SEC Filing | Capital Southwest Corporation

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2007 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from .............to ............. Commission File Number: 814-61 CAPITAL SOUTHWEST CORPORATION (Exact name of registrant as specified in its charter) Texas 75-1072796 (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 12900 Preston Road, Suite 700, Dallas, Texas 75230 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 233-8242 Securities registered pursuant to section 12(b) of the Act: None Securities registered pursuant to section 12(g) of the Act: Common Stock, $1.00 par value Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No X . Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No X . Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K/A or any amendment to this Form 10-K/A. [X] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check One): Large accelerated filer ____ Accelerated filer X Non-accelerated filer ____ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No X . The aggregate market value of the voting stock held by non-affiliates of the registrant as of September 30, 2006 was $332,548,127, based on the last sale price of such stock as quoted by Nasdaq on such date (officers, directors and 5% shareholders are considered affiliates for purposes of this calculation). The number of shares of common stock outstanding as of January 9, 2008 was 3,889,151. Documents Incorporated by Reference Part of Form 10-K ----------------------------------- ----------------- Proxy Statement for Annual Meeting of Shareholders Part III to be held July 16, 2007

TABLE OF CONTENTS Page EXPLANATORY NOTE...............................................................1 PART I Item 1. Business.................................................1 Item 1A. Risk Factors.............................................2 Item 1B. Unresolved Staff Comments................................5 Item 2. Properties...............................................6 Item 3. Legal Proceedings........................................6 Item 4. Submission of Matters to a Vote of Security Holders......6 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.....6 Item 6. Selected Financial Data..................................7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................7 Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................................................7 Item 8. Financial Statements and Supplementary Data..............7 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure...................8 Item 9A. Controls and Procedures..................................8 Item 9B. Other Information.......................................10 PART III Item 10. Directors, Executive Officers and Corporate Governance..10 Item 11. Executive Compensation..................................11 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters...........11 Item 13. Certain Relationships and Related Transactions, and Director Independence................................12 Item 14. Principal Accountant Fees and Services..................12 PART IV Item 15. Exhibits and Financial Statement Schedules..............12 Signatures ...................................................................13

PART I Explanatory Note Regarding Restatements Capital Southwest Corporation (the "Company") is filing this amendment to its Annual Report on Form 10-K for the year ended March 31, 2007, to amend and restate its consolidated financial statements and per share data and ratios for each of the fiscal years ended March, 31, 2007, 2006 and 2005 and our selected per share data and ratios for the years ended March 31, 2004 and 2003. In addition, we are filing an amendment to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007. After reviewing the accounting treatment for deferred taxes on unrealized appreciation of investments, the Company has determined its long-standing policy of recording deferred taxes on unrealized appreciation of investments was not in conformity with generally accepted accounting principles and its previously issued financial statements required restatement. Specifically, a Regulated Investment Company (RIC) is required to record deferred taxes when it is probable the RIC will not qualify under Subchapter M of the Internal Revenue Code for a period longer that one year. Historically, management believed it was probable the Company would not maintain its qualifying status as a RIC in future years and recorded a deferred tax liability on the unrealized appreciation of investments. However, upon further analysis, the Company determined it was only reasonably possible, but not probable, the Company would not maintain its qualifying status as a RIC. Thus the deferred tax liability consistently recorded and disclosed should not have been recognized. Additionally, the Company historically has accrued income taxes payable on its investment gains as they have been incurred, as it has been the Company's practice to retain its investment gains. However, RICs are required to accrue federal income taxes on investment gains that are retained only on the last day of the tax year. The Company incorrectly recorded the tax impact of its investment gains in periods other than the last day of its tax year, December 31. Therefore, the income taxes payable recorded at times other than the tax year end should not have been recognized. Furthermore, the Company incorrectly classified its' return of capital contributions cumulatively as "undistributed net realized gains on investments." RICs are required to classify return of capital contributions as "additional capital" in the period in which tax basis amounts become permanent; and reflect undistributed amounts remaining since its' previous tax year end adjusted for temporary tax basis differences as "undistributed net realized gains on investments." The restatement will eliminate the accrual for deferred taxes on unrealized appreciation of investments, and income taxes payable and related tax carryforwards on realized gains, increasing the net asset value per share and net assets from operations for the periods restated; and reclassify return of capital contributions to "additional capital." The summary of the effects of this change on our consolidated statements of financial condition as of March 31, 2007 and 2006, our consolidated statements of operations, our consolidated statements of cashflow and our consolidated statements of changes in net assets for the years ended March 31, 2007, 2006, and 2005 is included in Note 2, "Restatement of Consolidated Financial Statements," located in the notes to our consolidated financial statements elsewhere in this annual report amendment. The following information has been updated to give the effect to the restatement. In accordance with Rule 12b-15, under the Security Exchange Act of 1934, as amended, the complete text of each amended item is set forth in this report, even though much of the disclosure in the restated items has not changed. The disclosure in this annual report amendment supersedes and replaces corresponding disclosures in our annual report on Form 10-K for the year ended March 31, 2007. Item 1. Business We were organized as a Texas corporation on April 19, 1961. Until September 1969, we operated as a licensee under the Small Business Investment Act of 1958. At that time, we transferred to our wholly-owned subsidiary, Capital Southwest Venture Corporation ("CSVC"), certain assets and our license as a small business investment company ("SBIC"). CSVC is a closed-end, non-diversified investment company of the management type registered under the Investment Company Act of 1940 (the "1940 Act"). Prior to March 30, 1988, we were registered as a closed-end, non-diversified investment company under the 1940 Act. On that date, we elected to become a business development company subject to the provisions of the 1940 Act, as amended by the Small Business Incentive Act of 1980. Because we wholly own CSVC, the portfolios of both entities are referred to collectively as "our", "we" and "us". 1

We are a venture capital investment company whose objective is to achieve capital appreciation through long-term investments in businesses believed to have favorable growth potential. Our investment interests are focused on expansion financings, management buyouts, recapitalizations, industry consolidations and early-stage financings in a broad range of industry segments. Our portfolio is a composite of companies in which we have major interests as well as a number of developing companies and marketable securities of established publicly-owned companies. We make available significant managerial assistance to the companies in which we invest and believe that providing material assistance to such investee companies is critical to their business development activities. The 12 largest investments we own had a combined cost of $38,566,269 and a value of $638,196,845, representing 93.7% of the value of our consolidated investment portfolio at March 31, 2007. For a narrative description of the 12 largest investments, see "Twelve Largest Investments - March 31, 2007" in Exhibit 13.1 of this Form 10-K/A which is herein incorporated by reference. Certain of the information presented on the 12 largest investments has been obtained from the respective companies and, in certain cases, from public filings of such companies. The financial information presented on each of the respective companies is from such companies' audited financial statements. We compete for attractive investment opportunities with venture capital partnerships and corporations, venture capital affiliates of industrial and financial companies, SBICs and wealthy individuals. The number of persons employed by us at March 31, 2007 was seven. Our internet website address is www.capitalsouthwest.com. You can review the filings we have made with the U.S. Securities and Exchange Commission, free of charge by linking directly from our website to NASDAQ, a database that links to EDGAR, the Electronic Data Gathering, Analysis, and Retrieval System of the SEC. You should be able to access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. The charters adopted by the committees of our board of directors are also available on our website. Item 1A. Risk Factors You should carefully consider the risks described below and all other information contained in this restated annual report on Form 10-K/A, including our consolidated financial statements and the related notes thereto. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us, or not presently deemed material by us, may also impair our operations and performance. If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. If that happens, the trading price of our common stock could decline, and you may lose all or part of your investment. There is uncertainty regarding the value of our investments in restricted securities. Our net asset value is based on the values assigned to the various investments in our portfolio, determined in good faith by our board of directors. Because of the inherent uncertainty of the valuation of portfolio securities which do not have readily ascertainable market values, our fair value determinations may differ materially from the values which would be applicable to unrestricted securities having a public market. We have identified a material weakness in our internal control over financial reporting ("ICFR"), which could adversely affect our ability to report our financial condition and results of operations accurately or on a timely basis. As a result, current and potential stockholders could lose confidence in our financial reporting, which could harm our business and the trading price of our stock. 2

As required by Section 404 of the Sarbanes-Oxley Act of 2002, our management has conducted an evaluation of the effectiveness of our internal control over financial reporting as of March 31, 2007. We have identified material weakness in our internal controls over financial reporting, specifically related to accounting for taxes and have concluded that as of March 31, 2007, we did not maintain effective control over financial reporting. A material weakness is a control deficiency, or a combination of deficiencies, that result in more than a remote likelihood that a material misstatement of our annual or interim financial statements will not be prevented or detected. We determined as of November 19, 2007 we did not maintain effective controls related to accounting for taxes. Management believes they will be effective in remediation of the material weakness indentified in Management's Report on Internal Control over Financial Reporting within the current fiscal year. A material weakness in our internal control over financial reporting could adversely impact our ability to provide timely and accurate financial information. If we are unsuccessful in implementing or following our remediation plan, or fail to update our internal control over financial reporting as our business evolves, we may be unable to report financial information timely and accurately or to maintain effective disclosure controls and procedures. Any such failure in the future could also adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding disclosure controls and effectiveness of our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. If we are unable to report financial information in a timely and accurate manner or to maintain effective disclosure controls and procedures, we could be subject to, among other things, regulatory or enforcement actions by the SEC and NASDAQ, including a delisting from the NASDAQ Stock Market. We are subject to additional risks in light of the restatement of our prior period consolidated financial statements. As described in Note 2, "Restatement of Consolidated Financial Statements" of the notes to our consolidated financial statements, we have restated our consolidated financial statements for the year ended March 31, 2007 and all years represented in our Form 10-K for the year ended March 31, 2007. The restatement of our consolidated financial statements could expose us to legal actions. The defense of any such actions could cause the diversion of management's attention and resources, and we could be required to pay damages to settle such actions if any such actions are not resolved in our favor. Even if resolved in our favor, such actions could cause us to incur significant legal and other expenses. Moreover, we may be the subject of negative publicity focusing on the restatement and negative reactions from shareholders and others with whom we do business. The lack of liquidity of our restricted securities may adversely affect our business. Our portfolio contains many securities which are subject to restrictions on sale because they were acquired from issuers in "private placement" transactions or because we are deemed to be an affiliate of the issuer. Unless an exemption from the registration requirements of the Securities Act of 1933 is available, we will not be able to sell these securities publicly without the expense and time required to register the securities under applicable federal and state securities laws. In addition, contractual or practical limitations may restrict our ability to liquidate our securities in portfolio companies, because we may own a relatively large percentage of the issuer's outstanding securities. Sales may also be limited by unfavorable market conditions. The illiquidity of our investments may preclude or delay the disposition of such securities, which may make it difficult for us to obtain cash equal to the value at which we record our investments. There is limited publicly available information regarding the companies in which we invest. Many of the securities in our portfolio are issued by privately held companies. There is generally little or no publicly available information about such companies, and we must rely on the diligence of our management to obtain the information necessary for our decision to invest. There can be no assurance 3

