.12)
Income taxes...................................................          (.01)       (.01)      (.02)      (.02)      (.04)
                                                                    -------------------------------------------------------
Net investment income..........................................          1.09         .62        .62        .67        .60
Distributions from undistributed net investment income.........          (.60)       (.60)      (.60)      (.60)      (.60)
Net realized gain (loss) on investments........................          4.20        3.40      (1.57)      2.13        .35
Net increase (decrease) in unrealized appreciation of
investments after deferred taxes...............................         24.80       20.90       4.64      19.37     (11.85)
Exercise of employee stock options*............................          (.21)       (.02)       --        (.14)       --
Stock option expense...........................................           .04         --         --         --         --
Adjustment to initially apply FASB No. 158, net of tax.........           .30         --         --         --         --
                                                                    -------------------------------------------------------



Increase (decrease) in net asset value.........................         29.62       24.30       3.09      21.43     (11.50)
Net asset value
  Beginning of year............................................        102.74       78.44      75.35      53.92      65.42
                                                                    -------------------------------------------------------
  End of year..................................................    $   132.36  $   102.74  $   78.44  $   75.35  $   53.92
                                                                    =======================================================

Increase (decrease) in deferred taxes on
  unrealized appreciation .....................................    $    12.93  $    11.29  $    2.57  $   10.09  $   (6.35)
Deferred taxes on unrealized appreciation:
  Beginning of year............................................         41.65       30.36      27.79      17.70      24.05
                                                                    -------------------------------------------------------
  End of year..................................................    $    54.58  $    41.65  $   30.36  $   27.79  $   17.70
                                                                    =======================================================


Ratios and Supplemental Data
Ratio of operating expenses to average net assets..............           .50%        .58%       .67%       .63%       .52%
Ratio of operating expenses to average net assets plus average
  deferred taxes on unrealized appreciation ...................           .36%        .42%       .49%       .47%       .39%
Ratio of net investment income to average net assets...........           .96%        .71%       .83%      1.09%      1.04%
Portfolio turnover rate........................................          0.13%       2.36%       .56%      3.74%      1.53%


Net asset value total return...................................         32.41%      33.69%      4.90%     41.16%   (16.75)%

   Shares outstanding at end of period (000s omitted)..........          3,886       3,860      3,857      3,857     3,829

</TABLE>

------------
* Net decrease is due to the exercise of employee stock options at prices less
than beginning of period net asset value.

                                       22

<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, 2007. 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,  2007,  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 25, 2007

/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)



                                       23
<PAGE>


Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders
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,  2007,  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,  2007,  is fairly  stated,  in all material  respects,  based on
criteria  established in Internal  Control-Integrated  Framework issued by 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, 2007, based on criteria established in Internal  Control-Integrated
Framework issued by 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, 2007 and 2006,  including the portfolio of investments as of March 31,
2007,  and the related  consolidated  statements of  operations,  changes in net
assets,  cash flows,  and the selected per share data and ratios for each of the
three years in the period  ended March 31,  2007,  and our report  dated May 25,
2007  expressed an  unqualified  opinion on those  financial  statements and per
share data and ratios.



/s/Grant Thornton LLP

Dallas, Texas
May 25, 2007




                                       24
<PAGE>


Report of Independent Registered Public Accounting Firm


Board of Directors and Shareholders
Capital Southwest Corporation

     We have  audited the  accompanying  consolidated  statements  of  financial
condition  of  Capital   Southwest   Corporation  (a  Texas   Corporation)   and
subsidiaries  (the  "Company")  as of March  31,  2007 and 2006,  including  the
portfolio  of  investments  as of March 31, 2007,  and the related  consolidated
statements of operations,  changes in net assets,  cash flows,  and the selected
per share data and ratios for each of the three years in the period  ended March
31,  2007.  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.  The  selected  per share data and  ratios for the year ended  March 31,
2004,  were audited by other  independent  certified  public  accountants  whose
report dated May 12, 2004,  expressed an unqualified  opinion.  The selected per
share data and ratios for the year ended March 31,  2003,  were audited by other
independent  certified  public  accountants  whose  report dated April 25, 2003,
expressed an unqualified opinion.

