Capital Southwest Corporation
                          12900 Preston Road, Suite 700
                               Dallas, Texas 75230

(972) 233-8242  Telephone                                Fax (972) 233-7362



                                  June 29, 1997




Securities and Exchange Commission
450 5th Street, N.W.
Judiciary Plaza
Washington, DC  20549



Gentlemen:

Pursuant to regulations of the Securities and Exchange Commission, submitted for
filing on behalf of Capital Southwest  Corporation is the Company's Form 10-K405
for the year ended March 31, 1997.

This filing is being effected by direct  transmission to the Commission's  EDGAR
System.

                                                     Sincerely,



                                                     Susan Patterson
                                                     Controller





<PAGE>



                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                   ------------------------------------------

                                    FORM 10-K 405

                  (Mark One)
                  [  X ]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                           OF THE SECURITIES EXCHANGE ACT OF 1934

                  [    ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                           OF THE SECURITIES EXCHANGE ACT OF 1934
                  -----------------------------------------------------------

For the Fiscal Year Ended March 31, 1997          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                           (I.R.S. Employer
   Incorporation or Organization)                         Identification Number)

                12900 Preston Road, Suite 700, Dallas, Texas 75230
                     (Address of principal executive offices
                               including zip code)

                                 (972) 233-8242
               (Registrant's telephone number including area code)

        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 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 or any amendment to this
Form 10-K. [ X ]

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant as of May 1, 1997 was  $142,654,636,  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 May 1,  1997  was
3,767,051:

<TABLE>
<S>      <C>                                                                        <C>   



         Documents Incorporated by Reference                                            Part of Form 10-K

  (1)  Annual Report to Shareholders for the Year Ended                                 Parts I and II; and
                  March 31, 1997                                                    Part IV, Item 14(a)(1) and (2)

  (2)  Proxy Statement for Annual Meeting of Shareholders                                     Part III
                 to be held July 21, 1997

<PAGE>

</TABLE>


                                TABLE OF CONTENTS

<TABLE>
<S>       <C>          <C>                                                                                       <C>     

                                                                                                                 Page

PART I

         Item 1.      Business.....................................................................................1

         Item 2.      Properties...................................................................................1

         Item 3.      Legal Proceedings............................................................................1

         Item 4.      Submission of Matters to a Vote of Security Holders..........................................1


PART II

         Item 5.      Market for Registrant's Common Equity and Related Stockholder Matters........................2

         Item 6.      Selected Financial Data......................................................................2

         Item 7.      Management's Discussion and Analysis of Financial Condition and Results
                        of Operations..............................................................................2

         Item 8.      Financial Statements and Supplementary Data..................................................2

         Item 9.      Changes in and Disagreements With Accountants on Accounting and
                        Financial Disclosure.......................................................................3


PART III

         Item 10.     Directors and Executive Officers of the Registrant...........................................3

         Item 11.     Executive Compensation.......................................................................3

         Item 12.     Security Ownership of Certain Beneficial Owners and Management...............................4

         Item 13.     Certain Relationships and Related Transactions...............................................4


PART IV

         Item 14.     Exhibits, Financial Statement Schedules, and Reports on Form 8-K ............................4

Signatures ........................................................................................................5

Exhibit Index .....................................................................................................6

</TABLE>



<PAGE>

                                     PART I


Item 1.       Business

         Capital Southwest  Corporation (the "Company") was organized as a Texas
corporation on April 19, 1961.  Until September 1969, the Company  operated as a
licensee  under the Small  Business  Investment  Act of 1958. At that time,  the
Company  transferred to its wholly-owned  subsidiary,  Capital Southwest Venture
Corporation ("CSVC"),  certain of its assets and its license as a small business
investment company ("SBIC").  CSVC is a closed-end,  non-diversified  investment
company  of the  management  type.  Prior to March 30,  1988,  the  Company  was
registered  as  a  closed-end,  non-diversified  investment  company  under  the
Investment  Company  Act of 1940 (the "1940  Act").  On that date,  the  Company
elected to become a business  development  company  subject to the provisions of
Sections  55  through  65 of the 1940 Act,  as  amended  by the  Small  Business
Incentive Act of 1980.

         The Company is a venture capital  investment company whose objective is
to achieve  capital  appreciation  through  long-term  investments in businesses
believed  to have  favorable  growth  potential.  The  Company  participates  in
start-up and early-stage  financings,  expansion financings and leveraged buyout
financings in a broad range of industry segments.  The Company's  portfolio is a
composite  of  investments  in several  companies in which the Company has major
interests as well as a number of developing companies and marketable  securities
of established publicly-owned companies. The Company makes available significant
managerial  assistance  to the  companies in which it invests and believes  that
providing  material  assistance  to such  investee  companies is critical to its
business development activities.

         The twelve  largest  investments  of the Company had a combined cost of
$41,943,522 and a value of $263,978,402,  representing 90.0% of the value of the
Company's  consolidated  investment portfolio at March 31, 1997. For a narrative
description of the twelve largest investments, see "Twelve Largest Investments -
March  31,  1997"  on  pages 4  through  6 of the  Company's  Annual  Report  to
Shareholders  for the Year Ended March 31, 1997 (the "1997 Annual Report") which
is herein incorporated by reference. Certain of the information presented on the
twelve 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' financial statements, which in some instances are unaudited.

         The Company  competes  for  attractive  investment  opportunities  with
venture capital  partnerships and  corporations,  venture capital  affiliates of
industrial and financial companies, other SBICs and wealthy individuals.

         The number of persons  employed  by the  Company at March 31,  1997 was
eight.


I
tem 2.       Properties

         The Company  maintains its offices at 12900  Preston  Road,  Suite 700,
Dallas,  Texas,  75230, where it rents approximately 3,200 square feet of office
space  pursuant to a lease  agreement  expiring in  February  1998.  The Company
believes  that its offices are adequate to meet its current and expected  future
needs.


Item 3.       Legal Proceedings

         The Company has no material pending legal  proceedings to which it is a
party or to which any of its 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, 1997.
 


                                      1

<PAGE>


                                     PART II


Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

         Information  set forth under the captions  "Shareholder  Information  -
Shareholders,  Market Prices and Dividends" on page 27 of the 1997 Annual Report
are herein incorporated by reference.


Item 6.       Selected Financial Data
              -----------------------

     "Selected Consolidated Financial Data" on page 26 of the 1997 Annual Report
is herein incorporated by reference.


Item 7. Management's Discussion and Analysis of Financial ConditionI and Results
     of Operations

         Pages 23  through 25 of the  Company's  1997  Annual  Report are herein
incorporated by reference.


Item 8. Financial Statements and Supplementary Data

         Pages 7 through  22 of the  Company's  1997  Annual  Report  are herein
incorporated  by  reference.  See also Item 14 of this  Form  10-K -  "Exhibits,
Financial Statement Schedules, and Reports on Form 8-K".

         Selected Quarterly Financial Data (Unaudited)
         ---------------------------------------------

         The   following   presents  a  summary  of  the   unaudited   quarterly
consolidated financial information for the years ended March 31, 1997 and 1996.

<TABLE> 
 <S>                                                      <C>             <C>            <C>         <C>            <C>

                                                            First         Second           Third       Fourth
                                                           Quarter        Quarter         Quarter      Quarter        Total
                                                           -------        -------         -------      -------        -----
                                                                          (In thousands, except per share amounts)
1997
- ----
    Net investment income                                $    817        $   829        $   442      $    486      $  2,574
    Net realized gain on investments                            -              -            892         5,914         6,806
    Net increase (decrease) in unrealized
       appreciation of investments before
       distributions                                        8,291         12,505         11,150       (9,141)        22,805
    Net increase (decrease) in net assets
       from operations before distributions                 9,107         13,334         12,485       (2,741)        32,185
    Net increase (decrease) in net assets
       from operations before distributions
       per share                                             2.42           3.54           3.31         (.73)          8.54

1996
- ----
    Net investment income                                $    816        $   633        $   934      $    472      $  2,855
    Net realized gain (loss) on investments                     -              -         12,358       (1,184)        11,174
    Net increase (decrease) in unrealized
       appreciation of investments before
       distributions                                        2,613         27,272        (2,180)        11,041        38,746
    Net increase in net assets from operations
       before distributions                                 3,429         27,905         11,112        10,329        52,775
    Net increase in net assets from operations
       before distributions per share                         .91           7.41           2.95          2.74         14.01
</TABLE>




Item 9.  Changes  in  and  Disagreements  with  Accountants  on  Accounting  and
     Financial Disclosure

         Not applicable.

                                       2

<PAGE>



                                    PART III


Item 10. Directors and Executive Officers of the Registrant

         The information set forth under the captions "Election of Directors" in
the Company's  definitive  Proxy Statement for Annual Meeting of Shareholders to
be held July 21, 1997,  filed  pursuant to Regulation  14A under the  Securities
Exchange Act of 1934, on or about June 12, 1997 (the "1997 Proxy  Statement") is
herein incorporated by reference.

Executive Officers of the Registrant

         The officers of the Company,  together  with the offices in the Company
presently held by them, their business experience during the last five years and
their ages are as follows:

          D.Scott  Collier,  age 34, has served as Vice President of the Company
     since April 1995 and was an investment associate with the Company from 1991
     to 1995.

          J. Bruce  Duty,  age 46, has served as Senior  Vice  President  of the
     Company  since  1993,  Vice  President  of the  Company  from 1982 to 1993,
     Secretary  of the Company  from 1980 to 1993 and  Treasurer  of the Company
     from 1980 to January 1990.

          Patrick F. Hamner, age 41, has served as Vice President of the Company
     since 1986 and was an  investment  associate  with the Company from 1982 to
     1986.

          Gary L. Martin,  age 50, has been a director of the Company since July
     1988 and has  served  as Vice  President  of the  Company  since  1984.  He
     previously served as Vice President of the Company from 1978 to 1980. Since
     1980,  Mr.  Martin has served as President  of The  Whitmore  Manufacturing
     Company, a wholly-owned subsidiary of the Company.

          Tim Smith,  age 36, has served as Vice  President and Secretary of the
     Company since 1993,  Treasurer of the Company since January 1990 and was an
     investment associate with the Company from July 1989 to January 1990.

          William R.  Thomas,  age 68, has  served as  Chairman  of the Board of
     Directors  of the Company  since 1982 and  President  of the Company  since
     1980. In addition, he has been a director of the Company since 1972 and was
     previously Senior Vice President of the Company from 1969 to 1980.

         No family relationship exists between any of the above-listed officers,
and there are no  arrangements  or  understandings  between  any of them and any
other person  pursuant to which they were  selected as an officer.  All officers
are elected to hold office for one year and until their  successors  are elected
and qualify.


Item 11.      Executive Compensation

         The information set forth under the caption  "Compensation of Directors
and Executive  Officers" in the 1997 Proxy  Statement is herein  incorporated by
reference.