that such diligence efforts will uncover all material information necessary to make fully informed investment decisions. Certain of our portfolio companies are highly leveraged. Many of our portfolio companies have incurred substantial indebtedness in relation to their overall capital base. Such indebtedness often has a term that will require the balance of the loan to be refinanced when it matures. If portfolio companies cannot generate adequate cash flow to meet the principal and interest payments on their indebtedness, the value of our investments could be reduced or eliminated through foreclosure on the portfolio company's assets or by the portfolio company's reorganization or bankruptcy. Fluctuations may occur in our quarterly results. Our quarterly operating results may fluctuate materially due to a number of factors including, among others, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our portfolio companies' markets, the ability to find and close suitable investments, and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." We may not continue to qualify for pass-through tax treatment. We may not qualify for conduit tax treatment as a Regulated Investment Company ("RIC") if we are unable to comply with the requirements of Subchapter M of the Internal Revenue Code. If we fail to satisfy such requirements and cease to qualify for conduit tax treatment, we will be subject to federal taxes on our net investment income. To the extent we had unrealized gains, we would have to establish reserves for taxes, which would reduce our net asset value accordingly. In addition, if we, as a RIC, were to decide to make a deemed distribution of net realized capital gains and retain the net realized capital gain, we would have to establish appropriate reserves for taxes, at the end of the tax year, that we would have to pay on behalf of our shareholders. The loss of this pass-through tax treatment could have a material adverse effect on the total return, if any, obtainable from an investment in our common stock. Historically, we have distributed net investment income semi-annually. Our current intention is to continue these distributions of ordinary income to our shareholders. Also, historically, we have retained net realized capital gains, paid the resulting tax at the corporate level and retained the after-tax gains to supplement our equity capital and support continuing additions to our portfolio. Our shareholders then report such capital gains on their tax returns, receive credit for the tax we paid and are deemed to have reinvested the amount of the retained after-tax gain. We cannot assure you that we will achieve investment results or maintain a RIC tax status that will allow any specified level of cash distributions or our shareholders' current tax treatment of realized and retained capital gains. Our financial condition and results of operations will depend on our ability to effectively manage any future growth. Sustaining growth depends on our ability to identify, evaluate, finance, and invest in companies that meet our investment criteria. Accomplishing such results on a cost-effective basis is a function of our marketing capabilities and skillful management of the investment process. Failure to achieve future growth could have a material adverse effect on our business, financial condition, and results of operations. We are dependent upon management for our future success. Selection, structuring and closing our investments depends upon the diligence and skill of our management, which is responsible for identifying, evaluating, negotiating, monitoring and disposing of our investments. Our management's capabilities may significantly impact our results of operations. If 4

we lose any member of our management team and he/she cannot be promptly replaced with an equally capable team member, our results of operations could be significantly impacted. We operate in a highly competitive market for investment opportunities. We compete with a number of private equity funds, other investment entities and individuals for investment opportunities. Some of these competitors are substantially larger and have greater financial resources, and some are subject to different and frequently less stringent regulation. As a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time and there can be no assurance that we will be able to identify and make investments that satisfy our objectives. Changes in laws or regulations governing our operations or our failure to comply with those laws or regulations may adversely affect our business. We and our portfolio companies are subject to regulation by laws at the local, state and federal level. These laws and regulations, as well as their interpretation, may be changed from time to time. Accordingly, any changes in these laws and regulations or failure to comply with them could have a material adverse effect on our business. Certain of these laws and regulations pertain specifically to business development companies such as ours. Failure to deploy new capital may reduce our return on equity. If we fail to invest our capital effectively, our return on equity may be decreased, which could reduce the price of the shares of our common stock. Investment in shares of our common stock should not be considered a complete investment program. Our stock is intended for investors seeking long-term capital appreciation. Our investments in portfolio securities generally require many years to reach maturity, and such investments generally are illiquid. An investment in our shares should not be considered a complete investment program. Each prospective purchaser should take into account his or her investment objectives as well as his or her other investments when considering the purchase of our shares. Our common stock often trades at a discount from net asset value. Our common stock is listed on The Nasdaq Global Market ("NASDAQ"). Shareholders desiring liquidity may sell their shares on NASDAQ at current market value, which has often been below net asset value. Shares of closed-end investment companies frequently trade at discounts from net asset value, which is a risk separate and distinct from the risk that a fund's performance will cause its net asset value to decrease. The market price of our common stock may fluctuate significantly. The market price and marketability of shares of our common stock may from time to time be significantly affected by numerous factors, including our investment results, market conditions, and other influences and events over which we have no control and that may not be directly related to us. Item 1B. Unresolved Staff Comments We have no unresolved staff comments to report pursuant to Item 1B. 5

Item 2. Properties We maintain our offices at 12900 Preston Road, Suite 700, Dallas, Texas, 75230, where we rent approximately 4,232 square feet of office space pursuant to a lease agreement expiring in February 2008. On December 7, 2007, we renewed our lease and extended our commitment through February 2013. We believe that our offices are adequate to meet our current and expected future needs. Item 3. Legal Proceedings We have no material pending legal proceedings to which we are a party or to which any of our property is subject. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the quarter ended March 31, 2007. PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Information set forth under the captions "Shareholder Information - Shareholders, Market Prices and Dividends" in Exhibit 13.1 of this Form 10-K/A is herein incorporated by reference. Performance Graph The following graph compares our cumulative total shareholder return during the last five years (based on the market price of our common stock and assuming reinvestment of all dividends and tax credits on retained long-term capital gains) with the Total Return Index for NASDAQ (U.S. Companies) and with the Total Return Index for Nasdaq Financial Stocks, both of which indices have been prepared by the Center for Research in Security Prices at the University of Chicago. Comparison of Five Year Cumulative Total Returns [GRAPH OMITTED] Nasdaq Total Return (U.S.) Nasdaq Financial Stocks Capital Southwest Corporation 2002 100.000 100.000 100.000 2003 73.397 92.777 70.744 2004 108.335 133.387 112.003 2005 109.059 138.745 118.299 2006 128.607 162.999 143.785 2007 133.404 170.643 241.089 6

Item 6. Selected Financial Data See Exhibit 13.1 "Selected Consolidated Financial Data" of this Form 10-K/A. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations See Exhibit 13.1 "Selected Consolidated Financial Data" of this Form 10-K/A. Item 7A. Quantitative and Qualitative Disclosures About Market Risk We are subject to financial market risks, including changes in marketable equity security prices. We do not use derivative financial instruments to mitigate any of these risks. Our investment performance is a function of our portfolio companies' profitability, which may be affected by economic cycles, competitive forces, foreign currency fluctuations and production costs including labor rates, raw material prices and certain basic commodity prices. Most of the companies in our investment portfolio do not hedge their exposure to raw material and commodity price fluctuations. However, the portfolio company with the greatest exposure to foreign currency fluctuations generally hedges its exposure. All of these factors may have an adverse effect on the value of our investments and on our net asset value. Our investment in portfolio securities includes fixed-rate debt securities which totaled $6,109,238 at March 31, 2007, equivalent to 0.9% of the value of our total investments. Generally, these debt securities are below investment grade and have relatively high fixed rates of interest, therefore; minor changes in market yields of publicly-traded debt securities have little or no effect on the values of debt securities in our portfolio and no effect on interest income. Our investments in debt securities are generally held to maturity and their fair values are determined on the basis of the terms of the debt security and the financial condition of the issuer. A portion of our investment portfolio consists of debt and equity securities of private companies. We anticipate little or no effect on the values of these investments from modest changes in public market equity valuations. Should significant changes in market valuations of comparable publicly-owned companies occur, there may be a corresponding effect on valuations of private companies, which would affect the value and the amount and timing of proceeds eventually realized from these investments. A portion of our investment portfolio also consists of restricted common stocks of publicly-owned companies. The fair values of these restricted securities are influenced by the nature of applicable resale restrictions, the underlying earnings and financial condition of the issuers of such restricted securities and the market valuations of comparable publicly-owned companies. A portion of our investment portfolio also consists of unrestricted, freely marketable common stocks of publicly-owned companies. These freely marketable investments, which are valued at the public market price, are directly exposed to equity price risks, in that a change in an issuer's public market equity price would result in an identical change in the value of our investment in such security. Item 8. Financial Statements and Supplementary Data See Item 15 of this Form 10-K/A - "Exhibits and Financial Statement Schedules". 7