     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, 2007 and 2006, 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
respects,  the consolidated  financial position of Capital Southwest Corporation
and subsidiaries as of March 31, 2007 and 2006, and the consolidated  results of
operations,  changes in net assets,  cash flows, and the selected per share data
and ratios for each of the three years in the period  ended March 31,  2007,  in
conformity with accounting principles generally accepted in the United States of
America.

     As  described  in  Note 5 to the  consolidated  financial  statements,  the
Company  adopted the provisions of Financial  Accounting  Standards Board (FASB)
Statement of Financial Accounting Standards No. 123 (revised 2004),  Share-Based
Payment,  effective  April 1, 2006.  As described in Note 7 to the  consolidated
financial statements,  the Company also adopted the provisions of FASB Statement
of Financial  Accounting  Standards No. 158,  Employers'  Accounting for Defined
Benefit Pension and Other Postretirement  Plans: An Amendment of FASB Statements
No. 87, 88, 106, and 132(R), effective March 31, 2007.

     We have also  audited,  in  accordance  with the  standards  of the  Public
Company  Accounting  Oversight  Board  (United  States),  the  effectiveness  of
Company's internal control over financial  reporting as of March 31, 2007, based
on criteria established in Internal  Control-Integrated  Framework issued by the
Committee of Sponsoring  Organizations of the Treadway Commission and our report
dated May 25, 2007, expressed an unqualified opinion on management's  assessment
that the Company's  internal  control over  financial  reporting as of March 31,
2007,  was  effective and an  unqualified  opinion on the  effectiveness  of the
Company's internal control over financial reporting as of March 31, 2007.


/S/GRANT THORNTON LLP

Dallas, Texas
May 25, 2007



                                       25
<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  $1,187,676 in 2007,  $257,374 in 2006 and $35,048 in 2005.  The
Company also receives management fees primarily from its wholly-owned  portfolio
companies which  aggregated  $626,400 in 2007,  $792,570 in 2006 and $597,000 in
2005. During the three years ended March 31, 2007, the Company recorded dividend
income from the following sources:

                                             Years Ended March 31
                                             --------------------
                                         2007        2006        2005
                                     ----------  ---------   ----------
Alamo Group Inc. ................... $  677,112  $  677,112  $  677,112
Balco, Inc..........................          -     252,960     252,960
Dennis Tool Company.................     62,499      49,999      25,000
Kimberly-Clark Corporation..........    154,360     142,011     127,347
Lifemark Group......................    600,000     600,000     600,000
PalletOne, Inc......................     89,842     179,685      80,858
The RectorSeal Corporation..........  1,869,947   1,106,893     960,000
Sprint Nextel Corporation...........      9,000      18,000      45,000
TCI Holdings, Inc...................     81,270      81,270      81,270
The Whitmore Manufacturing Company..    240,000     240,000     846,273
Other...............................    170,845     137,500      82,370
                                    ------------------------------------
                                     $3,954,875  $3,485,430  $3,778,190
                                    ====================================
     Total operating expenses, excluding interest expense, increased by $270,833
or 13.9%  during  the year  ended  March  31,  2007.  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.

Net Realized Gain (Loss) on Investments

     Net realized gain on investments was $16,334,000  (after income tax expense
of  $9,712,995)  during the year ended March 31, 2007,  compared  with a gain of
$13,115,874  (after income tax expense of $7,162,692)  during 2006 and a loss of
$6,065,814 (after income tax benefit of $4,046,206) during 2005. 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.

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  $147,681,609,
$124,355,303 and $27,809,654 in 2007, 2006 and 2005, respectively.  As explained
in the first paragraph of this discussion and analysis, the realization of gains



                                       26
<PAGE>

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
                                    2007          2006         2005
                                -----------    -----------  -----------

Alamo Group Inc. .............. $ 2,821,000   $ (5,642,000) $19,749,000
Encore Wire Corporation.......  (12,260,000)    49,041,000  (27,245,000)
Heelys, Inc.................... 170,040,908     27,000,000    1,400,000
Hologic, Inc...................     715,086     12,472,883    1,836,760
Media Recovery, Inc............   3,000,000     15,744,000    9,256,000
Palm Harbor Homes, Inc......... (27,493,000)    27,493,000  (15,710,000)
The RectorSeal Corporation.....  10,500,000     15,000,000   12,500,000