Item 12.      Security Ownership of Certain Beneficial Owners and Management

         The  information  set forth  under the  captions  "Stock  Ownership  of
Certain  Beneficial  Owners"  and  "Election  of  Directors"  in the 1997  Proxy
Statement is herein incorporated by reference.


Item 13.      Certain Relationships and Related Transactions

         There were no relationships or transactions  within the meaning of this
item during the fiscal year ended March 31, 1997 or proposed for the fiscal year
ending March 31, 1998.

                                       3


<PAGE>


                                     PART IV


Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

     (a)(1) The following financial statements included in pages 7 through 22 of
the Company's 1997 Annual Report are herein incorporated by reference:

         (A)  Portfolio of Investments - March 31, 1997

               Consolidated Financial Statements of the Company and Subsidiary

               Consolidated  Statements of Financial  Condition - March 31, 1997
               and 1996

               Consolidated  Statements  of  Operations  - Years Ended March 31,
               1997, 1996 and 1995

               Consolidated  Statements  of Changes in Net Assets - Years  Ended
               March 31, 1997, 1996 and 1995

               Consolidated  Statements of Cash Flows - Years Ended March 31,
               1997, 1996 and 1995

         (B)   Notes to Consolidated Financial Statements

         (C)  Notes to Portfolio of Investments

         (D)  Selected Per Share Data and Ratios

         (E)  Independent Auditors' Report

    (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 on page 6.

    (b) The Company  filed no reports on Form 8-K during the three  months ended
March 31, 1997.

                                       4



<PAGE>



                                   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/ William R. Thomas

                                                  By:--------------------------
                                                  (William R. Thomas, President
                                                   and Chairman of the Board)

Date:  June 26, 1997

         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.

<TABLE>
<S>                                    <C>                                  <C>    


        Signature                          Title                              Date
        ---------                          -----                              ----

    /s/ William R. Thomas
- ---------------------------             President and Chairman              June 26, 1997
     (William R. Thomas)                    of the Board and Director

   /s/ Gary L. Martin                   Director                            June 26, 1997
- ---------------------------
     (Gary L. Martin)

   /s/ Graeme W. Henderson
- ---------------------------
                                        Director                            June 26, 1997
   (Graeme W. Henderson)


   /s/ James M. Nolan
- ---------------------------             Director                            June 26, 1997
   (James M. Nolan)


  /s/ John H. Wilson
- ---------------------------             Director                            June 26, 1997
   (John H. Wilson)


  /s/ Tim Smith
- ---------------------------             Vice President and                 June 26, 1997
   (Tim Smith)                          Secretary-Treasurer
                                       (Financial and Accounting Officer)
</TABLE>


                                       5


<PAGE>


                                  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.)


     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  (filed
                                    as Exhibit 2 to Amendment No. 11 to
                                    Form N-2 for the fiscal year ended
                                    March 31, 1987).

       4.1                          Specimen of Common Stock certificate 
                                    (filed as Exhibit 4 to Amendment No. 3 to
                                    Form N-2 for the fiscal year ended
                                    March 31, 1979).

       4.2                          Subordinated   debentures   of   CSVC  
                                    guaranteed   by  the   Small   Business
                                    Administration  (filed  as  Exhibit 5 to 
                                    Amendment  No. 11 to Form N-2 for the
                                    fiscal  year ended  March 31,  1987 and
                                    Exhibit 4.3 to Form 10-K for the fiscal
                                    year ended March 31, 1993).

       10.1                         The RectorSeal Corporation and Jet-Lube, 
                                    Inc. Employee Stock Ownership Plan as
                                    revised and restated effective April 1,
                                    1989.

       10.3                         Retirement  Plan for  Employees  of  Capital
                                    Southwest  Corporation and Its Affiliates as
                                    amended and restated effective April 1, 1989
                                    (filed as Exhibit  10.3 to Form 10-K for the
                                    fiscal year ended March 31, 1995).

       10.4                         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).

       10.5                         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).

                                        6
                                   

<PAGE>



     Exhibit No.                                 Description
     -----------                                 -----------

       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 1984
                                    Incentive Stock Option Plan as amended and
                                    restated  as of April 20,  1987  (filed as 
                                    Exhibit  10.10 to Form 10-K for the fiscal
                                    year ended March 31, 1990).
                                      
       13.  *                       Annual Report to Shareholders for the
                                    fiscal year ended March 31, 1997.

       21.                          List of  subsidiaries  of the Company 
                                    (filed as Exhibit 22 to Form 10-K for the
                                    fiscal year ended March 31, 1992).

       23.  *                       Independent Auditors' Consent.

       27.  *                       Financial Data Schedule.
                                       7


<PAGE>

   
                                   Exhibit 13


                   Twelve Largest Investments-March 31, 1997

Palm Harbor Homes, Inc.                                     $84,458,000
  
   Palm Harbor Homes, Dallas, Texas, is an integrated manufactured housing
company, building, retailing, financing and insuring homes produced in 15
plants in Alabama, Arizona, Florida, North Carolina, Ohio, Oregon and Texas and
sold in 34 states by over 600 independent dealers and 59 company-owned or 
affiliated retail superstores. Palm Harbor manufactures high-quality, energy-
efficient homes designed to meet the need for affordable housing, particulrly
among retirees and newly-formed families.

   During the year ended March 28, 1997, Palm Harbor earned $24,739,000 ($1.68
per share on net sales of $563,192,000, compared with earnings of $14,978,000
($1.18 per share) on net sales of $417,214,000 in the previous year.  The 
March 31, 1997 closing Nasdaq bid price of Palm Harbor's common stock was $21.00
per share.

   At March 31, 1997, the $10,931,955 investment in Palm Harbor by Capital 
Southwest and its subsidiary was valued at $84,458,000 ($16.80 per share)
consisting of 5,027,276 restricted shares of common stock, representing a 
fully-diluted equity interest of 33.2%.
                 
Skylawn Corporation
                                         $42,000,000
   Skylawn Corporation owns and operates cemeteries,  mausoleums and mortuaries.
Skylawn's operations, all of which are in California, include a mausoleum and an
adjacent  mortuary  in  Oakland  and  cemeteries  and  mausoleums  in San Mateo,
Hayward,  Sacramento and Napa, the latter three of which also have mortuaries at
the cemetery sites. All of these entities are well established and have provided
funeral services to their respective communities for many years.

   For the fiscal  year  ended  March 31,  1997,  Skylawn  Corporation  earned
$3,822,000  on  revenues  of   $20,602,000.   In  the  previous  year,  Skylawn
earned $4,462,000 on revenues of $22,939,000.

   At March 31,  1997,  Capital  Southwest  owned  100% of  Skylawn 
Corporation's common stock, which had a cost of $4,510,400 and was valued at
$42,000,000.
                                        
The RectorSeal Corporation                                  $35,000,000

   The RectorSeal  Corporation,  with plants in Houston and Mount Vernon,  New
York,  manufactures  specialty chemical products including pipe thread sealants,
fire- stop sealants, plastic solvent cements and other formulations for plumbing
and industrial  applications.  RectorSeal's  subsidiary,  Jet-Lube,  Inc.,  with
plants in Houston, England and Canada, produces anti-seize compounds,  specialty
lubricants  and other  products used in industrial  and oil field  applications.
RectorSeal also owns a 20% equity interest in The Whitmore Manufacturing Company
(described subsequently).

   During the year ended  March 31,  1997,  RectorSeal  earned  $3,116,000  on
revenues of  $37,988,000,  compared  with  earnings of $3,014,000 on revenues of
$29,290,000  in the  previous  year.  RectorSeal's  earnings  do not reflect its
20%equity in the Whitmore Manufacturing Company.

   At March 31, 1997, Capital Southwest owned 100% of RectorSeal's common Stock
having a cost of $52,600 and a value of $35,000,000.
                                       
Alamo Group Inc.                                            $31,777,000

   Alamo Group Inc. is a leading  designer,  manufacturer  and  distributor of
heavy-duty, tractor-mounted mowing and vegetation maintenance equipment. Founded
in  1969,   Alamo  Group  operates  12   manufacturing   facilities  and  serves
agricultural, governmental and commercial markets in the U.S. and Europe.

   For the year ended December 31, 1996, Alamo reported consolidated earnings of
$8,762,000  ($0.91  per  share)  on net  sales of  $183,595,000,  compared  with
earnings of $11,615,000  ($1.34 per share) on net sales of  $163,852,000  in the
previous  year.  The March 31, 1997 closing NYSE market price of Alamo's  common
stock was $15.875 per share.

   At March 31, 1997, the $575,000  investment in Alamo by Capital Southwest and
its subsidiary  was valued at  $31,777,000,  consisting of 2,660,000  restricted
shares of common  stock  valued at  $31,654,000  ($11.90 per share) and warrants
valued at $123,000,  representing a fully-diluted equity interest of 26.8% at an
anticipated cost of $1,575,000.
                                    

<PAGE>

Encore Wire Corporation                                     $16,381,000

   Encore Wire Corporation, McKinney, Texas, manufactures a broad line of copper
electrical wire and cable  including  non-metallic  sheathed cable,  underground
feeder  cable  and  THHN  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,  1996,  Encore  reported  net  income  of
$7,159,000  ($1.00 per share) on net sales of $179,132,000,  compared with a net
loss of $545,000  ($0.08 per share) on net sales of $151,308,000 in the previous
year. The March 31, 1997 closing  Nasdaq bid price of Encore's  common stock was
$18.25 per share.

   At March 31, 1997, the $4,100,000  investment in 1,122,000 shares of Encore's
restricted  common stock by Capital  Southwest and its  subsidiary was valued at
$16,381,000 ($14.60 per share),  representing a fully-diluted equity interest of
14.6%.

PETsMART, Inc.                                              $13,084,400

   PETsMART,  Inc.,  Phoenix,  Arizona,  is the  nation's  leading  operator  of
superstores  specializing in pet food, pet supplies and pet services,  including
full scale veterinary care. PETsMART currently operates 397 superstores in North
America and the United Kingdom.

   For the year  ended  February  2,  1997,  PETsMART  reported  net  income  of
$20,591,000  ($0.17 per share) on net sales of  $1,501,017,000,  compared with a
net loss of $7,018,000  ($0.06 per share) on net sales of  $1,168,056,000 in the
previous year. The March 31, 1997 closing Nasdaq bid price of PETsMART's  common
stock was $20.00 per share.

   At March 31, 1997,  Capital  Southwest  and its  subsidiary  owned  654,220
unrestricted  shares of PETsMART common stock, having a cost of $2,878,733 and a
market value of $13,084,400 ($20.00 per share).
 
Mail-Well, Inc.                                             $10,966,000

   Mail-Well, Inc., Englewood,  Colorado, is a leading envelope manufacturer and
printer in the United States and Canada,  specializing  in customized  envelopes
and high-impact color printing.  Mail-Well  operates over 50 plants and numerous
sales offices throughout North America.