Selected Quarterly Financial Data (Unaudited) The following presents a summary of the unaudited quarterly consolidated financial information for the years ended March 31, 2007 and 2006. First Second Third Fourth Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- ----- as restated as restated as restated as restated as restated (In thousands, except per share amounts) 2007 - ---- Net investment income $ 492 $ 1,170 $ 1,617 $ 954 $ 4,233 Net realized gain (loss) on investments 397 9,219 19,531 (14,181) 14,966 Net increase (decrease) in unrealized appreciation of investments (5,218) (2,931) 132,210 23,621 147,682 Net increase (decrease) in net assets from operations (4,329) 7,458 153,358 10,394 166,881 Net increase (decrease) in net assets from operations per share (1.12) 1.92 39.46 2.66 42.94 2006 - ---- Net investment income $ 574 $ 666 $ 893 $ 256 $ 2,389 Net realized gain on investments 5,261 5,915 6,317 (2,042) 15,451 Net increase in unrealized appreciation of investments 4,142 26,824 15,009 78,380 124,355 Net increase in net assets from operations 9,977 33,405 22,219 76,594 142,195 Net increase in net assets from operations per share 2.59 8.66 5.76 19.83 36.84 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures (i) Disclosure Controls and Procedures. An evaluation was performed under the supervision and with the participation of our management, including the President and Controller, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934). Based on that evaluation, the President and Controller concluded that our disclosure controls and procedures as of March 31, 2007 were not effective due to a material weakness in the Company's internal control over financial reporting disclosed in "Item 9A. Controls and Procedures" of the Company's Annual Report on Form 10-K/A, for the fiscal year ended March 31, 2007. (ii) Internal Control Over Financial Reporting. (a) Management's annual report on internal control over financial reporting. Management is responsible for establishing and maintaining adequate controls over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934. The Company's internal control over financial reporting ("ICFR")is designed to provide 8

reasonable assurance regarding the reliability of financial reporting and preparation of the 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 policies and procedures may deteriorate. The Company has reassessed the effectiveness of its internal control over financial reporting as of November 19, 2007. The Company has been subject to Section 404 (Management's Assessment of Internal Controls) of the Sarbanes-Oxley Act of 2002 since March 31, 2005. For purposes of Management's internal control evaluation, the following from the the Securities and Exchange Commission Federal Register SEC 17 CFR Part 241 ("SEC") and Public Company Accounting Oversight Board ("PCAOB") Auditing Standard No. 5 were considered. Deficiency in internal control over financial reporting exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. Significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that are less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of a company's financial reporting. Material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. Under the supervision and with the participation of our management, including our President and Controller, we conducted an evaluation of the effectiveness of our internal control over financial reporting in connection with preparation of the Amended Annual Report on Form 10-K/A for the year ended March 31, 2007. As a result of this assessment, a material weakness was identified. The following material weakness was the basis for our conclusion at March 31, 2007: o We did not maintain an adequate process to assess and determine the probability of the Company maintaining its qualifying status as a RIC subject to subchapter M of the IRC over the next twelve months at any given quarter end. According to SEC and PCAOB Auditing Standard No. 5, one of the indicators of a material weakness in internal control is a restatement of previously issued financial statements to reflect the correction of a material misstatement. Management has concluded that ICFR as of March 31, 2007 was not effective as it relates to the Company's accounting for taxes. Impact on the Company's Financial Reporting and ICFR Management has identified a material weakness related to its accounting for taxes, and has determined that a restatement of its previously issued financial statements is required. Management believes, however, the material weakness identified does not have a pervasive impact on ICFR and the restatement is not an indication that other significant control deficiencies or material weaknesses exist. Remediation Management will add a formal evaluation to consider whether it is probable the Company will not qualify as a RIC subject to Subchapter M of the IRC over the next 12 months at any given quarter end. The considerations will primarily include review of current investments and assessing the probability that a non-qualifying event will occur to a degree the Company would not be able to cure within prescribed timeframes. Additionally, the Company will review its investment gains quarterly and calculate the tax impact on those gains it will retain, however, they will only record the tax liability at the last day of the tax year. Management will also determine, based on materiality, any footnote disclosure that will be required during the interim periods. Furthermore, Management will review and assess temporary and permanent differences for reclassification to "additional capital" at each tax year end. When 9

considered necessary by Management, an independent attorney or accountant with requisite knowledge of investment company taxation will be consulted in order to provide necessary guidance. As a result, the Company will amend and restate its previously filed Annual Report on Form 10-K for the fiscal year ended March 31, 2007 and its Form 10-Q for the quarter ended June 30, 2007. Concurrent with this assessment, Management concludes the Company's ICFR related to accounting for taxes was ineffective and a material weakness exists. Management believes the actions taken to remediate the internal control deficiencies, as more fully described above, are adequate to address future considerations of RIC status and related financial statement presentations and disclosures. There were no other changes in the Company's internal control over financial reporting that have materially affected or are reasonably likely to materially affect our ICFR during the year ended March 31, 2007. (b) Attestation report of the registered public accounting firm Grant Thornton, LLP, the independent registered public accounting firm that audited the consolidated financial statements of the Company included in the Amended Annual Report on Form 10-K/A has issued an audit report on the effectiveness of the Company's internal control over financial reporting as of March 31, 2007. The report, dated January 9, 2008, which expressed an opinion that the Company had not maintained effective internal control over financial reporting as of March 31, 2007 is based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and is set forth in our Exhibit 13.1. Item 9B. Other Information None. PART III Item 10. Directors, Executive Officers and Corporate Governance The section of our 2007 Proxy Statement captioned "Nominees for Director" under "Proposal 1. Election of Directors" identifies members of our board of directors and nominees, and is incorporated in this Item 10 by reference. The names and ages of our executive officers as of January 8, 2008, together with certain biographical information, are as follows: William M. Ashbaugh, age 52, has served as Senior Vice President since 2005 and Vice President since 2001. He previously served as Managing Director in the corporate finance departments of Hoak Breedlove Wesneski & Co. from 1998 to 2001, Principal Financial Securities from 1997 to 1998 and Southwest Securities from 1995 to 1997. Gary L. Martin, age 61, was named President and Chief Executive Officer in July 2007, has been a director since July 1988 and has served as Vice President since 1984. He previously served as Vice President from 1978 to 1980. Since 1980, Mr. Martin has served as President of The Whitmore Manufacturing Company, a wholly-owned portfolio company. Jeffrey G. Peterson, age 34, was named Secretary in August 2007 and has served as Vice President and Treasurer since 2005 and was an Investment Associate since 2001. He previously held positions with the investment banking division of Scott & Stringfellow, Inc. and the corporate lending division of Bank One. William R. Thomas, age 79, has served as Chairman of the Board of Directors since 1982. In July 2007, he retired from his role as President, which he held since 1980. In addition, he has been a director since 1972 and was previously Senior Vice President from 1969 to 1980. 10

The sections of our 2007 Proxy Statement captioned "Meetings and Committees of the Board of Directors under "Proposal 1. Election of Directors" and "Report of the Audit Committee" identifies members of our audit committee of our board of directors and our audit committee financial expert, and are incorporated in this Item 10 by reference. The section of our 2007 Proxy Statement captioned "Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated in this Item 10 by reference. Code of Ethics We have adopted a code of ethics that applies to all our directors, officers and employees. We have made the Code of Conduct and Ethics available on our website at www.capitalsouthwest.com. Item 11. Executive Compensation The information in the section of our 2007 Proxy Statement captioned "Compensation Discussion and Analysis" is incorporated in this Item 11 by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information in the sections of our 2007 Proxy Statement captioned "Stock Ownership of Certain Beneficial Owners" are incorporated in this Item 12 by reference. The table below sets forth certain information as of March 31, 2007 regarding the shares of our common stock available for grant or granted under stock option plans that (i) were approved by our shareholders, and (ii) were not approved by our shareholders. Equity Compensation Plan Information Number of Securities Number of Securities Remaining Available For To Be Issued Upon Weighted-Average Exercise Future Issuance Under Equity Exercise of Price Of Outstanding Compensation Plans Outstanding Options, Options, (excluding securities reflected Plan Category Warrants And Rights Warrants And Rights in column (a) - ------------- ------------------- ------------------- ------------- (a) (b) (c) --- --- --- Equity 52,500 $86.184 58,500 compensation plans approved by security holders(1) Equity - - - compensation plans not approved by security holders ______ ______ ______ Total 52,500 $86.184 58,500 - ------ (1) Includes the 1999 Stock Option Plan. For a description of this plan, please refer to Footnote 5 contained in our consolidated financial statements. 11

Item 13. Certain Relationships and Related Transactions, and Director Independence The information in the sections of our 2007 Proxy Statement captioned "Meetings and Committees of the Board of Directors" - "Committee Member Independence" and "Certain Relationships and Related Party Transactions" are incorporated in this Item 13 by reference. Item 14. Principal Accountant Fees and Services The information in the sections of our 2007 Proxy Statement captioned "Proposal 2: Ratification of Appointment of Independent Registered Accounting Firm" and "Audit and Other Fees" are incorporated in this Item 14 by reference. PART IV Item 15. Exhibits and Financial Statement Schedules (a)(1) The following information included in Exhibit 13.1 is herein incorporated by reference: (A) Portfolio of Investments - March 31, 2007 Consolidated Statements of Financial Condition - March 31, 2007 and 2006 Consolidated Statements of Operations - Years Ended March 31, 2007, 2006 and 2005 Consolidated Statements of Changes in Net Assets - Years Ended March 31, 2007, 2006 and 2005 Consolidated Statements of Cash Flows - Years Ended March 31, 2007, 2006 and 2005 (B) Notes to Consolidated Financial Statements (C) Notes to Portfolio of Investments (D) Selected Per Share Data and Ratios (E) Management's Report on Internal Control over Financial Reporting (F) Reports of Independent Registered Public Accounting Firm (G) Portfolio Changes During the Year (a)(2) All schedules are omitted because they are not applicable or not required, or the information is otherwise supplied. (a)(3) See the Exhibit Index. 12

SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CAPITAL SOUTHWEST CORPORATION /s/ Gary L. Martin By:___________________________ Gary L. Martin, President Date: January 9, 2008 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Signature Title Date --------- ----- ---- /s/ Gary L. Martin _____________________ President January 9, 2008 Gary L. Martin (chief executive officer) /s/ William R. Thomas ______________________ Chairman of the Board January 9, 2008 William R. Thomas /s/ Donald W. Burton _____________________ Director January 9, 2008 Donald W. Burton /s/ Graeme W. Henderson _____________________ Director January 9, 2008 Graeme W. Henderson /s/ Gary L. Martin _____________________ Director January 9, 2008 Gary L. Martin /s/ Samuel B. Ligon _____________________ Director January 9, 2008 Samuel B. Ligon /s/ John H. Wilson ______________________ Director January 9, 2008 John H. Wilson /s/ Tracy L. Morris _____________________ Controller January 9, 2008 Tracy L. Morris (chief financial/accounting officer) 13

EXHIBIT INDEX The following exhibits are filed with this report or are incorporated herein by reference to a prior filing, in accordance with Rule 12b-32 under the Securities Exchange Act of 1934. Asterisk denotes exhibits filed with this report. Double asterick denotes exhibits furnished with this report. Exhibit No. Description ----------- ----------- 3.1(a) Articles of Incorporation and Articles of Amendment to Articles of Incorporation, dated June 25, 1969 (filed as Exhibit 1(a) and 1(b) to Amendment No. 3 to Form N-2 for the fiscal year ended March 31, 1979). 3.1(b) Articles of Amendment to Articles of Incorporation, dated July 20, 1987 (filed as an exhibit to Form N-SAR for the six month period ended September 30, 1987). 3.2 By-Laws of the Company, as amended. 4.1 Specimen of Common Stock certificate (filed as Exhibit 4.1 to Form 10-K for the fiscal year ended March 31, 2002). 10.1 The RectorSeal Corporation and Jet-Lube, Inc. Employee Stock Ownership Plan as revised and restated effective April 1, 2007. 10.2 Retirement Plan for Employees of Capital Southwest Corporation and Its Affiliates as amended and restated effective April 1, 2006. 10.3 Capital Southwest Corporation and Its Affiliates Restoration of Retirement Income Plan for certain highly-compensated superseded plan participants effective April 1, 1993 (filed as Exhibit 10.4 to Form 10-K for the fiscal year ended March 31, 1995). 10.4 Amendment One to Capital Southwest Corporation and Its Affiliates Restoration of Retirement Income Plan for certain highly-compensated superceded plan participants effective April 1, 1993 (filed as Exhibit 10.6 to Form 10-K for the fiscal year ended March 31, 1998). 10.5 Capital Southwest Corporation Retirement Income Restoration Plan as amended and restated effective April 1, 1989 (filed as Exhibit 10.5 to Form 10-K for the fiscal year ended March 31, 1995). 10.6 Form of Indemnification Agreement which has been established with all directors and executive officers of the Company (filed as Exhibit 10.9 to Form 8-K dated February 10, 1994). 10.7 Capital Southwest Corporation 1999 Stock Option Plan (filed as Exhibit 10.10 to Form 10-K for the fiscal year ended March 31, 2000). 10.8 Severance Pay Agreement with William M. Ashbaugh (filed as Exhibit 10.1 to Form 8-K dated July 18, 2005). 10.9 Severance Pay Agreement with Susan K. Hodgson (filed as Exhibit 10.3 to Form 8-K dated July 18, 2005). 10.10 Severance Pay Agreement with Jeffrey G. Peterson (filed as Exhibit 10.4 to Form 8-K dated July 18, 2005). 14

13.1 * Selected Consolidated Financial Data. 21.1 List of subsidiaries of the Company. 23.1 * Consent of Independent Registered Public Accounting Firm - Grant Thornton LLP. 31.1 * Certification of President required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), filed herewith. 31.2 * Certification of Controller required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act, filed herewith. 32.1 ** Certification of President required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code, furnished herewith. 32.2 ** Certification of Controller required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code, furnished herewith.

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. 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%. 1

- -------------------------------------------------------------------------------- Alamo Group Inc. $47,962,000 - -------------------------------------------------------------------------------- Alamo Group Inc., Seguin, Texas, is a leading designer, manufacturer and distributor of heavy-duty, tractor and truck mounted mowing and other vegetation maintenance equipment, mobile excavators, street-sweeping 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). 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. 2

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

Portfolio of Investments - March 31, 2007 Company Equity (a) Investment (b) Cost Value (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) 3,000,00 3,000,000 Electronics contract manufacturing; 150,000 shares Series A convertible distribution and productionof memory preferred stock, convertible and other components for computer into 600,000 shares of common manufacturers, retailers and stock at $0.25 per share value-added resellers. (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 in the construction and remodeling of (acquired 10-25-83 and 5-30-02) 624,920 2,500,000 commercial and institutional buildings. - ------------------------------------------------------------------------------------------------------------------------------------ BOXX TECHNOLOGIES, INC. 15.2% 3,125,354 shares Series B convertible Austin, Texas preferred stock,convertible into Workstations for computer graphics 3,125,354 shares of common stock imaging and design. 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 notes, Richardson, Texas convertible into 720,350 shares Owns Chase Medical, which develops and of common stock at $1.32 per share, sells devices used in cardiac surgery due 2007 to relieve congestive heart failure; (acquired 4-16-04 thru 12-17-04) 750,000 750,000 develops and supports cardiac imaging 2,327,658 shares Series A convertible systems. 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

Company Equity (a) Investment (b) Cost Value (c) - ------------------------------------------------------------------------------------------------------------------------------------ +COMCAST CORPORATION <1% ++64,656 shares common stock $ 21 $ 1,675,884 Philadelphia, Pennsylvania (acquired 11-18-02) Leading provider of cable, entertainment and communications products and services. - ------------------------------------------------------------------------------------------------------------------------------------ DENNIS TOOL COMPANY 67.4% 20,725 shares 5% convertible Houston, Texas preferred stock, convertible Polycrystalline diamond compacts (PDCs) into 20,725 shares of common used in oil field drill bits and in stock at $48.25 per share mining and industrial applications. (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 common stock Englewood, Colorado (acquired 7-21-05) 220,262 1,347,274 Provider of creative content, media management and network services worldwide. - ------------------------------------------------------------------------------------------------------------------------------------ +EMBARQ CORPORATION <1% ++4,500 shares common stock Overland Park, Kansas (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 10-7-98) 5,800,000 69,475,000 Electric wire and cable for residential and commercial use. - ------------------------------------------------------------------------------------------------------------------------------------ EXTREME INTERNATIONAL, INC. 53.3% 39,359.18 shares Series C convertible Sugar Land, Texas preferred stock, convertible into Owns Bill Young Productions, Texas Video and Post, 157,436.72 shares of common stock at and Extreme Communications, which produce radio $25.00 per share and television commercials and corporate (acquired 9-30-03) 2,625,000 6,449,000 communications videos. 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

Company Equity (a) Investment (b) Cost Value (c) - ------------------------------------------------------------------------------------------------------------------------------------ +HEELYS, INC. 31.8% 9,317,310 shares common stock $ 102,490 $195,664,000 Carrollton, Texas (acquired 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 2007 Dallas, Texas (acquired 10-19-04 and 1-13-05) 352,646 - Holding company previously engaged in 12% subordinated notes due 2008 mortgage banking operations, which (acquired 3-25-05 thru 2-27-06) 717,523 354,738 have now been sold. 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 stock Englewood, Colorado (acquired 6-15-05) 106,553 1,397,033 Owns interests in broadband, ++42,463 shares Series C common stock distribution and content companies. (acquired 9-6-05) 100,870 1,299,368 --------- --------- 207,423 2,696,401 - ------------------------------------------------------------------------------------------------------------------------------------ +LIBERTY MEDIA CORPORATION <1% ++35,250 shares Liberty Capital Series Englewood, Colorado A common stock(acquired 5-9-06) 51,829 3,897,593 Holding company owning interests in ++176,252 shares Liberty Interactive electronic retailing, media, Series A common stock communications and entertainment (acquired 5-9-06) 66,424 4,196,560 businesses. --------- --------- 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

Company Equity (a) Investment (b) Cost Value (c) - ------------------------------------------------------------------------------------------------------------------------------------ MEDIA RECOVERY, INC. 96.5% 800,000 shares Series A convertible Dallas, Texas preferred stock, convertible into Computer datacenter and office automation 800,000 shares of common stock at supplies and accessories; impact, tilt $1.00 per share monitoring and temperature sensing devices (acquired 11-4-97) $ 800,000 $ 7,500,000 to detect mishandled shipments; dunnage 4,000,000 shares common stock for protecting shipments. (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 due 2012 Bartow, Florida (acquired 9-25-06) 1,553,150 2,000,000 Manufacturer of wooden pallets 150,000 shares common stock and pressure-treated lumber. (acquired 10-18-01) 150,000 1,714,000 Warrant to purchase 15,294 shares share, of common stock at $1.00 per 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 3-31-73) 52,600 98,000,000 Specialty chemicals for plumbing, HVAC, electrical, construction, industrial, oil field and automotive applications; smoke containment systems for building fires; also owns 20% of The Whitmore Manufacturing Company. - ------------------------------------------------------------------------------------------------------------------------------------ +SPRINT NEXTEL CORPORATION <1% ++90,000 shares common stock Reston, Virginia (acquired 6-20-84) 457,113 1,706,400 Diversified telecommunications company. - ------------------------------------------------------------------------------------------------------------------------------------ TCI HOLDINGS, INC. - 21 shares 12% Series C cumulative Denver, Colorado compounding preferred stock Cable television systems and (acquired 1-30-90) - 677,250 microwave 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