     On December 8, 2006, the Company realized a significant gain on the sale of
a small fraction of its Heelys  investment,  and during the year ended March 31,
2007, the value of our remaining  Heelys stock increased from the March 31, 2006
value by  $170,040,908.  This was  attributable to the increases in Heelys sales
and earnings  during 2006 and the market interest in the initial public offering
of Heelys  common  stock on December 8, 2006.  The  offering  totaled  7,393,750
shares at $21.00 per share.  A total of  4,268,750  shares  were sold by selling
stockholders including 1,591,790 shares sold by our Company.

     Offsetting  part of the major  increase  in Heelys'  value  during the year
ended  March  31,  2007  was a  decrease  of  $27,493,000  in the  value  of the
restricted  stock of Palm Harbor  Homes,  Inc.,  which  experienced  an earnings
decline in the face of unfavorable industry conditions.

     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, 2007."

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, 2007  consolidated  deferred Federal income taxes of
$212,102,000  were provided on net  unrealized  appreciation  of  investments of
$609,512,736  compared with deferred  taxes of  $160,764,000  on net  unrealized
appreciation of  $461,831,127 at March 31, 2006.  Deferred income taxes at March
31, 2007 and 2006 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,  2007,  the Company  invested  $803,269 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 2006 and 2005 fiscal years, the Company invested a total
of $15,054,741 and $2,280,690, respectively.

Financial Liquidity and Capital Resources

     At  March  31,  2007,  the  Company  had  cash  and  cash   equivalents  of
approximately  $38.8 million.  Pursuant to Small Business  Administration  (SBA)
regulations,  cash and cash  equivalents of $3.1 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 $16.4  million.  The Company  also has an  unsecured
$25.0 million  revolving  line of credit from a commercial  bank, of which $25.0
million was  available at March 31, 2007.  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 39 years. Retention of future gains is
viewed as an  important  source of funds to  sustain  the  Company's  investment
activity.  Approximately $61.9 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, 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.

     Management  believes that the Company's cash and cash  equivalents and cash
available from other sources  described  above are adequate to meet its expected


                                       27
<PAGE>

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,  2007.  For  further  information  see  Note  4  and  Note  8 of  the
Consolidated Financial Statements.

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

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:

     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.


                                       28
<PAGE>
<TABLE>
<CAPTION>


     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.


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


                                   1997       1998      1999       2000       2001      2002       2003      2004
-------------------------------------------------------------------------------------------------------------------
<S>                                <C>        <C>       <C>        <C>        <C>       <C>        <C>       <C>

Financial Position  (as of March 31)
Investments at cost..........    $ 59,908 $  61,154  $  73,580 $  85,002  $  87,602 $  82,194  $  91,462  $  97,283
Unrealized appreciation......     233,383   340,132    276,698   238,627    228,316   265,287    195,598    309,666
                                 -------- ---------  --------- ---------  --------- ---------  ---------  ---------
Investments at market or
   fair value................     293,291   401,286    350,278   323,629    315,918   347,481    287,060    406,949
Total assets.................     310,760   522,324    360,786   392,586    322,668   357,183    298,490    423,979
Notes payable *..............       5,000     5,000      5,000    10,000     16,000    14,000     23,000     20,500

Deferred taxes on
   unrealized appreciation...      81,313   118,674     96,473    83,151     79,310    92,107     67,790    107,169
Net assets...................     218,972   296,023    256,232   236,876    226,609   250,491    206,467    290,623
Shares outstanding...........       3,767     3,788      3,815     3,815      3,815     3,829      3,829      3,857