   For the  year  ended  December  31,  1996,  Mail-Well  reported  earnings  of
$16,927,000  ($1.42  per  share) on net  sales of  $778,524,000,  compared  with
earnings of $10,373,000  ($1.36 per share) on net sales of  $596,803,000  in the
previous year. The March 31, 1997 closing Nasdaq bid price of Mail-Well's common
stock was $19.75 per share.

     At March 31,  1997,  the  $2,889,010  investment  in  Mail-Well  by Capital
Southwest  was valued at  $10,966,000  ($15.80 per share)  consisting of 694,063
restricted shares of common stock,  representing a fully-diluted equity interest
of 5.3%.

American Homestar Corporation                                $8,512,002

   American  Homestar  Corporation,  League  City,  Texas,  builds,  retails and
finances  manufactured  housing,  producing  homes  from its  eight  plants  and
retailing its products  through 52  company-owned  retail sales centers and more
than 300 independent dealers in 24 states.

   For the year ended May 31,  1996,  American  Homestar  reported net income of
$9,756,000  ($0.98 per share) on net sales of $231,232,000.  Unaudited  earnings
for the nine months ended  February 28, 1997 were  $9,713,000  ($0.87 per share)
compared  with  $6,423,000  ($0.67  per  share)  during  the same  period in the
preceding  year.  The March  31,  1997  closing  Nasdaq  bid  price of  American
Homestar's stock was $17.00 per share.

   At March  31,  1997,  Capital  Southwest  and its  subsidiary  owned  500,706
unrestricted  shares  of  American  Homestar  common  stock,  having  a cost  of
$3,405,824 and a market value of $8,512,002  ($17.00 per share),  representing a
fully-diluted equity interest of 4.2%.

                                    5



<PAGE>



PTS Holdings, Inc.                                           $6,800,000

   PTS  Holdings,  Inc.  Anaheim,  California,  through  its  subsidiary,  Power
Paragon,  manufactures  power  systems  which  provide  continuous  high-quality
electric power for military and commercial equipment.  Operating divisions based
in California,  Arizona and Germany produce power  conditioning  systems for the
U.S.  Navy and navies of other  countries,  uninterruptible  power  supplies for
commercial  installations  including computer  facilities,  and power conversion
devices for aerospace, industrial and commercial use.

   For the year ended June 30, 1996,  PTS reported net income of  $6,681,000  on
net sales of $79,950,000. Earnings for the nine months ended March 31, 1997 were
$3,119,000,  compared  with  $4,329,000  during the same period in the preceding
year.

   At March 31, 1997, Capital Southwest's  $2,000,000 investment in the common
stock  of  PTS  Holdings,  Inc.  was  valued  at  $6,800,000  and  represents  a
fully-diluted equity interest of 21.6%.

The Whitmore Manufacturing Company                           $6,000,000

   The  Whitmore  Manufacturing  Company,  with  plants in  Rockwall,  Texas and
Cleveland,  Ohio,  manufactures specialty lubricants for heavy equipment used in
surface  mining and other  industries,  and  produces  transit  coatings for the
automobile industry.  Whitmore's  subsidiary,  Hanson-Loran Company, Inc., Buena
Park, California, produces floor-finishing compounds, supplies and equipment for
supermarkets.

   During  the year  ended  March 31,  1997,  Whitmore  reported  net  income of
$971,000 on net sales of  $17,431,000,  compared  with a net loss of $611,000 on
net sales of  $16,829,000  in the  previous  year.  The  company is owned 80% by
Capital  Southwest and 20% by Capital  Southwest's  subsidiary,  The  RectorSeal
Corporation (described on a previous page).

   At March 31, 1997, the direct  investment in Whitmore by Capital  Southwest
was valued at $6,000,000 and had a cost of $1,600,000.  Our Company's direct and
indirect  equity in  Whitmore's  income  for the year ended  March 31,  1997 was
$971,000.

SDI Holding Corp.                                            $6,000,000

   SDI  Holding  Corp.,  Glasgow,  Delaware,  through its  subsidiary,  Sterling
Diagnostic Imaging, Inc.,  manufactures and markets on a world-wide basis, x-ray
imaging film,  intensifying screens,  cassettes,  film development chemicals and
related  equipment and services.  A subsidiary,  Direct  Radiography  Corp.,  is
developing a system, scheduled for 1998 introduction,  which will capture, store
and transmit conventional x-ray images in a digital format.

     The net assets of the Diagnostic Imaging business were purchased from E. I.
DuPont de Nemours for  approximately  $315 million in March 1996. The operations
acquired  by SDI  recorded  1995  sales of $539  million  and 1996 sales of $500
million.

     At March 31, 1997, Capital Southwest's  $6,000,000 investment in the common
stock of SDI Holding  Corp.  was valued at cost and  represents a  fully-diluted
equity interest of 10.6%.


Rewind Holdings, Inc.                                        $3,000,000

   Rewind  Holdings,   Inc.,  Sugar  Land,   Texas,   through  its  wholly-owned
subsidiary,  Bill Young Productions,  Inc., is the leading producer of radio and
television   commercials  for  the  touring  entertainment  industry  and  is  a
nationally-recognized   producer  of  music   videos,   commercials   and  other
productions.

   In October 1996, Capital Southwest's  subsidiary invested $3,000,000 in a 12%
subordinated note and 8% convertible  preferred stock of Rewind Holdings,  Inc.,
which acquired the outstanding common stock of Bill Young Productions,  Inc. The
operations  acquired by Rewind reported revenues of $6,928,000 during the twelve
months ended September 30, 1996.

   At March  31,  1997,  the  investment  by  Capital  Southwest's  subsidiary
consisting  of  $2,625,000  in a  12%  subordinated  note  and  $375,000  in  8%
convertible  preferred  stock was valued at cost and represents a  fully-diluted
equity interest of 40.7%.

                                       6

<PAGE>


                    Portfolio of Investments - March 31, 1997



<TABLE>

<S>                <C>                          <C>                  <C>                                   <C>           <C>    


                   Company                      Equity (a)           Investment (b)                        Cost          Value (c)
- -----------------------------------------------------------------------------------------------------------------------------------
=ALAMO GROUP INC.                                26.8%       2,660,000 shares common stock (acquired     $ 575,000      $31,654,000
   San Antonio, Texas                                        4-1-73 and 7-18-78)                                                
   Heavy-duty, tractor-mounted mowing and 
   vegetation maintenance equipment for                      Warrant to purchase 62,500 shares of common 
   agricultural and governmental markets.                    stock at $16.00 per share, expiring 2000            -          123,000
                                                             (acquired 11-25-91)                         -----------    -----------
                                                                                                           575,000       31,777,000

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

  ALL COMPONENTS, INC.                           30.0%       14% subordinated debenture, due 1999          
   Addison, Texas                                            (acquired 9-16-94)                             600,000         600,000
   Distribution and production of memory and                 150,000 shares Series A convertible  
   other components to personal computer                     preferred stock acquired 9-16-94)              150,000       1,150,000
   manufacturers, retailers and value-added                  450,000 shares Series B preferred stock        450,000         450,000
   resellers.                                                (acquired 9-16-94)                            --------       ---------
                                                                                                          1,200,000       2,200,000
                                                                                                                       
- -----------------------------------------------------------------------------------------------------------------------------------

=AMERICAN HOMESTAR CORPORATION                   4.2%        ++500,706 shares common stock 
   League City, Texas                                         (acquired 8-31-93, 7-12-94 and 3-28-96)     3,405,824       8,512,002
   Manufacturing, retailing and financing                  
   of manufactured housing sold in 24 states. 
   
- -----------------------------------------------------------------------------------------------------------------------------------

  AMFIBE, INC.                                  40.0%        2,000 shares Class B non-voting                                     
   Martinsville, Virginia                                    stock (acquired 6-15-94)                       200,000       1,600,000
   Nylon monofilament yarns for the textile
   industry.
- -----------------------------------------------------------------------------------------------------------------------------------

  BALCO, INC.                                   86.0%        14% subordinated debentures, payable 1998 
   Wichita, Kansas                                               to 2002 (acquired 8-13-91)                 400,000         400,000
   Specialty architectural products used                     14% subordinated debenture, payable 1998 
   the construction and remodeling of commercial                 to 2002, last maturing $250,000 
   and institutional buildings.                                  convertible into 250,000 shares of                   
                                                                 common stock at $1.00 per share                                   
                                                                 (acquired 6-1-91)                          800,000         800,000
                                                                 110,000 shares common stock and 60,920 
                                                                  shares Class B non-voting stock 
                                                                  (acquired 10-25-83)                       170,920         170,920
                                                                 Warrants to purchase 85,000 shares of 
                                                                 common stock a $2.40 per share, expiring        -               -
                                                                 2001 (acquired 8-13-91)                    -------         -------
                                                                                                          1,370,920       1,370,920

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

=DATA RACE, INC.                                 2.9%        ++176,105 shares common stock                  480,116       2,333,000
   San Antonio, Texas                                        (acquired 10-7-92)          
   Statistical multiplexers, custom                           35,507 shares common stock                     94,698         235,000
   data/fax/voice modems and local and wide                  (acquired 2-3-97)                              -------       --------- 
                                                                                                            574,814       2,568,000
                                                                                                  
    
 
=Publicly-owned company         ++Unrestricted securities as defined in Note (b)


                                       7

<PAGE>


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

  DENNIS TOOL COMPANY                          46.1%      98,687 shares common stock (acquired 3-7-94)  $   330,000    $  2,305,000
   Houston, Texas
   Polycrystalline  diamond  compacts 
   (PDCs) used in oil field drill bits and in
   mining and industrial applications.
- -----------------------------------------------------------------------------------------------------------------------------------

  DYMETROL COMPANY, INC.                       33.8%      15% subordinated notes, payable quarterly
   Hockessin, Delaware                                    1998 to 1999(acquired 5-27-93)                    774,379         774,379
   Nylon strapping for packaging                          19,912 shares common stock, non-voting            199,115         199,115
   applications and copolyester elastomeric               (acquired 5-27-93)                                -------         -------
   tape used in automobiles.                                                                                973,494         973,494

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

=ENCORE WIRE CORPORATION                       14.6%      1,122,000 shares common stock (acquired 7-16-92, 
   McKinney, Texas                                        3-15-94 and 4-28-94)                              4,100,000    16,381,000
   Electrical wire and cable for residential
   and commercial use.

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

=FMC CORPORATION                           less than 1%   ++6,430 shares common stock (acquired 6-6-86)       123,778       393,838
   Chicago, Illinois
   Machinery and chemicals in 
   diversified product areas.