Company Equity (a) Investment (b) Cost Value (c) - ------------------------------------------------------------------------------------------------------------------------------------ VIA HOLDINGS, INC. 28.2% 9,118 shares Series B preferred stock Sparks, Nevada (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 preferred Developer and supporter of software stock, convertible into 4,478,673 used by the oil and gas industry to shares of common stock at $1.1164 control drilling and maintenance expenses. 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) 8

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

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

Capital Southwest Corporation and Subsidiaries Consolidated Statements of Financial Condition March 31 --------------------------- 2007 2006 ------------ ------------ Assets as restated as restated 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)................... 77,763,048 159,875,248 ------------- ------------ 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 2007 2006 ------------ ------------ Liabilities and Shareholders' Equity as restated as restated Note payable to bank....................... $ - $ 8,000,000 Other liabilities.......................... 1,457,847 1,697,086 Deferred income taxes................ 2,317,777 1,635,057 ------------- -------------- Total liabilities ..... 3,775,624 11,332,143 ------------- -------------- 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...................... 116,373,960 92,410,082 Undistributed net investment income................................ 5,655,020 3,744,830 Undistributed net realized gain (loss) on investments........................... (3,100,142) 2,785,636 Unrealized appreciation of investments . 609,512,737 461,831,128 Treasury stock - at cost (437,365 shares)...................... (7,033,302) (7,033,302) -------------- --------------- Net assets at market or fair value, equivalent to $186.75 per share at March 31, 2007 on the 3,886,051 shares outstanding and $144.56 per share at March 31, 2006 on the 3,860,251 shares outstanding.......... 725,731,689 558,035,990 ------------- ------------- Totals.................................. $729,507,313 $569,368,133 ============ ============ See Notes to Consolidated Financial Statements 11

Capital Southwest Corporation and Subsidiaries Consolidated Statements of Operations Years Ended March 31 ----------------------------------------------- 2007 2006 2005 ------------- ------------- ------------- as restated as restated as restated 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 ............................................................. 11,080,699 4,827,663 -- ------------- ------------- ------------- Net realized gain (loss) on investments ........................................ 14,966,296 15,450,903 (10,112,020) ------------- ------------- ------------- Net increase in unrealized appreciation of investments ......................... 147,681,609 124,355,303 27,809,654 ------------- ------------- ------------- Net realized and unrealized gain on investments ................................ $ 162,647,905 $ 139,806,206 $ 17,697,634 ============= ============= ============= Increase in net assets from operations ......................................... $ 166,881,245 $ 142,195,462 $ 20,103,582 ============= ============= ============= See Notes to Consolidated Financial Statements 12

Capital Southwest Corporation and Subsidiaries Consolidated Statements of Changes in Net Assets Years Ended March 31 ----------------------------------------------- 2007 2006 2005 ------------- ------------- ------------- as restated as restated as restated Operations: Net investment income ........................................................ $ 4,233,340 $ 2,389,256 $ 2,405,948 Net realized gain (loss) on investments ...................................... 14,966,296 15,450,903 (10,112,020) Net increase in unrealized appreciation of investments ....................... 147,681,609 124,355,303 27,809,654 ------------- ------------- ------------- Increase in net assets from operations ....................................... 166,881,245 142,195,462 20,103,582 Distributions from: Undistributed net investment income .......................................... (2,323,150) (2,314,231) (2,314,231) Net realized gains deemed distributed to shareholders ........................ (11,417,283) (13,573,139) -- Capital share transactions: Allocated increase in share value for deemed distribution .................... 11,417,283 13,573,139 -- 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 ..................................................... 167,695,699 140,089,231 17,789,351 Net assets, beginning of year .................................................. 558,035,990 417,946,759 400,157,408 ------------- ------------- ------------- Net assets, end of year ........................................................ $ 725,731,689 $ 558,035,990 $ 417,946,759 ============= ============= ============= See Notes to Consolidated Financial Statements 13

Capital Southwest Corporation and Subsidiaries Consolidated Statements of Cash Flows Years Ended March 31 ----------------------------------------------- 2007 2006 2005 ------------- ------------- ------------- as restated as restated as restated Cash flows from operating activities Increase in net assets from operations ........................................... $ 166,881,245 $ 142,195,462 $ 20,103,582 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 after income taxes ...................... (14,966,296) (15,450,905) 10,112,020 Net increase in unrealized appreciation of investments ...................... (147,681,609) (124,355,303) (27,809,654) 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) Increase in deferred income taxes ........................................... 50,700 40,800 88,800 ------------- ------------- ------------- Net cash provided by operating activities ........................................ 49,949,336 18,332,821 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 -- Payment of federal income tax for deemed capital gains distribution .............. (11,080,699) (4,827,659) -- ------------- ------------- ------------- Net cash used in financing activities ............................................ (19,608,999) (11,933,890) (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 ....................................... $ 20,000 $ 18,420 $ -- See Notes to Consolidated Financial Statements 14

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 3 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. The Company's policy is to retain and pay the 35% corporate tax on realized long-term capital gains. For investment companies that qualify as RIC's under the IRC, federal income taxes payable on security gains that the company elects to retain are accrued only on the last day of the tax year, December 31. Therefore, CSC and CSVC made no provision for federal income taxes on such gains and net investment income in their financial statements. CSMC, a wholly owned subsidiary of CSC, is not a RIC and is required to pay taxes at the current corporate rate. Deferred Taxes. The Company sponsors a qualified defined benefit pension plan which covers its employees and employees of certain of its wholly-owned portfolio companies. Deferred taxes related to the qualified defined benefit pension plan are recorded as incurred. 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 15

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 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 ------------ ------------ as restated as restated Net asset value, as reported $558,035,990 $417,946,757 Deduct: Total fair value computed stock-based compensation 150,936 160,764 ------------ ------------ Pro forma net asset value $557,885,054 $417,785,993 ============ ============ Net asset value per share: Basic - as reported $144.56 $108.36 ======= ======= Basic - pro forma $144.52 $108.32 ======= ======= Diluted - as reported $144.20 $108.28 ======= ======= Diluted- pro forma $144.16 $108.24 ======= ======= 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 16

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 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. Restatement As previously announced in a Current Report on Form 8-K filed with the SEC on November 20, 2007, the Company determined that its long-standing practice of recording deferred taxes on unrealized appreciation of investments was not in conformity with GAAP, and its previously issued financial statements, including the Company's annual report on Form 10-K for the fiscal year ended March 31, 2007 and the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2007, as well as all prior period data included within these reports, required restatement. The effects of these changes on the consolidated statements of financial condition as of March 31, 2007 and 2006; the consolidated statements of operations, statements of cash flow and changes in net assets for the three years ended March 31, 2007, 2006 and 2005 are summarized as follows and shown in the tables below: (A) A Regulated Investment Company (RIC) is required to record deferred taxes when it is probable the RIC will not qualify under Subchapter M of the Internal Revenue Code for a period longer that one year. Historically, management believed it was probable the Company would not maintain its qualifying status as a RIC in future years and recorded a deferred tax liability on the unrealized appreciation of investments. However, upon further analysis, the Company determined it was only reasonably possible, but not probable, the Company would not maintain its qualifying status as a RIC. Thus the deferred tax liability consistently recorded and disclosed should not have been recognized. (B) The Company historically has accrued income taxes payable on its investment gains as they have been incurred, as it has been the Company's practice to retain its investment gains. However, RICs are required to accrue federal income taxes on investment gains that are retained only on the last day of the tax year. The Company incorrectly recorded the tax impact of its investment gains in periods other than the last day of its tax year, December 31. Therefore, the income taxes payable recorded at times other than the tax year end should not have been recognized. (C) The Company incorrectly classified its' return of capital contributions cumulatively as "undistributed net realized gains on investments." RICs are required to classify return of capital contributions as "additional capital" in the period in which tax basis amounts become permanent; and reflect undistributed amounts remaining since its' previous tax year end adjusted for temporary tax basis differences as "undistributed net realized gains on investments." The restatement will eliminate the accrual for deferred taxes on unrealized appreciation of investments, and income taxes payable and related tax carryforwards on realized gains, increasing the net asset value per share and net assets from operations for the periods restated; and reclassify return of capital contributions to "additional capital." Our prior accounting treatments resulted in an understatement of our net asset value, and overstatement of our deferred tax liability. This resulted in an understatement of the Company's net asset value in an aggregate amount of $211,388,177 and $161,417,881 as of March 31, 2007 and 2006, respectively. The impact on undistributed net realized gains, undistributed appreciation of investments and additional capital as of April 1, 2005, is $115,412,852 in the aggregate; ($76,531,825) in undistributed net realized losses, $117,094,000 in undistributed appreciation of investments, and $74,850,675 in additional capital. 17

As of March 31, 2007 Consolidated ------------------------------------------------------- Statement of Previously Adjustment As Financial Condition Reported (1) Restated (2) - ---------------- ------------- --------------- ------------------ Total assets 729,507,313 -- 729,507,313 ============ ============ ============ Income taxes payable 231,274 (231,274) -- (B) Deferred income tax 213,474,680 (211,156,903) 2,317,777 (A)(B) ------------ ------------ ------------ Total liabilities 215,163,801 (211,388,177) 3,775,624 ------------ ------------ ------------ Additional capital 11,221,601 105,152,359 116,373,960 (C) Undistributed net realized gain (loss) on investment 102,766,040 (105,152,359) (3,100,142)(B)(C) Net unrealized appreciation of investments 397,410,737 212,102,000 609,512,737 (A) Net assets at market or fair value 514,343,512 211,388,177 725,731,689 ------------ ------------ ------------ Total liabilities and shareholders' equity 729,507,313 -- 729,507,313 ============ ============ ============ As of March 31, 2006 Consolidated ------------------------------------------------------- Statement of Previously Adjustment As Financial Condition Reported (1) Restated (2) - ---------------- ------------- --------------- ------------------ Total assets 569,368,133 -- 569,368,133 ============ ============ ============ Income taxes payable 982,653 (982,653) -- (B) Deferred income tax 162,070,285 (160,435,228) 1,635,057 (A)(B) ------------ ------------ ------------ Total liabilities 172,750,024 (161,417,881) 11,332,143 ------------ ------------ ------------ Additional capital 8,109,797 84,300,285 92,410,082 (C) Undistributed net realized gain on investments 86,432,040 (83,646,404) 2,785,636 (B)(C) Net unrealized appreciation of investments 301,067,128 160,764,000 461,831,128 (A) Net assets at market or fair value 396,618,109 161,417,881 558,035,990 ------------ ------------ ------------ Total liabilities and shareholders' equity 569,368,133 -- 569,368,133 ============ ============ ============ 18