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

Changes in Net Assets (years ended March 31)
Net investment income........    $  2,574 $   2,726  $   1,762 $   1,663  $   1,723 $   2,042  $   2,299  $   2,587
Net realized gain (loss) on
   investments...............       6,806     6,485        995     6,020     (3,231)     (538)     1,346      8,192
Net increase (decrease) in
   unrealized appreciation
   before distributions......      22,804    69,388    (41,233)  (24,750)    (6,470)   24,174    (45,372)    74,689
                                 -------- ---------  --------- ---------  --------- ---------  ---------  ---------
Increase (decrease) in net
   assets from operations
   before distributions......      32,184    78,599    (38,476)  (17,067)    (7,978)   25,678    (41,727)    85,468
Cash dividends paid..........      (2,260)   (2,268)    (2,280)   (2,289)    (2,289)   (2,295)    (2,297)    (2,309)
Employee stock options
   exercised.................           -       720        965         -          -       499          -        997
Stock option expense.........           -         -          -         -          -         -          -          -
Adjustment to initially apply FASB
   Statement No. 158, net of tax        -         -          -         -          -         -          -          -
                                 -----------------------------------------------------------------------------------

Increase (decrease) in net assets  29,924    77,051    (39,791)  (19,356)  ( 10,267)   23,882    (44,024)    84,156

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

Per Share Data (as of March 31)
Deferred taxes on
   unrealized appreciation...    $  21.59 $   31.33  $   25.29 $   21.80  $   20.79 $   24.05  $   17.70  $   27.79
Net assets...................       58.13     78.15      67.16     62.09      59.40     65.42      53.92      75.35
Closing market price.........       67.875    94.00      73.00     54.75      65.00     68.75      48.15      75.47

Cash dividends paid..........         .60       .60        .60       .60        .60       .60        .60        .60

</TABLE>


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



                                       29
<PAGE>


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


                                               2005      2006      2007
                                           ------------------------------

Financial Position  (as of March 31)
Investments at cost..........               $ 84,546  $ 88,597   $ 71,642
Unrealized appreciation......                337,476   461,831    609,513
                                           --------- ---------  ---------
Investments at market or
   fair value................                422,022   550,428    681,155
Total assets.................                434,384   569,368    729,507
Notes payable *..............                 13,000     8,000          -

Deferred taxes on
   unrealized appreciation...                117,094   160,764    212,102
Net assets...................                302,534   396,618    514,344
Shares outstanding...........                  3,857     3,860      3,886

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

Changes in Net Assets (years ended March 31)
Net investment income........               $  2,406  $  2,389   $  4,233
Net realized gain (loss) on
   investments...............                 (6,066)   13,116     16,334
Net increase (decrease) in
   unrealized appreciation
   before distributions......                 17,885    80,685     96,344
                                           --------- ---------  ---------
Increase (decrease) in net
   assets from operations
   before distributions......                 14,225    96,190    116,911
Cash dividends paid..........                 (2,314)   (2,314)    (2,323)
Employee stock options
   exercised.................                     -        208      1,795
Stock option expense.........                     -          -        169
Adjustment to initially apply FASB
   Statement No. 158, net of tax                  -          -      1,173
                                           ------------------------------

Increase (decrease) in net assets             11,911    94,084    117,725

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

Per Share Data (as of March 31)
Deferred taxes on
   unrealized appreciation...               $  30.36  $  41.65   $  54.58
Net assets...................                  78.44    102.74     132.36
Closing market price.........                  79.10     95.50     153.67

Cash dividends paid..........                    .60       .60        .60




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




                                       30
<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, 2007. This total does not include an estimated 4,000 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  Global  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, 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

Quarter Ended                                            High      Low
-------------------------------------------------------------------------
June 30, 2006....................................      $104.45   $ 90.65
September 30, 2006...............................       121.00     96.47
December 31, 2006...............................        154.36    115.33
March 31, 2007...................................       155.99    122.05



Dividends

   The payment dates and amounts of cash dividends per share since April 1, 2005
are as follows:

Payment Date                                              Cash Dividend
-----------------------------------------------------------------------
May 31, 2005..............................................    $0.20
November 30, 2005.........................................     0.40
May 31, 2006..............................................     0.20
November 30, 2006.........................................     0.40
May 31, 2007..............................................     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.  Questions and answers about the Plan are
on the next page.

Annual Meeting

     The Annual Meeting of Shareholders of Capital Southwest Corporation will be
held on Monday,  July 16,  2007,  at 10:00 a.m.  in the North  Dallas Bank Tower
Meeting Room (second floor), 12900 Preston Road, Dallas, Texas.




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