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

=FRONTIER CORPORATION                      less than 1%   ++31,338 shares common stock (acquired 12-20-95)     78,346       560,167
   Rochester, New York
   Diversified telecommunications company.
- -----------------------------------------------------------------------------------------------------------------------------------

  LIL' THINGS, INC.                            7.3%       2,250,000 shares Class A cumulative preferred stock, 
   Arlington, Texas                                        convertible into 2,250,000 shares of common 
   Retail chain of superstores selling                     stock at $1.00 per share (acquired 2-12-93                   
   Products for children from                              and 12-1-93)                                     2,250,000            -
   birth to six years.                                    666,666 shares Class B cumulative preferred                             
                                                           stock, convertible into 746,268 shares of common  
                                                           stock at at $1.34 per share (acquired 9-15-94)   1,000,000            -
                                                          617,410 shares Class C cumulative preferred stock,
                                                           convertible into 617,410 shares of common stock 
                                                           at $1.20 per share (acquired 12-4-95)              740,894            2
                                                          Warrants to purchase 58,842 shares of common 
                                                           stock at $.01 per share, expiring 2000                   -            -
                                                           (acquired 11-6-95)                               
                                                                                                             ---------    ---------
                                                                                                            3,990,894            2
- -----------------------------------------------------------------------------------------------------------------------------------

=MAIL-WELL, INC.                               5.3%       694,063 shares common stock (acquired 2-18-94, 
   Englewood, Colorado                                    12-14-94 and 7-27-95)                             2,889,010    10,966,000
   Customized envelopes and high-impact 
   color printing.
</TABLE>



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

                                       8

<PAGE>



<TABLE>
<S>                <C>                       <C>                    <C>                                   <C>            <C>   


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


=MYLAN LABORATORIES INC.                    less than 1%   ++128,286 shares common stock                 $    400,000  $  1,908,254
   Pittsburgh, Pennsylvania                                (acquired 11-20-91)
   Proprietary and generic pharmaceutical 
   products.
- -----------------------------------------------------------------------------------------------------------------------------------

  PTS HOLDINGS, INC.                          21.6%        200,000 shares Class B non-voting common stock 
   Anaheim, California                                      stock (acquired 11-21-94)                         2,000,000   6,800,000
   Power systems for military and 
   commercial applications.

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

=PALM HARBOR HOMES, INC.                     33.2%        5,027,276 shares common stock (acquired 1-3-85,
   Dallas, Texas                                           3-31-88 and 7-31-95)                              10,931,955  84,458,000
   Integrated manufacturing, retailing,
   financing and insuring of manufactured
   housing sold in 34 states.

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

=PETSMART, INC.                            less than 1%   ++654,220 shares common stock (acquired 6-1-95)     2,878,733  13,084,400
   Phoenix, Arizona
   Retail chain of superstores selling
   pet foods, supplies and services.
- -----------------------------------------------------------------------------------------------------------------------------------

  THE RECTORSEAL CORPORATION                100.0%        27,907 shares common stock (acquired 1-5-73 and
   Houston, Texas                                           3-31-73)                                             52,600  35,000,000
   Chemical specialty products for 
   industrial, construction and
   oil field applications; owns 20%
   of Whitmore Manufacturing.
- -----------------------------------------------------------------------------------------------------------------------------------

  REWIND HOLDINGS, INC.                      40.7%        12% subordinated note, payable 2003                 
   Sugar Land, Texas                                       (acquired 10-21-96)                                2,625,000   2,625,000
   Production of radio and television                     375 shares 8% Series A convertible preferred       
   commercials and music videos.                          stock (acquired 10-21-96)                             375,000     375,000
                                                                                                              ---------   ---------
                                                                                                              3,000,000   3,000,000
- -----------------------------------------------------------------------------------------------------------------------------------

  SDI HOLDING CORP.                          10.6%        60,000 shares common stock (acquired 3-26-96)       6,000,000   6,000,000
   Glasgow, Delaware
   Owns Sterling  Diagnostic  Imaging, 
   a manufacturer of x-ray imaging film
   and direct radiography systems.
   
- -----------------------------------------------------------------------------------------------------------------------------------

  SKYLAWN CORPORATION                       100.0%        1,449,026 shares common stock                       4,510,400  42,000,000
   Hayward, California                                     (acquired 7-16-69)
   Cemeteries, mausoleums and
   mortuaries located in northern
   California.
</TABLE>




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

                                       9


<PAGE>


<TABLE>
<S>                <C>                    <C>                <C>                                    <C>                 <C>   

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

=SPRINT CORPORATION                       less than 1%      ++36,000  shares common stock             
   Westwood, Kansas                                         (acquired 6-20-84)                       $  503,645         $ 1,633,500
   Diversified telecommunications 
   company.


- -----------------------------------------------------------------------------------------------------------------------------------
=TECNOL MEDICAL PRODUCTS, INC.            less than 1%      ++183,764 shares common stock 
   Fort Worth, Texas                                        (acquired 2-7-92 and 5-11-94)             2,396,926           2,894,283
   Disposable  medical products for
   health-care facilities.

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

=TELE-COMMUNICATIONS, INC. - TCI Group    less than 1%      ++180,000 shares Series A common stock           68           2,137,500
   Englewood, Colorado                                      (acquired 6-3-69)                   
   Operation of the nation's largest 
   cable television system.

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

=TELE-COMMUNICATIONS, INC. -              less than 1%      ++67,500 shares Series A common stock             -           1,341,563
 Liberty Media Group                                        (acquired 8-4-95)                             
 Englewood, Colorado
 Production and distribution of cable 
 television programming services.
- -----------------------------------------------------------------------------------------------------------------------------------

  TEXAS PETROCHEMICAL HOLDINGS, INC.           5.4%        30,000 shares common stock                 3,000,000           2,400,000
   Houston, Texas                                           (acquired 6-27-96)                                             
   Butadiene for synthetic  rubber, 
   MTBE for gasoline  octane  
   enhancement and butylenes for
   varied applications.
- -----------------------------------------------------------------------------------------------------------------------------------

  TEXAS SHREDDER, INC.                        45.7%       14% subordinated debentures, payable 
   San Antonio, Texas                                       1997 to 1999 (acquired 3-6-91)            1,012,500           1,012,500
   Design and manufacture of heavy-duty                   3,000 shares Series A preferred stock  
   shredder systems for recycling steel                    (acquired 3-6-91)                            300,000             300,000
   and other materials from junk automobiles.             750 shares Series B preferred stock,
                                                           convertible into 7,500 shares of common 
                                                           stock at $10.00 per share (acquired 3-6-91)   75,000           1,500,000
                                                                                                      ---------           ---------
                                                                                                      1,387,500           2,812,500
- -----------------------------------------------------------------------------------------------------------------------------------

=TRITON ENERGY CORPORATION              less than 1%      ++6,022 shares common stock                    144,167            233,353
   Dallas, Texas                                          (acquired 12-15-86)
   Oil and gas exploration and 
   development.
- -----------------------------------------------------------------------------------------------------------------------------------

  VARIX CORPORATION                          100.0%       12% promissory notes due 1997 
   Richardson, Texas                                       (acquired 12-5-86, 3-21-88 and 1-31-90)       566,486            325,000
   Formerly developed software for                        1,514,566 shares preferred stock, 
   computer-aided design of                                 convertible into 3 shares of common stock 
   electronic circuits.                                     at $171,667 per share (acquired 6-1-84 and   
                                                            3-21-88)                                     515,000                  -
                                                          37 shares common stock (acquired 6-2-86,
                                                             3-21-88 and 1-31-90)                        100,000                  -
                                                                                                       ---------         ----------

                                                                                                       1,181,486            325,000
</TABLE>



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

  
                                     10

<PAGE>

<TABLE>
<S>                <C>                      <C>           <C>                                        <C>                <C>    


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

 WESTMARC COMMUNICATIONS, INC.                 -         21 shares 12% Series C preferred stock   
  Denver, Colorado                                         (acquired 1-3-90)                          $    -            $   508,000
  Cable television systems and microwave
  relay systems.
 


  THE WHITMORE MANUFACTURING COMPANY          80.0%      80 shares common stock (acquired 8-31-79)     1,600,000          6,000,000
   Rockwall, Texas
   Specialized  mining and industrial 
   lubricants;  automotive transit coatings;
   floor-finishing compounds and equipment.


  MISCELLANEOUS                                 -        Cherokee Communications, Inc. - Escrowed             
                                                         funds                                                 -            639,000
                                              98.8%      Humac Company - 1,041,000 shares common stock                             
                                                         (acquired 1-31-75 and 12-31-75)                       -            164,000
                                          less than 1%   =360degree Communications Company - 
                                                         ++12,000 shares common stock (acquired 3-7-96)  108,355            207,000
                                          less than 1%   =TCI Satellite Entertainment, Inc. -  
                                                         ++18,000 Series A common stock                                    
                                                         (acquired 12-4-96)                                    -            137,250
- -----------------------------------------------------------------------------------------------------------------------------------

  TOTAL INVESTMENTS                                                                                   $59,907,915      $293,291,026
                                                                                                      ===========    ==============
</TABLE>


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



                        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 outstanding warrants, convertible securities and employee stock options.
The symbol "less than 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,  1997,  restricted  securities  represented
approximately 88% 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 closing bid
price  for  over-the-counter   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

  
                                     11

<PAGE>





                  Notes to Portfolio of Investments (continued)


<PAGE>


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,
which cover common stocks owned at March 31, 1997 and common stocks which may be
acquired thereafter through exercise of warrants and conversion of debentures
and preferred stocks, 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, 
Skylawn Corporation and The Whitmore Manufacturing Company.