Year Ended March 31, 2007 ------------------------------------------------------- Consolidated Statement of Previously As Operations Reported (1) Adjustment Restated (2) - ---------------- ------------- --------------- ------------------ Net investment income 4,233,340 -- 4,233,340 Net realized gain on investments 16,334,000 (1,367,704) 14,966,296 (B) Net increase in unrealized appreciation of investments 96,343,609 51,338,000 147,681,609 (A) ----------- ----------- ----------- Net realized and unrealized gain on investments 112,677,609 49,970,296 162,647,905 ----------- ----------- ----------- Increase in net assets from operations 116,910,949 49,970,296 166,881,245 =========== =========== =========== Year Ended March 31, 2006 ------------------------------------------------------- Consolidated Statement of Previously As Operations Reported (1) Adjustment Restated (2) - ------------------ ------------- ---------------- ------------------ Net investment income 2,389,256 -- 2,389,256 Net realized gain on investments 13,115,874 2,335,029 15,450,903 (B) Net increase in unrealized appreciation of investments 80,685,303 43,670,000 124,355,303 (A) ----------- ----------- ----------- Net realized and unrealized gain on investments 93,801,177 46,005,029 139,806,206 ----------- ----------- ----------- Increase in net assets from operations 96,190,433 46,005,029 142,195,462 =========== =========== =========== 19

Year Ended March 31, 2005 ------------------------------------------------------- Consolidated Statement of Previously As Operations Reported (1) Adjustment Restated (2) - ---------------- ------------- --------------- ------------------ Net investment income 2,405,948 -- 2,405,948 Net realized loss on investments (6,065,814) (4,046,206) (10,112,020) (B) Net increase in unrealized appreciation of investments 17,884,654 9,925,000 27,809,654 (A) ----------- ----------- ----------- Net realized and unrealized gain on investments 11,818,840 5,878,794 17,697,634 ----------- ----------- ----------- Increase in net assets from operations 14,224,788 5,878,794 20,103,582 =========== =========== =========== Year Ended March 31, 2007 ------------------------------------------------------- Consolidated Statement of Changes in Net Previously As Assets Reported (1) Adjustment Restated (2) - ----------------- ------------- ---------------- ----------------- Net investment income 4,233,340 -- 4,233,340 Net realized gain on investments 16,334,000 (1,367,704) 14,966,296 (B) Net increase on unrealized appreciation before distributions 96,343,609 51,338,000 147,681,609 (A) ------------ ------------ ------------ Increase in net assets from operations before distributions 116,910,949 49,970,296 166,881,245 Undistributed net investment income (2,323,150) -- (2,323,150) Net realized gains deemed distributed to shareholders -- (11,417,283) (11,417,283) (C) Allocated increase in share value for deemed distribution -- 11,417,283 11,417,283 (C) Employee stock options exercised 1,794,850 -- 1,794,850 Stock option expense 1,173,751 -- 1,173,751 Adjustment to initially apply FASB Statement No. 158, net of tax 169,003 -- 169,003 ------------ ------------ ------------ Increase in net assets 117,725,403 49,970,296 167,695,699 Net assets, beginning of year 396,618,109 161,417,881 558,035,990 ------------ ------------ ------------ Net assets, end of year 514,343,512 211,388,177 725,731,689 ============ ============ ============ Net asset value, per share $ 132.36 $ 54.40 $ 186.75 ============ ============ ============ 20

Year Ended March 31, 2006 ------------------------------------------------------ Consolidated Statement of Changes in Net Previously As Assets Reported (1) Adjustment Restated (2) - ------------------- ------------- ---------------- ----------------- Net investment income 2,389,256 -- 2,389,256 Net realized gain on investments 13,115,874 2,335,029 15,450,903 (B) Net increase on unrealized appreciation before distributions 80,685,303 43,670,000 124,355,303 (A) ------------ ------------ ------------ Increase in net assets from operations before distributions 96,190,433 46,005,029 142,195,462 Undistributed net investment income (2,314,231) -- (2,314,231) Net realized gains deemed distributed to shareholders -- (13,573,139) (13,573,139)(C) Allocated increase in share value for deemed distribution -- 13,573,139 13,573,139 (C) Employee stock options exercised 208,000 -- 208,000 Stock option expense -- -- -- Adjustment to initially apply FASB Statement No. 158, net of tax -- -- -- ------------ ------------ ------------ Increase in net assets 94,084,202 46,005,029 140,089,231 Net assets, beginning of year 302,533,907 115,412,852 417,946,759 ------------ ------------ ------------ Net assets, end of year 396,618,109 161,417,881 558,035,990 ============ ============ ============ Net asset value, per share $ 102.74 $ 41.82 $ 144.56 ============ ============ ============ 21

Year Ended March 31, 2005 ------------------------------------------------------- Consolidated Statement of Changes in Net Previously As Assets Reported (1) Adjustment Restated (2) - ------------------- ------------- ---------------- ----------------- Net investment income 2,405,948 -- 2,405,948 Net realized loss on investments (6,065,814) (4,046,206) (10,112,020) (B) Net increase on unrealized appreciation before distributions 17,884,654 9,925,000 27,809,654 (A) ------------ ------------ ------------ Increase (decrease) in net assets from operations before distributions 14,224,788 5,878,794 20,103,582 Undistributed net investment income (2,314,231) -- (2,314,231) Employee stock options exercised -- -- -- Stock option expense -- -- -- Adjustment to initially apply FASB Statement No. 158, net of tax -- -- -- ------------ ------------ ------------ Increase in net assets 11,910,557 5,878,794 17,789,351 Net assets, beginning of year 290,623,350 109,534,058 400,157,408 ------------ ------------ ------------ Net assets, end of year 302,533,907 115,412,852 417,946,759 ============ ============ ============ Net asset value, per share $ 78.44 $ 29.92 $ 108.36 ============ ============ ============ Year Ended March 31, 2007 --------------------------------------------------- Consolidated Statement of Cash Previously As Flow Reported (1) Adjustment Restated (2) - ---------------------- ------------------ ------------- ------------- Net Cash provided by (used in): Operating activities 35,868,637 11,080,699 46,949,336 (B) Financing activities (8,528,300) (11,080,699) (19,608,999)(B) ------------------ ------------- ------------- Net increase in cash and cash equivalents 27,340,337 -- 27,340,337 ================== ============= ============= 22

Year Ended March 31, 2006 Consolidated ---------------------------------------------------- Statement of Cash Previously As Flow Reported (1) Adjustment Restated (2) - ---------------------- ------------------ ------------- ------------- Net Cash provided by (used in): Operating activities 13,505,162 4,827,659 18,332,821 (B) Financing activities (7,106,231) (4,827,659) (11,933,890)(B) ------------------ ------------- ------------- Net increase in cash and cash equivalents 6,398,931 -- 6,398,931 ================== ============= ============= Year Ended March 31, 2005 Consolidated ---------------------------------------------------- Statement of Cash Previously Adjustment As Flow Reported (1) Restated (2) - ---------------------- ------------------ ------------- ------------- Net Cash provided by (used in): Operating activities 4,768,370 -- 4,768,370 Financing activities (9,814,231) -- (9,814,231) ------------------ ------------- ------------- Net decrease in cash and cash equivalents (5,045,861) -- (5,045,861) ================== ============= ============= - ------------ (1) As presented in the Company's original Form 10-K for the fiscal year ended March 31, 2007. (2) Adjusted to reflect the restatement described above. (A), (B) and (C) are described in detail above. 3. 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. 4. 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). To the extent that we retain capital gains and declare a deemed dividend to shareholders, at the corporate rate, on the distribution, and the shareholders would receive a tax credit equal to their proportionate share of the tax paid. 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 23

$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. CSMC, a wholly owned subsidiary of CSC, is not a RIC and is required to pay taxes at the current corporate rate. The Company sponsors a qualified defined benefit pension plan which covers its employees and employees of certain of its wholly-owned portfolio companies. Deferred taxes related to the qualified defined benefit pension plan are recorded as incurred. 5. Undistributed Net Realized Gains (Losses) on Investments Distributions made by RICs often differ from aggregate GAAP-basis undistributed net investment income and accumulated net realized gains (total GAAP-basis net realized gains). The principal cause is that required minimum fund distributions are based on income and gain amounts determined in accordance with federal income tax regulations, rather than GAAP. The differences created can be temporary, meaning that they will reverse in the future, or they can be permanent. In subsequent periods when all or a portion of a temporary difference becomes a permanent difference, the amount of the permanent difference will be reclassified to "additional capital". For income tax purposes, the $11,417,283 and $13,573,139 are treated as deemed distributions to our shareholders for the tax years ended December 31, 2006 and 2005. We reclassified the deemed distribution, net of tax, from our undistributed net realized earnings capital in excess of par value. For the tax year ended December 31, 2004 to the extent we had capital gains, they were fully offset by either capital losses or capital loss carry forwards. As of March 31, 2007 and 2006, our undistributed net realized gains (losses) on investments determined in accordance with generally accepted accounting principles as reflected on our consolidated statement of financial condition were comprised of the following: As of March 31, 2007 2006 - ----------------------------------------- ------------ ------------ (as restated) (as restated) Undistributed net realized gains (losses) on investments ($3,100,142) $2,785,636 6. 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. 7. 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: 24

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. 8. 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. 9. 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. 25

The following tables set forth the qualified plan's benefit obligations and fair value of plan assets at March 31, 2007, 2006 and 2005: 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 to date .......................... $ (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. 26

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% 27

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 25

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 10. 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. 11. 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 ============ ============ ============ ============ Investment Income ------------------------------------------- Realized Gain (Loss) on Years Ended Investments March 31 Other Before Income 2006 Interest Dividends Income Taxes - ---- ------------ ------------ ------------ ------------ Companies more than 25% owned ........... $ -- $ 2,926,964 $ 642,500 $ -- Companies 5% to 25% owned ............... (55,236) 188,233 10,000 -- Companies less than 5% owned ............ 302,622 370,233 195,570 20,278,566 Other sources, including temporary investments ......... 258,150 -- -- -- ------------ ------------ ------------ ------------ $ 505,536 $ 3,485,430 $ 848,070 $ 20,278,566 ============ ============ ============ ============ 28

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) ============ ============ ============ ============ 12. Subsequent Events In July 2007, William R. Thomas, retired from his role as President and Chief Executive Officer, but has continued in capacity as Chairman of the Board. Gary L Martin was named President and Chief Executive Officer. In August 2007, Susan K. Hodgson resigned from her position as Secretary-Treasurer and Chief Financial Officer. Tracy L. Morris was hired in September 2007, as Controller and Chief Financial Officer. On August 27, 2007, Capital Southwest Corporation and Capital Southwest Venture Corporation, were named in a lawsuit filed in the United States District Court of the Northern District of Texas, Dallas Division, against Heelys, Inc and its Chief Executive Officer, Chief Financial Officer and the directors who signed its registration statement with the Securities and Exchange Commission in connection with its December 7, 2006 initial public offering ("IPO"), and its underwriters for the IPO. The complaint alleges violations of Sections 11 and 15 of the Securities Act of 1933 and the plaintiffs are seeking compensatory damages in an unspecified amount, as well as reasonable costs and expenses incurred in the action, including counsel fees and expert fees. We believe that the plaintiffs' claims are without merit, we deny the allegations in the complaints, and we intend to vigorously defend the lawsuits. In September and October 2007 four similar suits were also filed in the United States District Court of the Northern District of Texas making substantially similar allegations under Sections 11, 12 and 15 of the Securities Act of 1933, and seeking substantially similar damages. These lawsuits have been transferred to a single judge, and we expect that all the cases will be consolidated into a single action, with a consolidated complaint filed shortly thereafter. We believe that the plaintiffs' claims are without merit, we deny the allegations in the complaints, and we intend to vigorously defend the lawsuits. On November 15, 2007, the Company received a Staff Determination Letter from NASDAQ, stating that we were delinquent in our SEC filings for the quarter ended September 30, 2007 and in violation of NASDAQ rules. On November 20, 2007, the Company requested a written hearing with NASDAQ. The hearing date is set for January 10, 2008 at 4:00 PM. 29

Selected Per Share Data and Ratios Years Ended March --------------------------------------------------------- Per Share Data 2007 2006 2005 2004 2003 --------- --------- --------- --------- --------- as restated as restated as restated as restated as restated 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 3.85 4.00 (2.62) 3.27 .52 Net increase (decrease) in unrealized appreciation of investments 38.00 32.22 7.21 29.57 (18.20) Exercise of employee stock options* (.49) (.04) -- (.25) -- Stock option expense .04 -- -- -- -- Adjustment to initially apply FASB No. 158, net of tax .30 -- -- -- -- --------- --------- --------- --------- --------- Increase (decrease) in net asset value 42.19 36.20 5.21 32.66 (17.68) Net asset value Beginning of year 144.56 108.36 103.75 71.09 88.77 --------- --------- --------- --------- --------- End of year $ 186.75 $ 144.56 $ 108.36 $ 103.75 $ 71.09 ========= ========= ========= ========= ========= Ratios and Supplemental Data Ratio of operating expenses to average net assets .36% .42% .49% .47% .39% Ratio of net investment income to average net assets .68% .51% .60% .81% .78% Portfolio turnover rate 0.13% 2.36% .56% 3.74% 1.53% Net asset value total return 29.85% 34.31% 5.25% 47.42% (19.11)% Shares outstanding at end of period (000s omitted) 3,886 3,860 3,857 3,857 3,829 - ------------- * Net decrease is due to the exercise of employee stock options at prices less than beginning of period net asset value. 30

Management's Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting ("ICFR"), 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. With the participation of the Chief Executive Officer and the Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of March 31, 2007 based on the criteria established in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. In the company's Annual Report on Form 10-K for the year ended March 31, 2007 filed on May 15, 2007, management concluded that our internal control over financial reporting was effective as of March 31, 2007. Subsequently, management identified the following material weakness in internal control over financial reporting with respect to accounting for taxes: Under the supervision and with the participation of our management, including our President and Controller, we conducted an evaluation of the effectiveness of our internal control over financial reporting in connection with preparation of the Amended Annual Report on Form 10-K/A for the year ended March 31, 2007. As a result of the assessments, a material weakness was identified. The following material weakness is the basis for our conclusion: o We did not maintain an adequate process to assess and determine the probability of the Company maintaining its qualifying status as a RIC subject to subchapter M of the IRC over the next twelve months at any given quarter. This material weakness has caused us to amend our Annual Report on Form 10-K for the year ended March 31, 2007, in order to restate the financial statements and our selected per share data and ratios for the years ended March 31, 2007, 2006 and 2005, and our selected per share data and ratios for the years ended March 31, 2004 and 2003. Additionally, we have amended our Form 10-Q for the quarter ended June 30, 2007. As a result of this material weakness, our Management has revised its earlier assessment and has now concluded that our internal control over financial reporting was not effective as of March 31, 2007. Grant Thornton LLP has issued its opinion that the Company had not 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 Organzations of the Treadway Commission. This opinion appears on the next page. Date: January 9, 2008 /s/ Gary L. Martin - ------------------ Gary L. Martin President & Chief Executive Officer /s/ Tracy L. Morris - ------------------- Tracy L. Morris Controller (chief financial/accounting officer) 31

Report of Independent Registered Public Accounting Firm Board of Directors and Shareholders Capital Southwest Corporation We have audited Capital Southwest Corporation (a Texas Corporation) and subsidiaries (the "Company") 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, included in the accompanying management's report on internal control over financial reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. 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. A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management's assessment. o The Company did not maintain an adequate process to assess and determine the probability of the Company maintaining its qualifying status as a RIC subject to subchapter M of the IRC over the next twelve months at any given quarter end. In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of March 31, 2007, based on criteria established in Internal Control--Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial condition of 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. The material weakness identified above was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2007 financial statements, and this report does not affect our report dated, January 9, 2008, which expressed an unqualified opinion on those financial statements and the selected per share data and ratios. /s/ GRANT THORNTON LLP Dallas, Texas January 9, 2008 32

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 another independent registered public accounting firm whose report dated May 12, 2004, except for Note 2, which is as of January 9, 2008 expressed an unqualified opinion. The selected per share data and ratios for the year ended March 31, 2003, were audited by another independent registered public accounting firm whose report dated April 25, 2003, except for Note 2, which is as of January 9, 2008 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 6 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 8 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. As described in Note 2 to the consolidated financial statements, the Company restated its consolidated financial statements and the selected per share data and ratios for each of the fiscal years ended March 31, 2007, 2006 and 2005 and the selected per share data and ratios for the years ended March 31, 2004 and 2003 by eliminating the accrual for deferred taxes on unrealized appreciation of investments, and income taxes payable and related tax carry forwards on realized gains, which increased the net asset value per share and net assets from operations for the periods restated, and reclassified return of capital contributions to "additional capital". We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Capital Southwest Corporation and subsidiaries' 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 accompanying report dated January 9, 2008, expressed an adverse opinion on the effective operation of the Company's internal control over financial reporting. /s/ Grant Thornton LLP Dallas, Texas January 9, 2008 33

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 based on the Company's tax year. 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. 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 $14,966,296 (after income tax expense of $11,080,699) during the year ended March 31, 2007, compared with a gain of $15,450,903 (after income tax expense of $4,827,663) during 2006 and a loss of $10,112,020 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 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 or losses results in a corresponding decrease or increase in unrealized appreciation of 34

investments. Set forth in the following table are the significant increases and decreases in unrealized appreciation 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." 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 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. 35

Contractual Obligations As shown below, the Company had the following contractual obligations as of March 31, 2007. For further information see Note 5 and Note 9 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. 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. 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. 36

Selected Consolidated Financial Data (all figures in thousands except per share data) 1997 1998 1999 2000 2001 Financial Position --------- --------- --------- --------- --------- (as of March 31) as restated as restated as restated as restated as restated Investments at cost ............ $ 59,908 $ 61,154 $ 73,580 $ 85,002 $ 87,602 Unrealized appreciation ........ 233,383 340,132 276,698 238,627 228,316 --------- --------- --------- --------- --------- Investments at market or fair value .................. 293,291 401,286 350,278 323,629 315,918 Total assets ................... 310,760 522,324 360,786 392,586 322,668 Notes payable * ................ 5,000 5,000 5,000 10,000 16,000 Net assets ..................... 303,469 414,697 352,974 319,438 303,436 Shares outstanding ............. 3,767 3,788 3,815 3,815 3,815 --------- --------- --------- --------- --------- Changes in Net Assets (years ended March 31) Net investment income .......... $ 2,574 $ 2,726 $ 1,762 $ 1,663 $ 1,723 Net realized gain (loss) on investments ................. 4,290 3,301 1,264 5,162 (5,126) Net increase (decrease) in unrealized appreciation before distributions ........ 34,996 106,749 (63,4334) (38,072) (10,311) --------- --------- --------- --------- --------- Increase (decrease) in net assets from operations before distributions ........ 41,860 112,776 (60,408) (31,247) (13,714) Cash dividends paid ............ (2,260) (2,268) (2,280) (2,289) (2,289) Employee stock options exercised ................... -- 720 965 -- -- Stock option expense ........... -- -- -- -- -- Adjustment to initially apply FASB Statement No. 158, net of tax -- -- -- -- -- --------- --------- --------- --------- --------- Increase (decrease) in net assets 39,600 111,228 (61,723) (33,536) (16,003) Per Share Data (as of March 31) Net assets ..................... $ 80.56 $ 109.48 $ 92.52 $ 83.73 $ 79.54 Closing market price ........... 67.88 94.00 73.00 54.75 65.00 Cash dividends paid ............ .60 .60 .60 .60 .60 37