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


<PAGE>

                        Portfolio Changes During the Year



New Investments and Additions to Previous Investments


                                                               Amount
                                                               ------
Data Race, Inc............................................$     23,684
Rewind Holdings, Inc. ....................................   3,000,000
Texas Petrochemical Holdings, Inc.........................   3,000,000
                                                           -----------


                                                           $ 6,023,684
                                                           =========== 

Dispositions

                                                            Amount
                                               Cost         Received
                                               ----         --------
Cherokee Communications, Inc............  $ 2,400,000    $ 10,113,939
Columbia Scientific Industries Corporation          0          23,551
Data Race, Inc..........................    1,219,369       4,040,090
                                         ------------  --------------
                                          $ 3,619,369    $ 14,177,580
                                          ===========    ============

Repayments Received.....................                $   1,040,500
                                                        =============

                                       12


<PAGE>

                  Capital Southwest Corporation and Subsidiary
                 Consolidated Statements of Financial Condition


<TABLE>
<S>                                        <C>    
                                                      March 31
                                                      --------
Assets                                           1997         1996
                                           -------------   -------

Investments at market or fair value (Notes 1
   and 2)
   Companies more than 25% owned
     (Cost: 1997 - $20,552,361,
     1996 - $21,480,361)..................  $203,399,920   $191,043,920
   Companies 5% to 25% owned
     (Cost: 1997 - $19,979,904,
     1996 - $18,750,404)..................    35,747,002     19,633,672
   Companies less than 5% owned
     (Cost: 1997 - $19,375,650,
     1996 - $18,313,335)..................    54,144,104     46,252,869
                                          -------------- --------------

Total investments
     (Cost: 1997 - $59,907,915,
     1996 - $58,544,100)..................   293,291,026    256,930,461
Cash and cash equivalents.................    14,009,481     67,045,185
Receivables...............................       279,815        285,002
Other assets (Note 8).....................     3,180,171      2,711,802
                                       ------------------------------

                     Totals...............  $310,760,493   $326,972,450
                                            ============   ============


                                                        March 31
                                                        --------
Liabilities and Shareholders' Equity               1997          1996
                                               -----------   -----------

Note payable to bank (Note 4) ............ $             -  $ 50,000,000
Accrued interest and other liabilities (Note 8)  1,735,372     1,669,839
Income taxes payable......................       3,184,373     6,050,730
Deferred income taxes (Note 3)............      81,868,628    69,204,128
Subordinated debentures (Note 5)..........       5,000,000    11,000,000
                                           -----------------------------
                    Total liabilities ....      91,788,373   137,924,697
                                           --------------  -------------

Shareholders' equity (Notes 3 and 6)
   Common stock, $1 par value: authorized,
     5,000,000 shares; issued, 4,204,416
     shares at March 31, 1997, and
     March 31, 1996.......................      4,204,416      4,204,416
   Additional capital.....................      4,813,121      4,813,121
   Undistributed net investment
     income...............................      4,804,205      4,490,374
   Undistributed net realized gain on
     investments..........................     60,113,568     53,307,782
   Unrealized appreciation of investments -
     net of deferred income taxes.........    152,070,112    129,265,362
   Treasury stock - at cost
     (437,365 shares).....................     (7,033,302)    (7,033,302)
                                           ---------------- -------------
   Net assets at market or fair value,
     equivalent to $58.13 per share at
     March 31, 1997, and $50.18 per share
     at March 31, 1996, on the 3,767,051
     shares outstanding...................    218,972,120    189,047,753
                                            -------------  -------------

                       Totals.............   $310,760,493   $326,972,450
                                             ============   ============

</TABLE>


                 See Notes to Consolidated Financial Statements

  
                                     13

<PAGE>
                  Capital Southwest Corporation and Subsidiary

                      Consolidated Statements of Operations


<TABLE>
<S>                                                                                   <C>    
                                                                                                                 
                                                                                                         Years Ended March 31
                                                                                      ---------------------------------------------
                                                                                             1997            1996           1995
                                                                                           ----------    ------------   ----------
Investment income (Note 9):
   Interest........................................................................... $  1,371,802    $  2,018,308    $  1,952,557
   Dividends..........................................................................    2,774,321       3,597,004       2,629,384
   Management and directors' fees.....................................................      586,900         561,950         523,750
                                                                                      -------------- --------------  --------------
                                                                                          4,733,023       6,177,262       5,105,691
                                                                                      -------------- --------------  --------------

Operating expenses:
   Interest...........................................................................      634,667       1,700,003       1,394,266
   Salaries...........................................................................    1,147,294       1,112,640         913,555
   Net pension expense (benefit) (Note 8).............................................     (349,903)       (208,701)       (241,430)
   Other operating expenses...........................................................      599,578         642,955         541,243
                                                                                       -------------   -------------   ------------
                                                                                          2,031,636       3,246,897       2,607,634
                                                                                        ------------   -------------   ------------
Income before income taxes............................................................    2,701,387       2,930,365       2,498,057
Income tax expense (Note 3)...........................................................      127,325          75,448          51,404
                                                                                       --------------  ------------    ------------
Net investment income ................................................................ $  2,574,062    $  2,854,917    $  2,446,653
                                                                                       ============    ============    ============

Proceeds from disposition of investments..............................................  $14,177,580     $21,470,173    $  1,702,276
Cost of investments sold (Note 1).....................................................    3,619,369       4,938,933       1,483,194
                                                                                      -------------   -------------   -------------
Realized gain on investments before income taxes (Note 9).............................   10,558,211      16,531,240         219,082
Income tax expense ...................................................................    3,752,425       5,357,215          76,679
                                                                                      -------------   ------------- ---------------
Net realized gain on investments......................................................    6,805,786      11,174,025         142,403
                                                                                                       -------------    -----------
Increase in unrealized appreciation of investments before income taxes and distributions.34,996,750      54,619,668      20,898,731
Increase in deferred income taxes on appreciation of investments (Note 3).............   12,192,000      15,874,000       7,315,000
                                                                                       ------------    ------------   -------------
Net increase in unrealized appreciation of investments before distributions.........     22,804,750      38,745,668      13,583,731
                                                                                       -------------   ------------    ------------

Net realized and unrealized gain on investments before distributions..................  $29,610,536     $49,919,693     $13,726,134
                                                                                       ===========     ===========     ===========

Increase in net assets from operations before distributions...........................  $32,184,598     $52,774,610     $16,172,787
                                                                                        ===========     ===========     ===========
</TABLE>


                 See Notes to Consolidated Financial Statements

                                       14


<PAGE>

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


<TABLE>
                                                                           
                                                                                                    
                                                                                                                                  
                                                                                               Years Ended March 31
                                                                                        ----------------------------------
<S>                                                                                  <C>              <C>             <C>           

                                                                                           1997             1996            1995
                                                                                         -------------   -------------  -----------
Operations
   Net investment income...........................................................  $    2,574,062   $   2,854,917   $   2,446,653
   Net realized gain on investments.................................................      6,805,786      11,174,025         142,403
   Net increase in unrealized appreciation of investments before distributions......     22,804,750      38,745,668      13,583,731
                                                                                     --------------  --------------  --------------
   Increase in net assets from operations before distributions......................     32,184,598      52,774,610      16,172,787

Distributions from:
   Undistributed net investment income.............................................      (2,260,231)     (2,253,831)     (2,241,031)
   Undistributed net realized gain on investments..................................               -        (153,376)              -
   Unrealized appreciation of investments..........................................               -      (9,264,304)              -

Capital share transactions
   Exercise of employee stock options..............................................               -         574,750         384,750
                                                                                     ----------------------------------------------

   Increase in net assets.........................................................      29,924,367       41,677,849      14,316,506
Net assets, beginning of year.....................................................     189,047,753      147,369,904     133,053,398
                                                                                      -------------   -------------   -------------
Net assets, end of year ..........................................................   $ 218,972,120    $189,047,753    $147,369,904
                                                                                       ============    ============    ============
</TABLE>


                 See Notes to Consolidated Financial Statements

                                       15

<PAGE>

                  Capital Southwest Corporation and Subsidiary
                      Consolidated Statements of Cash Flows


<TABLE>
                                                                                                   Years Ended March 31
<S>                                                                                    <C>             <C>            <C>    
                                                                                           1997              1996            1995
                                                                                        ------------     ------------      -------
    Cash flows from operating activities
    Increase in net assets from operations before distributions....................   $ 32,184,598     $ 52,774,610   $ 16,172,787
    Adjustments to reconcile increase in net assets from operations before 
    distributions to net cash provided by operating activities:
     Depreciation and amortization.................................................         31,240           33,439         42,623
     Net pension benefit...........................................................       (349,903)        (208,701)      (241,430)
     Net realized and unrealized gain on investments...............................    (29,610,536)     (49,919,693)   (13,793,624)
     (Increase) decrease in receivables............................................          5,187          (41,369)        63,301
     (Increase) decrease in other assets...........................................        (17,812)          28,950        (18,354)
     Increase (decrease) in accrued interest and other liabilities.................        (66,361)          48,075          7,092
     Deferred income taxes.........................................................        122,500           72,640         84,500
                                                                                     --------------   ----------------  -----------
    Net cash provided by operating activities......................................      2,298,913        2,787,951       2,316,895
                                                                                    ---------------     ------------   ------------
    Cash flows from investing activities
    Proceeds from disposition of investments......................................      14,177,580       21,470,173       1,611,976
    Purchases of securities.......................................................      (6,023,684)     (19,406,816)     (9,556,876)
    Maturities of securities......................................................       1,040,500        5,515,824         574,625
    Income taxes paid on realized gain on investments.............................      (6,268,782                -               -
                                                                                       -------------      ----------    -----------
                       
    Net cash provided (used) by investing activities..............................       2,925,614        7,579,181      (7,370,275)
                                                                                     -------------    ------------      ------------
    Cash flows from financing activities
    Increase (decrease) in note payable to bank....................................    (50,000,000)      50,000,000     (75,000,000)
    Repayment of subordinated debentures...........................................     (6,000,000)               -      (4,000,000)
    Distributions from undistributed net investment income.........................     (2,260,231)      (2,253,831)     (2,241,031)
    Distributions from undistributed net realized gain on investments..............             -           (15,842)              -
    Proceeds from exercise of employee stock options...............................             -           574,750         384,750
                                                                                   ---------------    -------------     -----------

    Net cash provided (used) by financing activities...............................   (58,260,231)      48,305,077      (80,856,281)
                                                                                   ---------------    -------------     ------------
                                                                                                 
    Net increase (decrease) in cash and cash equivalents...........................   (53,035,704)      58,672,209      (85,909,661)
    Cash and cash equivalents at beginning of year.................................    67,045,185        8,372,976       94,282,637
                                                                                   ---------------    --------------    ------------
    Cash and cash equivalents at end of year....................................... $  14,009,481     $ 67,045,185     $  8,372,976
                                                                                     ============     ============      ============
    Supplemental disclosure of cash flow information:
    Cash paid during the year for:  Interest.......................................  $    691,397     $  1,653,277     $  1,419,883
                                    Income taxes...................................  $  6,270,291     $        483     $     15,049
</TABLE>



    Supplemental disclosure of financing activities:
    On  July  31,  1995,  Capital  Southwest  Corporation   distributed  to  its
    shareholders  940,184  shares of common  stock of Palm Harbor  Homes,  Inc.,
    which had a cost of $137,534 and a fair market value of $10.00 per share, or
    $9,401,838, as adjusted for a 5-for-4 stock split on August 2, 1996.

                 See Notes to Consolidated Financial Statements

                                       16


<PAGE>


                   Notes to Consolidated Financial Statements


1.   Summary of Significant Accounting Policies

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

     Principles of  Consolidation.  The consolidated  financial  statements have
been prepared on the value method of accounting  in  accordance  with  generally
accepted  accounting  principles  for  investment  companies.   All  significant
intercompany accounts and transactions have been eliminated in consolidation.

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

     Portfolio  Security  Valuations.  Investments  are stated at market or fair
value  determined  by the  Board  of  Directors  as  described  in the  Notes to
Portfolio of  Investments  and Note 2 below.  The average cost method is used in
determining cost of investments sold.

2.   Valuation of Investments

     The consolidated financial statements as of March 31, 1997 and 1996 include
securities  valued  at  $257,914,916  (88%  of the  value  of  the  consolidated
investment  portfolio) and  $223,234,086  (87% of the value of the  consolidated
investment  portfolio),  respectively,  whose values have been determined by the
Board of  Directors  in the  absence of  readily  ascertainable  market  values.
Because  of the  inherent  uncertainty  of  valuation,  these  values may differ
significantly  from the values that would have been used had a ready  market for
the securities existed, and the differences could be material.

3.   Income taxes

     For the tax years ended  December  31,  1996,  1995 and 1994,  CSC and CSVC
qualified  to  be  taxed  as  regulated   investment  companies  ("RICs")  under
applicable  provisions of the Internal  Revenue Code. As RICs, CSC and CSVC must
distribute  at least 90% of their  taxable  net  investment  income  (investment
company  taxable  income) and may either  distribute or retain their taxable net
realized gain on investments  (capital gains).  Both CSC and CSVC intend to meet
the  applicable  qualifications  to be taxed as RICs in future  years;  however,
either company's ability to meet certain portfolio diversification  requirements
of RICs in future years may not be controllable by such company.

     No provision was made for Federal  income taxes on the  investment  company
taxable  income of CSC and CSVC for the 1997,  1996 and 1995 fiscal years.  Such
income was  distributed to  shareholders in the form of cash dividends for which
CSC and CSVC receive a tax deduction. With respect to net investment income, the
income tax expense  for each of the three years ended March 31, 1997  includes a
deferred tax provision related to the net pension benefit.

     With respect to the net increase in unrealized  appreciation of investments
before  distributions  during fiscal 1996, the increase in deferred income taxes
on appreciation of investments at the Federal statutory rate of 35% differs from
the amounts  reported in the financial  statements  due to the  distribution  of
appreciated securities with no associated tax liability.

     CSC and CSVC may not qualify or elect to be taxed as RICs in future  years.
Therefore,  consolidated  deferred  Federal  income  taxes  of  $81,313,000  and
$69,121,000 have been provided on net unrealized  appreciation of investments of
$233,383,111  and  $198,386,361 at March 31, 1997 and 1996,  respectively.  Such
appreciation is not included in taxable income until  realized.  Deferred income
taxes on net unrealized  appreciation  of investments  have been provided at the
then currently  effective maximum Federal corporate tax rate on capital gains of
35% at March 31, 1997 and 1996.

                                       17


<PAGE>


4.   Notes Payable to Bank

     The Company has an unsecured  $15,000,000  revolving line of credit, all of
which was  available  at March 31,  1997.  The  revolving  line of credit  bears
interest at the bank's base rate less .50%,  and matures on July 31,  1997.  The
note  payable  to bank at March 31,  1996 was an  unsecured  note with  interest
payable at 6.24%. The note was paid in full on April 1, 1996.

5.   Subordinated Debentures

     The subordinated debentures,  payable to others and guaranteed by the Small
Business Administration ("SBA"), are as follows:
                                             

                                                       March 31
                                                       --------
                                                    1997            1996
                                                    ----            ----
8.75%, due in 1996........................... $           -    $  6,000,000
8.00%, due in 2002...........................     5,000,000       5,000,000
                                                -----------     ------------   
Total                                         $   5,000,000    $ 11,000,000
                                              =============    =============


6.   Employee Stock Option Plan

     Under the 1984  Incentive  Stock  Option Plan,  options to purchase  90,000
shares at prices ranging from $23.25 to $39.1875 per share (the adjusted  market
prices at the time of grant)  were  outstanding  at March 31,  1997.  Options on
53,825 shares were  exercisable  at March 31, 1997.  During the year ended March
31, 1997, no options were  exercised.  Outstanding  options  expire 2000 through
2003. The 1984  Incentive  Stock Option Plan expired in 1994 and no options have
been  authorized  or granted  since that date.  At March 31, 1997 and 1996,  the
dilution  of net assets  per share  arising  from  options  outstanding  was not
material.

7.   Employee Stock Ownership Plan

     The Company and one of its  wholly-owned  subsidiaries  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  Company's  Board of  Directors.  Aparticipant's 
interest in contributions to the ESOP fully vests after five years of active 
service. During the three years ended March 31, the Company made contributions
to the ESOP, which were charged against net investment income, of $54,104 in 
1997, $76,341 in 1996 and $19,338 in 1995.

8.   Retirement Plan

     The  Company  sponsors a defined  benefit  pension  plan  which  covers its
employees  and  employees  of  certain  of its  wholly-owned  subsidiaries.  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, 1997.

     Components of net pension benefit related to the qualified plan include the
following:
                                            Years Ended March 31
                                            --------------------
                                      1997         1996        1995
                                      ----         ----        ----
Service cost - benefits earned during
     the year....................  $  47,662    $   42,184   $   36,661
Interest cost on projected benefit
     obligation..................    174,792       165,906      148,318
Actual return on assets..........   (961,831)   (1,421,745)     (94,881)
Net amortization and deferral....    257,580       873,696     (469,483)
                                   ---------    ------------ ----------
Net pension expense (benefit) from
     qualified plan..............  $(481,797)   $ (339,959)  $ (379,385)
                                   =========    ==========   ==========

                                       18


<PAGE>


The following  table sets forth the plan's funded status and amounts  recognized
in the Company's consolidated statements of financial condition:

                                                       March 31
                                                       --------
                                                  1997         1996
                                                  ----         ----
Actuarial present value of benefit
     obligations: Accumulated benefit obligation,
     including vested benefits of $2,017,257 in
     1997 and $2,002,992 in 1996............ $(2,082,399) $ (2,056,275)
                                             ============ =============
Projected benefit obligation for service rendered to
     date................................... $(2,376,257) $ (2,289,114)
Plan assets at fair value*..................   7,820,401     6,927,656
                                             ------------ -------------
Excess of plan assets over the projected benefit
     obligation.............................   5,444,144     4,638,542
Unrecognized net gain from past experience
     different from that assumed and effects of
     changes in assumptions.................  (1,819,422)   (1,418,507)
Prior service costs not yet recognized......     (39,719)      (42,998)
Unrecognized net assets being amortized over
     19 years...............................    (590,632)     (664,463)
                                            ------------  ------------
Prepaid pension cost included in other asset $ 2,994,371  $ (2,512,574)
                                             ============ =============
- --------------
*Primarily  equities and bonds including  approximately  29,200 shares of common
stock of the Company.

     The  weighted-average   discount  rate  and  rate  of  increase  in  future
compensation  levels used in  determining  the  actuarial  present  value of the
projected benefit obligation were 8.0% and 5.0%, respectively, at March 31,
1997, 7.75% and 5.25%, respectively, at March 31, 1996 and 8.0% and 5.5%,
respectively, at March 31, 1995. The expected long-term rate of return used to  
project estimated earnings on plan assets was 8.5% for the years ended March 31,
1997, 1996 and 1995. The calculations also assume retirement at age 65, the
normal retirement age.

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

     The  following  table sets forth the status of the  Retirement  Restoration
Plan and the amounts  recognized  in the  consolidated  statements  of financial
condition:
                                                         March 31
                                                         --------
                                                     1997         1996
                                                     ----         ----
Projected benefit obligation.....................  $(1,474,701)  $(1,465,570)
Unrecognized net (gain) loss from past experience
     different from that assumed and effects of
     changes in assumptions.................           (11,453)       91,477
Unrecognized net obligation.................            79,322        99,155
                                                   ------------  -------------
Accrued pension cost included in other liabilities $(1,406,832)  $(1,274,938)
                                                   ============  =============
The expenses recognized during the years ended March 31, 1997, 1996 and 1995 of
$131,894, $131,258 and $137,955, respectively, are offset against the net
pension benefit from the qualified plan.

                                       19

<PAGE>


 9.  Sources of Income

     Income was derived from the following sources:

                               Investment  Income         Realized Gain
                                                            (Loss) on
Years Ended                                                Investments
March 31                                           Other  Before Income
1997                   Interest     Dividends    Income       Taxes
- -------------------------------------------------------------------------------

Companies more than
   25% owned........ $   237,600   $2,454,895   $531,400   $         -
Companies 5% to 25%
   owned............           -            -     55,500     2,844,272
Companies less than
   5% owned.........     496,847      319,426          -     7,713,939
Other sources,
   including temporary
   investments......     637,355           -           -             -
                    --------------------------------------------------
                      $1,371,802   $2,774,321   $586,900   $10,558,211
                      ================================================

1996
- ----

Companies more than
   25% owned........  $  755,146   $3,101,219   $545,200   $         -
Companies 5% to 25%
   owned............       2,730            -     16,750    17,954,600
Companies less than
   5% owned.........     568,915      495,785          -    (1,423,360)
Other sources,
   including temporary
   investments......     691,517            -          -             -
                    --------------------------------------------------
                      $2,018,308   $3,597,004   $561,950   $16,531,240
                      ================================================

1995
- ----

Companies more than
    25% owned....... $   661,252   $2,269,312   $501,500   $         -
Companies 5% to 25%
   owned............       2,083            -     22,250       774,943
Companies less than
   5% owned.........     618,073      360,072          -      (408,506)
Other sources,
   including temporary
   investments......     671,149            -          -      (147,355)
                     --------------------------------------------------
                      $1,952,557   $2,629,384   $523,750   $   219,082
                      ================================================

<PAGE>


10.  Summarized Financial Information of Unconsolidated
     Subsidiaries

     The  Company  has  three  significant   wholly-owned   subsidiaries  -  The
RectorSeal   Corporation,   The  Whitmore   Manufacturing  Company  and  Skylawn
Corporation  which are neither  investment  companies  nor business  development
companies.  Accordingly, the accounts of such subsidiaries are not included with
those of the Company.  Summarized  combined  financial  information of the three
subsidiaries is as follows:

(all figures in thousands)                          March 31
                                         ---------------------------
                                           1997                 1996
                                         --------              -----
Condensed Balance Sheet Data
   Assets
   Cash and temporary
     investments........................  $11,240               $11,444
   Receivables..........................   22,762                20,517
   Inventories..........................   32,825                31,209
   Property, plant and equipment........   19,252                15,910
   Other assets.........................   11,553                12,238
                                         --------              --------
     Totals.............................  $97,632               $91,318
                                          =======               =======


   Liabilities and Shareholder's Equity
   Long-term debt.......................$     681              $  2,092
   Other liabilities....................   11,486                10,533
   Shareholder's equity.................   85,465                78,693
                                        --------               --------
     Totals.............................  $97,632               $91,318
                                          =======               =======

Condensed Statements of Income             1997       1996       1995
                                         --------    -------    ------
   Revenues.............................  $76,021    $69,058    $63,987
   Costs and operating expenses.........  $67,088    $60,050    $56,373
   Net income........................... $  7,909   $  6,865   $  6,186

11.  Commitments and Contingencies

     The Company  leases  office space under an operating  lease which  requires
base annual rentals of $44,285 through  February 1998 and provides one five-year
renewal option subject to certain rental escalations.  For the three years ended
March 31, total rental expense charged to investment income was $43,844 in 1997,
$43,449 in 1996 and $42,754 in 1995.