2002 2003 2004 2005 2006 2007 Financial Position --------- --------- --------- --------- --------- --------- (as of March 31) as restated as restated as restated as restated as restated as restated Investments at cost ............ $ 82,194 $ 91,462 $ 97,283 $ 84,546 $ 88,597 $ 71,642 Unrealized appreciation ........ 265,287 195,598 309,666 337,476 461,831 609,513 --------- --------- --------- --------- --------- --------- Investments at market or fair value .................. 347,481 287,060 406,949 422,022 550,428 681,155 Total assets ................... 357,183 298,490 423,979 434,384 569,368 729,507 Notes payable * ................ 14,000 23,000 20,500 13,000 8,000 -- Net assets ..................... 339,891 272,211 400,157 417,947 558,036 725,732 Shares outstanding ............. 3,829 3,829 3,857 3,857 3,860 3,886 --------- --------- --------- --------- --------- --------- Changes in Net Assets (years ended March 31) Net investment income .......... $ 2,042 $ 2,299 $ 2,587 $ 2,406 $ 2,389 $ 4,233 Net realized gain (loss) on investments ................. (762) 2,007 12,603 (10,112) 15,451 14,966 Net increase (decrease) in unrealized appreciation before distributions ........ 36,971 (69,689) 114,068 27,810 124,355 147,682 --------- --------- --------- --------- --------- --------- Increase (decrease) in net assets from operations before distributions ........ 38,251 (65,383) 129,257 20,104 142,195 166,881 Cash dividends paid ............ (2,295) (2,297) (2,309) (2,314) (2,314) (2,323) Employee stock options exercised ................... 499 -- 997 -- 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 36,455 (67,680) 127,946 17,790 140,089 167,695 Per Share Data (as of March 31) Net assets ..................... $ 88.77 $ 71.09 $ 103.75 $ 108.36 $ 144.56 $ 186.75 Closing market price ........... 68.75 48.15 75.47 79.10 95.50 153.67 Cash dividends paid ............ .60 .60 .60 .60 .60 .60 o Excludes quarter-end borrowing which is repaid on the first business day after year end. 38

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 was 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. 39

                                                                    EXHIBIT 23.1


            Consent of Registered Independent Public Accounting Firm


We have issued our reports dated January 9, 2008,  accompanying the consolidated
financial  statements  and  management's  assessment  of  the  effectiveness  of
internal control over financial reporting included in the Form 10-K/A of Capital
Southwest  Corporation  and  subsidiaries  for the year ended March 31, 2007. We
hereby  consent  to the  incorporation  by  reference  of  said  reports  in the
Registration Statement of Capital Southwest Corporation and subsidiaries on Form
S-8 (File No. 33-43881).

/s/ GRANT THORNTON LLP
January 9, 2008

                                                                    Exhibit 31.1
                                 CERTIFICATIONS

I, Gary L. Martin, President of Capital Southwest Corporation, certify that:

1.   I have  reviewed  this annual  report on Form  10-K/A of Capital  Southwest
     Corporation (the "registrant");

2.   Based on my knowledge, this report does not contain any untrue statement of
     a material  fact or omit to state a  material  fact  necessary  to make the
     statements made, in light of the circumstances  under which such statements
     were made,  not  misleading  with  respect  to the  period  covered by this
     report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included  in  this  report,  fairly  present  in all  material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this report;

4.   The  registrant's  other  certifying  officer  and  I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules  13a-15(e) and 15d-15(e))  and internal  control over
     financial  reporting  (as  defined  in  Exchange  Act Rules  13a-15(f)  and
     15d-15(f)) for the registrant and have:

     a)   Designed  such  disclosure  controls  and  procedures,  or caused such
          disclosure   controls  and   procedures  to  be  designed   under  our
          supervision,  to ensure  that  material  information  relating  to the
          registrant,  including its consolidated subsidiaries, is made known to
          us by others within those entities,  particularly during the period in
          which this report is being prepared;

     b)   Designed such internal  control over  financial  reporting,  or caused
          such internal  control over  financial  reporting to be designed under
          our  supervision,   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;

     c)   Evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures and presented in this report our conclusions  about the
          effectiveness of the disclosure controls and procedures, as of the end
          of the period covered by this report based on such evaluation; and

     d)   Disclosed  in this  report  any  change in the  registrant's  internal
          control over financial reporting that occurred during the registrant's
          most recent fiscal quarter (the registrant's  fourth fiscal quarter in
          the case of an annual  report)  that has  materially  affected,  or is
          reasonably  likely to materially  affect,  the  registrant's  internal
          control over financial reporting; and

5.   The registrant's  other certifying  officer and I have disclosed,  based on
     our most recent evaluation of internal control over financial reporting, to
     the registrant's auditors and the audit committee of the registrant's board
     of directors (or persons performing the equivalent functions):

     a)   All significant  deficiencies and material weaknesses in the design or
          operation  of internal  control  over  financial  reporting  which are
          reasonably  likely to  adversely  affect the  registrant's  ability to
          record, process, summarize and report information; and

     b)   Any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          control over financial reporting.





Date:  January 9, 2008                            By:  /s/ Gary L. Martin
       ----------------                                -------------------------
                                                       Gary L. Martin, President

                                                                    Exhibit 31.2

                                 CERTIFICATIONS


I, Tracy L. Morris, Controller of Capital Southwest Corporation, certify that:

1.   I have  reviewed  this annual  report on Form  10-K/A of Capital  Southwest
     Corporation (the "registrant");

2.   Based on my knowledge, this report does not contain any untrue statement of
     a material  fact or omit to state a  material  fact  necessary  to make the
     statements made, in light of the circumstances  under which such statements
     were made,  not  misleading  with  respect  to the  period  covered by this
     report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included  in  this  report,  fairly  present  in all  material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this report;

4.   The  registrant's  other  certifying  officer  and  I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules  13a-15(e) and 15d-15(e))  and internal  control over
     financial  reporting  (as  defined  in  Exchange  Act Rules  13a-15(f)  and
     15d-15(f)) for the registrant and have:

     a)   Designed  such  disclosure  controls  and  procedures,  or caused such
          disclosure   controls  and   procedures  to  be  designed   under  our
          supervision,  to ensure  that  material  information  relating  to the
          registrant,  including its consolidated subsidiaries, is made known to
          us by others within those entities,  particularly during the period in
          which this report is being prepared;

     b)   Designed such internal  control over  financial  reporting,  or caused
          such internal  control over  financial  reporting to be designed under
          our  supervision,   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;

     c)   Evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures and presented in this report our conclusions  about the
          effectiveness of the disclosure controls and procedures, as of the end
          of the period covered by this report based on such evaluation; and

     d)   Disclosed  in this  report  any  change in the  registrant's  internal
          control over financial reporting that occurred during the registrant's
          most recent fiscal quarter (the registrant's  fourth fiscal quarter in
          the case of an annual  report)  that has  materially  affected,  or is
          reasonably  likely to materially  affect,  the  registrant's  internal
          control over financial reporting; and

5.   The registrant's  other certifying  officer and I have disclosed,  based on
     our most recent evaluation of internal control over financial reporting, to
     the registrant's auditors and the audit committee of the registrant's board
     of directors (or persons performing the equivalent functions):

     a)   All significant  deficiencies and material weaknesses in the design or
          operation  of internal  control  over  financial  reporting  which are
          reasonably  likely to  adversely  affect the  registrant's  ability to
          record, process, summarize and report financial information; and

     b)   Any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          control over financial reporting.





Date: January 9, 2008                         By:    /s/Tracy L. Morris
      ---------------                                ---------------------------
                                                     Tracy L. Morris, Controller

                                                                    Exhibit 32.1
                           Certification of President

  Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code


     I, Gary L. Martin,  President  of Capital  Southwest  Corporation,  certify
that, to my knowledge:

     1. the Form 10-K/A,  filed with the Securities  and Exchange  Commission on
January 9, 2008  ("accompanied  report") fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     2. the information  contained in the accompanied report fairly presents, in
all material  respects,  the  consolidated  financial  condition  and results of
operations of Capital Southwest Corporation.


Date: January 9, 2008                  By:  /s/ Gary L. Martin
     ----------------                       -------------------------
                                            Gary L. Martin, President

                                                                    Exhibit 32.2
                           Certification of Controller

  Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code




     I, Tracy L. Morris,  Controller of Capital Southwest  Corporation,  certify
that, to my knowledge:

     1. the Form 10-K/A,  filed with the Securities  and Exchange  Commission on
January 9, 2008  ("accompanied  report") fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     2. the information  contained in the accompanied report fairly presents, in
all material  respects,  the  consolidated  financial  condition  and results of
operations of Capital Southwest Corporation.


Date: January 9, 2008                            /s/ Tracy L. Morris
      ---------------                            -------------------------------
                                                 Tracy L. Morris, Controller