                                       20

<PAGE>

                       Selected Per Share Data and Ratios


<TABLE>
<S>                                                                                 <C>    

                                                                                                     Years Ended March
                                                                                           ------------------------------
                                                                                       1997      1996      1995     1994     1993
                                                                                     ---------------------------------------------
   Investment income.............................................................    $ 1.26     $ 1.64    $ 1.37   $ 1.48   $ 1.34
   Operating expenses............................................................      (.37)      (.41)     (.32)    (.30)    (.37)
   Interest expense..............................................................      (.17)      (.45)     (.37)    (.39)    (.37)
   Income taxes..................................................................      (.03)      (.02)     (.01)    (.02)    (.01)
                                                                                     ----------------------------------------------
   
   Net investment income.........................................................       .69        .76       .67      .77      .59
   Distributions from undistributed net investment income........................      (.60)      (.60)     (.60)    (.60)    (.60)
   Net realized gain (loss) on investments.......................................      1.81       2.97       .04     (.13)    1.39
   Distributions from undistributed net realized gain on investments.............         -       (.04)        -        -        -
   Net increase in unrealized appreciation of investments before distributions...      6.05      10.28      3.64     3.00     2.32
   Distributions from unrealized appreciation of investments.....................         -      (2.46)        -         -       -
   Exercise of employee stock options*...........................................         -       (.19)     (.10)    (.22)    (.22)
                                                                                     -----------------------------------------------

   Increase in net asset value...................................................      7.95      10.72      3.65     2.82     3.48
   Net asset value:
     Beginning of year...........................................................     50.18      39.46     35.81    32.99    29.51
                                                                                     ----------------------------------------------
     End of year.................................................................    $58.13     $50.18    $39.46   $35.81   $32.99
                                                                                     ==============================================

   Ratio of operating expenses to average net assets.............................       .7%        .9%       .9%      .9%     1.2%
   Ratio of net investment income to average net assets..........................      1.2%       1.7%      1.8%     2.3%     1.9%
   Portfolio turnover rate.......................................................      1.6%       4.5%      1.3%     1.3%     5.2%
   Shares outstanding at end of period (000s omitted)............................     3,767      3,767     3,735     3,715    3,681
</TABLE>


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

                                       21

<PAGE>



Independent Auditors' Report


The Board of Directors and Shareholders of
   Capital Southwest Corporation:


We have audited the accompanying consolidated statements of financial condition
of Capital Southwest Corporation and subsidiary as of March 31, 1997 and 1996, 
the portfolio of investments as of March 31, 1997, the related consolidated 
statements of operations, changes in net assets and cash flows for each of
the years in the  three-year  period ended March 31, 1997 and the selected per 
share data and ratios for each of the years in the  five-year  period ended
March 31,  1997.  These  financial  statements  and per share  data and ratios
are the responsibility of the Company's management.  Our responsibility is to 
express an opinion on these financial statements and per share data and ratios
based on our audits.

   We  conducted  our audits in  accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable  assurance about whether the financial  statements and per share data
and ratios 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 of securities owned as of March
31, 1997 and 1996, by examination of such securities  held by the custodian.  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 selected per share
data and ratios referred to above present fairly, in all material respects,  the
financial  position of Capital Southwest  Corporation and subsidiary as of March
31, 1997 and 1996, and the results of their operations, the changes in their net
assets and their cash flows for each of the years in the three-year period ended
March 31, 1997 and the  selected per share data and ratios for each of the years
in the  five-year  period ended March 31, 1997,  in  conformity  with  generally
accepted accounting principles.



                                                           KPMG PEAT MARWICK LLP
Dallas, Texas
April 25, 1997


                                       22


<PAGE>

 
                    Management's Discussion and Analysis
                  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 before  distributions"  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 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.  The third  element  is the "Net  increase  in  unrealized
appreciation of investments  before  distributions",  which is the net change in
the market or fair value of the Company's  investment  portfolio,  compared with
stated cost, net of an increase or decrease in deferred income taxes which would
become payable if the unrealized  appreciation  was realized through the sale or
other disposition of the investment portfolio.  It should be noted that the "Net
realized gain on  investments"  and "Net increase in unrealized  appreciation of
investments  before   distributions"  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 $637,000 in 1997,  $687,000  in 1996 and  $667,000 in 1995.  The
Company also receives  management fees from its wholly-owned  subsidiaries which
aggregated $506,400 in the year ended March 31, 1997, $523,200 in the year ended
March 31, 1996 and $480,000 in the year ended March 31,  1995.  During the three
years  ended  March 31,  1997,  the Company  recorded  dividend  income from the
following sources:

                                           Years Ended March 31
                                           --------------------
                                      1997         1996        1995
                                      ----         ----        ----
Alamo Group Inc. ................ $1,064,000    $1,064,000 $   984,200
Cherokee Communications, Inc. ...    108,789       144,000     180,000
Humac Company....................          -       208,200           -
The RectorSeal Corporation.......    940,895     1,529,019   1,285,112
Skylawn Corporation..............    450,000       300,000           -
Texas Shredder, Inc. ............     37,500       178,125           -
Other............................    173,137       173,660     180,072
                                 -----------  ------------------------
                                  $2,774,321    $3,597,004  $2,629,384
                                  ==========    ==========  ==========

   Total operating expenses,  excluding interest expense,  decreased by $149,925
or 9.7% and increased by $333,526 or 27.5% during the years ended March 31, 1997
and 1996,  respectively.  Due to the nature of its business, the majority of the
Company's operating expenses are related to employee and director  compensation,
office expenses, legal and accounting fees and the net pension benefit. Interest
expense,  the  majority of which is related to the  SBA-guaranteed  subordinated
debentures,  decreased by $1,065,336 and increased by $305,737  during the years
ended March 31, 1997 and 1996, respectively.

                                       23

<PAGE>


Net Realized Gain on Investments

   Net realized gain on investments was $6,805,786  (after income tax expense of
$3,752,425)  during  the year  ended  March 31,  1997,  compared  with a gain of
$11,174,025  (after income tax expense of $5,357,215)  during 1996 and a gain of
$142,403 (after income tax expense of $76,679) during 1995.  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  through the  disposition  of certain  portfolio
investments.


Net Increase in Unrealized Appreciation of Investments


   For the three  years  ended  March 31, the  Company  recorded  an increase in
unrealized  appreciation of investments before income taxes and distributions of
$34,996,750,  $54,619,668 and $20,898,731 in 1997, 1996 and 1995,  respectively.
As  explained  in the first  paragraph  of this  discussion  and  analysis,  the
realization of gains or losses results in a  corresponding  decrease or increase
in unrealized appreciation of investments.  Set forth in the following table are
the significant  increases and decreases in unrealized  appreciation (before the
related  change in deferred  income taxes and  distributions  and  excluding the
effect of gains or losses  realized  during the year) by  portfolio  company for
securities held at the end of each year.

                                           Years Ended March 31
                                           --------------------
                                      1997         1996         1997
                                      ----         ----         ----
Alamo Group Inc................  $(6,432,000  $  3,652,000  $   103,000
All Components, Inc............   1,000,000              -            -
American Homestar Corporation..     550,792      3,834,276      921,434
Amfibe, Inc....................   1,400,000              -            -
Data Race, Inc.................   2,118,317     (1,905,300)     920,600
Dennis Tool Company............   1,105,000       (500,000)           -
Encore Wire Corporation.......    9,782,000     (5,812,000)     358,250
LiL' Things, Inc...............  (1,835,670)    (2,155,222)           -
Mail-Well, Inc. ...............   6,830,000      1,246,990            -
Mylan Laboratories, Inc........    (785,752)       (21,381)   1,218,717
PTS Holdings, Inc..............   4,800,000              -            -
Palm Harbor Homes, Inc.........  13,372,000     39,931,777   14,096,600
PETsMART, Inc. ................   1,226,663      7,059,004    1,639,320
The RectorSeal Corporation.....   7,000,000      3,000,000    5,300,000
Skylawn Corporation............  (3,000,000)     5,000,000   (7,000,000)
Tecnol Medical Products, Inc. .    (321,587)      (275,646)   1,017,758
Tele-Communications, Inc.......  (1,192,500)      (450,000)      45,000
Texas Shredder, Inc............     250,000      1,175,000      749,998
The Whitmore Manufacturing
     Company...................   1,200,000     (1,200,000)    (400,000)

     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, 1997."


Deferred Taxes on Unrealized Appreciation of Investments


     The Company  provides for deferred  Federal  income taxes on net unrealized
appreciation  of  investments.  Such taxes would become  payable at such time as
unrealized  appreciation  is realized  through the sale or other  disposition of
those  components  of the  investment  portfolio  which would  result in taxable
transactions.  At March 31, 1997,  consolidated deferred Federal income taxes of
$81,313,000  were provided on net  unrealized  appreciation  of  investments  of
$233,383,111  compared  with deferred  taxes of  $69,121,000  on net  unrealized
appreciation of  $198,386,361 at March 31, 1996.  Deferred income taxes at March
31, 1997 and 1996 were provided at the then currently  effective maximum Federal
corporate tax rate on capital gains of 35%.

<PAGE>


Portfolio Investments


     During the year ended March 31, 1997,  the Company  invested  $6,023,684 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 1996 and 1995 fiscal years, the Company invested a total
of $19,406,816 and $9,556,876, respectively.

Financial Liquidity and Capital Resources


     At March 31,  1997,  the  Company  had cash and cash  equivalents  of $14.0
million. Pursuant to Small Business Administration ("SBA") regulations, cash and
cash  equivalents  of  $11.5  million  held by CSVC  may not be  transferred  or
advanced  to CSC  without  the  consent  of the  SBA.  The  Company  also has an
unsecured  $15,000,000  revolving line of credit,  all of which was available at
March 31, 1997.  Under current SBA  regulations and subject to SBA's approval of
its credit application,  CSVC would be entitled to borrow up to $43.2 million in
addition to the $5 million presently outstanding. Approximately $35.4 million of
the   Company's    investment   portfolio   is   represented   by   unrestricted
publicly-traded  securities,  which  have  an  ascertainable  market  value  and
represent a primary source of liquidity.

                                       24

<PAGE>



     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  Skylawn
Corporation,  The RectorSeal Corporation and The Whitmore Manufacturing Company,
wholly-owned  subsidiaries of the Company, to the extent of their available cash
reserves and borrowing capacities.


   Management believes that the Company's cash and cash equivalents 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.

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.

                                       25


<PAGE>





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

<TABLE>
<S>                        <C>        <C>      <C>     <C>      <C>      <C>       <C>       <C>       <C>      <C>       <C>


                                1987     1988     1989     1990     1991     1992      1993       1994     1995      1996      1997
- -----------------------------------------------------------------------------------------------------------------------------------
Financial Position 
 (as of March 31)
Investments at cost........$  21,241 $ 28,478 $ 29,665 $ 32,212 $ 31,593 $ 34,929  $ 33,953  $ 41,993  $ 49,730  $ 58,544  $ 59,908
Unrealized appreciation....   65,290   89,512   97,134   99,903  107,120  100,277   113,153   132,212   153,031   198,386   233,383
                           --------- --------- -------- -------- -------- --------- ---------  --------- -------- --------  -------
Investments at market or
   fair value..............   86,531  117,990   26,799  132,115  138,713  135,206   147,106   174,205   202,761    256,930  293,291
Total assets...............  137,520   83,941   31,365  185,231  149,975  208,871   176,422   270,874   213,811    326,972  310,760
Subordinated debentures....   16,000   15,000   15,000   15,000   15,000   11,000    15,000    15,000    11,000     11,000    5,000
Deferred taxes on
   unrealized appreciation.   21,837*  30,073   32,619   33,608   36,063   33,761    38,112    45,932    53,247     69,121   81,313
Net assets.................   66,367*  78,376   83,124   94,610   97,139   07,522   121,455   133,053   147,370    189,048  218,972
Shares outstanding**.......    3,776    3,563    3,563    3,617    3,617    3,644     3,681     3,715     3,735      3,767    3,767
- -----------------------------------------------------------------------------------------------------------------------------------
Changes in Net Assets 
 (years ended March 31)
Net investment income......  $    45  $    22  $   716  $ 1,737  $ 2,090  $ 2,363  $  2,189  $  2,870  $  2,447  $   2,855  $ 2,574
Net realized gain (loss) on
   investments.............    8,157      497       27   12,722   (2,515)  14,313     5,099      (475)      142     11,174    6,806
Net increase (decrease) in
   unrealized appreciation
   before distributions....   10,105*  15,986    5,075    1,780    4,762   (4,541)    8,524    11,160    13,584     38,746   22,804
                             -------   ------  -------  -------  --------  ------- --------   --------   ------    -------  -------
Increase in net assets
   from operations before
   distributions...........   18,307*  16,505    5,818   16,239    4,337   12,135    15,812    13,555    16,173     52,775   32,184
   Cash dividends paid.....     (425)    (378)  (1,069)  (5,197)  (1,809)  (2,181)   (2,202)   (2,228)   (2,241)    (2,270)  (2,260)
   Securities dividends....        -        -        -        -        -        -         -         -         -     (9,402)       -
   Treasury stock acquired.   (2,563)  (4,118)       -        -        -        -         -         -         -          -        - 
   Employee stock options
   exercised...............        -        -        -      444        -      429       322       272       385        575        -
                            ---------  -------  ------   ------   ------ --------   -------   -------  --------    -------  -------
   Increase in net assets..   15,319*  12,009    4,749   11,486    2,528   10,383    13,932    11,599    14,317     41,678   29,924
- -----------------------------------------------------------------------------------------------------------------------------------
Per Share Data (as
 of March 31)**
Deferred taxes on
 unrealized appreciation... $   5.78* $  8.44  $  9.15  $  9.29  $  9.97  $  9.27  $  10.35  $  12.36  $  14.26  $   18.35 $  21.59
Net assets.................    17.58*   22.00    23.33    26.16    26.86    29.51     32.99     35.81     39.46      50.18    58.13
  % Increase...............    36.2%    25.1%     6.0%    12.1%     2.7%     9.9%     11.8%      8.5%     10.2%      27.2%    15.8%
Closing market price.......    17.50    16.75    18.25    21.375   20.75    24.25     36.50     38.125    38.00      60.00    67.875
Cash dividends paid........     0.1075   0.10     0.30     1.44      .50      .60       .60       .60       .60        .60      .60
Securities dividends.......        -        -        -        -        -        -         -         -         -       2.50        -
</TABLE>


- --------------
* Restated on a pro forma basis to reflect a change in method of accounting  for
deferred income taxes.
** Shares outstanding and per share amounts have been restated to give effect to
a two-for-one stock split in September 1987.

                                       26



<PAGE>


Shareholder Information

Stock Transfer Agent

   American Stock Transfer & Trust Company,  40 Wall Street,  New York, NY 10005
(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 900 record holders of its common stock at March
31,  1997.  This total does not include an  estimated  1,600  shareholders  with
shares held under beneficial  ownership in nominee name or within  clearinghouse
positions of brokerage firms or banks.

Market Prices

   The  common  stock  of  Capital  Southwest   Corporation  is  traded  in  the
over-the-counter  market through the National  Association of Securities Dealers
Automated Quotation ("Nasdaq") National Market System 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 the
National Association of Securities Dealers, Inc.

Quarter Ended                                         High        Low
- ------------------------------------------------------------------------
June 30, 1995....................................      $45       $37 3/4
September 30, 1995...............................       45 3/4    41 1/2
December 31, 1995................................       51 1/2    44 1/4
March 31, 1996...................................       60        50 1/2

Quarter Ended                                         High        Low
- ------------------------------------------------------------------------
June 30, 1996....................................      $66       $57 1/2
September 30, 1996...............................       73        63 1/2
December 31, 1996................................       72 1/2    67 1/4
March 31, 1997...................................       72        65 3/8

Dividends

   The  payment  dates and  amounts of cash  dividends  per share since April 1,
1995, are as follows:

Payment Date                                              Cash Dividend
- ------------                                              -------------
May 31, 1995..............................................    $0.20
November 30, 1995.........................................     0.40

May 31, 1996..............................................     0.20
November 29, 1996.........................................     0.40

May 30, 1997..............................................     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 of regulated investment companies.

   A dividend of one share of Palm Harbor Homes, Inc. common stock for each five
shares  of  Capital  Southwest  common  stock  was paid on July 31,  1995.  Cash
payments were made in lieu of Palm Harbor stock to record  holders of fewer than
50 shares of Capital Southwest and in lieu of fractional shares.

Automatic Dividend Reinvestment and Optional Cash Contribution Plan

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

Annual Meeting

   The Annual Meeting of Shareholders of Capital  Southwest  Corporation will be
held on Monday,  July 21,  1997,  at 10:00 a.m.  in the North  Dallas Bank Tower
Meeting Room (first floor), 12900 Preston Road, Dallas, Texas.

                                       27

<PAGE>


KPMG Peat Marwick LLP
                                                                      Exhibit 23


                          INDEPENDENT AUDITORS' CONSENT



The Board of Directors
Capital Southwest Corporation:

We consent to  incorporation  by reference in the  registration  statement  (No.
33-43881) on Form S-8 of Capital Southwest Corporation of our report dated April
25, 1997,  relating to the  consolidated  statements  of financial  condition of
Capital Southwest  Corporation and subsidiary as of March 31, 1997 and 1996, the
portfolio  of  investments  as of March 31, 1997,  and the related  consolidated
statements of  operations,  changes in net assets and cash flows for each of the
years in the  three-year  period ended March 31, 1997 and the selected per share
data and ratios for each of the years in the  five-year  period  ended March 31,
1997,  which report  appears in the annual report to  shareholders  for the year
ended March 31, 1997 and is  incorporated  by reference in the annual  report on
Form 10-K of Capital Southwest Corporation.




                                                           KPMG Peat Marwick LLP

Dallas, Texas
June 26, 1997




WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.


<TABLE> <S> <C>

<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Financial Condition at Mach 31, 1997 and the
Consolidatd Statement of Operations for the year ended March 31, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000017313
<MULTIPLIER> 1
<CURRENCY>   USD
       
<S>                             <C>
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          MAR-31-1997
<PERIOD-START>                             APR-01-1996
<PERIOD-END>                               MAR-31-1997
<EXCHANGE-RATE>                                      1
<INVESTMENTS-AT-COST>                       59,907,915
<INVESTMENTS-AT-VALUE>                     293,291,026 
<RECEIVABLES>                                  279,815
<ASSETS-OTHER>                               3,180,171
<OTHER-ITEMS-ASSETS>                        14,009,481
<TOTAL-ASSETS>                             310,760,493
<PAYABLE-FOR-SECURITIES>                             0
<SENIOR-LONG-TERM-DEBT>                      5,000,000
<OTHER-ITEMS-LIABILITIES>                   86,788,373         
<TOTAL-LIABILITIES>                         91,788,373
<SENIOR-EQUITY>                                      0
<PAID-IN-CAPITAL-COMMON>                     1,984,235
<SHARES-COMMON-STOCK>                        3,767,051
<SHARES-COMMON-PRIOR>                        3,797,051
<ACCUMULATED-NII-CURRENT>                    4,804,205
<OVERDISTRIBUTION-NII>                               0
<ACCUMULATED-NET-GAINS>                     60,113,568
<OVERDISTRIBUTION-GAINS>                             0
<ACCUM-APPREC-OR-DEPREC>                   152,070,112
<NET-ASSETS>                               218,972,120
<DIVIDEND-INCOME>                            2,774,321
<INTEREST-INCOME>                            1,371,802
<OTHER-INCOME>                                 586,900
<EXPENSES-NET>                               2,031,636
<NET-INVESTMENT-INCOME>
                      2,574,062
<REALIZED-GAINS-CURRENT>                     6,805,786
<APPREC-INCREASE-CURRENT>                   22,804,750
<NET-CHANGE-FROM-OPS>                       32,184,598
<EQUALIZATION>                                       0 
<DISTRIBUTIONS-OF-INCOME>                    2,260,231
<DISTRIBUTIONS-OF-GAINS>                             0
<DISTRIBUTIONS-OTHER>                                0
<NUMBER-OF-SHARES-SOLD>                              0
<NUMBER-OF-SHARES-REDEEMED>                          0
<SHARES-REINVESTED>                                  0
<NET-CHANGE-IN-ASSETS>                      29,924,367
<ACCUMULATED-NII-PRIOR>                      4,490,374
<ACCUMULATED-GAINS-PRIOR>                   53,307,782
<OVERDISTRIB-NII-PRIOR>                              0
<OVERDIST-NET-GAINS-PRIOR>                           0
<GROSS-ADVISORY-FEES>                                0
<INTEREST-EXPENSE>                             634,667
<GROSS-EXPENSE>                              2,031,636
<AVERAGE-NET-ASSETS>                                 0
<PER-SHARE-NAV-BEGIN>                            50.18
<PER-SHARE-NII>                                    .69
<PER-SHARE-GAIN-APPREC>                           7.86
<PER-SHARE-DIVIDEND>                              (.60)
<PER-SHARE-DISTRIBUTIONS>                            0
<RETURNS-OF-CAPITAL>                                 0
<PER-SHARE-NAV-END>                              58.13
<EXPENSE-RATIO>                                      0
<AVG-DEBT-OUTSTANDING>                               0
<AVG-DEBT-PER-SHARE>                                 0
        

</TABLE>