UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-Q

(Mark One)

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

For the quarterly period ended December 31, 2006

                                       OR

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

For the transition period from .....................to  ........................

                         Commission File Number: 814-61

                          CAPITAL SOUTHWEST CORPORATION
             (Exact name of registrant as specified in its charter)

             Texas                                               75-1072796
(State or other jurisdiction of                               (I.R.S. Employer
 incorporation or organization)                              Identification No.)


12900 Preston Road, Suite 700, Dallas, Texas                       75230
(Address of principal executive offices)                         (Zip Code)


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

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 whether the registrant is a large  accelerated  filer, an
accelerated  filer, or a  non-accelerated  filer. See definition of "accelerated
filer and large  accelerated  filer" in Rule 12b-2 of the Exchange  Act.  (Check
One):

 Large accelerated filer     Accelerated filer  X      Non-accelerated filer
                        ----                  ----                          ----

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes    No X
                           ----  ----

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.

      3,886,051 shares of Common Stock, $1 Par Value as of January 31, 2007




                                TABLE OF CONTENTS

                                                                        Page No.
                                                                        --------

PART I.   FINANCIAL INFORMATION

     ITEM 1. Consolidated Financial Statements

       Consolidated Statements of Financial Condition
          December 31, 2006 (Unaudited) and March 31, 2006.....................3

       Consolidated Statements of Operations (Unaudited)
          For the three and nine months ended December 31, 2006 and
          December 31, 2005....................................................4

       Consolidated Statements of Changes in Net Assets
          For the nine months ended December 31, 2006 (Unaudited) and year
          ended March 31, 2006.................................................5

       Consolidated Statements of Cash Flows (Unaudited)
          For the three and nine months ended December 31, 2006 and
          December 31, 2005....................................................6

       Portfolio of Investments
          December 31, 2006....................................................7

       Notes to Consolidated Financial Statements.............................12

     ITEM 2. Management's Discussion and Analysis of Financial
               Condition and Results of Operations............................15

     ITEM 3. Quantitative and Qualitative Disclosure About
               Market Risk....................................................18

     ITEM 4. Controls and Procedures..........................................18

PART II.  OTHER INFORMATION

     ITEM 1A.Risk Factors.....................................................19

     ITEM 6. Exhibits and Reports on Form 8-K.................................19

Signatures ...................................................................20





                                       2

PART I. FINANCIAL INFORMATION - ----------------------------- Item 1. Consolidated Financial Statements CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES Consolidated Statements of Financial Condition ---------------------------------------------- Assets December 31, 2006 March 31, 2006 ----------------- -------------- (Unaudited) Investments at market or fair value Companies more than 25% owned (Cost: December 31, 2006 - $32,632,356 March 31, 2006 - $23,114,866) $521,169,985 $298,481,983 Companies 5% to 25% owned (Cost: December 31, 2006 - $18,798,896 March 31, 2006 - $18,595,746) 68,224,002 92,070,852 Companies less than 5% owned (Cost: December 31, 2006 - $23,782,504 March 31, 2006 - $46,886,344) 71,712,439 159,875,248 ------------ ------------ Total investments (Cost: December 31, 2006 - $75,213,756 March 31, 2006 - $88,596,956) 661,106,426 550,428,083 Cash and cash equivalents 56,530,336 11,503,866 Receivables 288,259 135,887 Other assets 7,466,502 7,300,297 ------------ ------------ Totals $725,391,523 $569,368,133 ============ ============ Liabilities and Shareholders' Equity Note payable to bank $ 8,000,000 $ 8,000,000 Other liabilities 1,598,172 1,697,086 Income taxes payable 11,080,699 982,653 Deferred income taxes 205,125,385 162,070,285 ------------ ------------ Total liabilities 225,804,256 172,750,024 ------------ ------------ Shareholders' equity Common stock, $1 par value: authorized, 5,000,000 shares; issued, 4,323,416 shares at December 31, 2006 and 4,297,616 shares at March 31, 2006 4,323,416 4,297,616 Additional capital 10,004,264 8,109,797 Undistributed net investment income 4,700,087 3,744,830 Undistributed net realized gain on investments 105,481,131 86,432,040 Unrealized appreciation of investments - net of deferred income taxes 382,111,671 301,067,128 Treasury stock - at cost (437,365 shares) (7,033,302) (7,033,302) ------------ ------------ Net assets at market or fair value, equivalent to $128.56 per share at December 31, 2006 on the 3,886,051 shares outstanding and $102.74 per share at March 31, 2006 on the 3,860,251 shares outstanding 499,587,267 396,618,109 ------------ ------------ Totals $725,391,523 $569,368,133 ============ ============
(See Notes to Consolidated Financial Statements) 3
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations ------------------------------------- (Unaudited) Three Months Ended Nine Months Ended December 31 December 31 ------------------ ----------------- 2006 2005 2006 2005 ---- ---- ---- ---- Investment income: Interest $ 484,888 $ 99,140 $ 1,624,418 $ 342,806 Dividends 1,626,702 1,174,743 3,167,203 2,740,363 Management and directors' fees 163,750 178,950 542,150 658,420 ------------ ----------- ------------ ----------- 2,275,340 1,452,833 5,333,771 3,741,589 ------------ ----------- ------------ ----------- Operating expenses: Salaries 310,127 287,584 973,926 767,084 Net pension benefit (36,237) (29,187) (108,708) (87,560) Other operating expenses 238,504 185,619 690,469 569,611 ------------ ----------- ------------ ----------- 512,394 444,016 1,555,687 1,249,135 ------------ ----------- ------------ ----------- Income before interest expense and income taxes 1,762,946 1,008,817 3,778,084 2,492,454 Interest expense 133,749 105,565 458,953 320,647 ------------ ----------- ------------ ----------- Income before income taxes 1,629,197 903,252 3,319,131 2,171,807 Income tax expense 12,700 10,200 40,724 38,100 ------------ ----------- ------------ ----------- Net investment income $ 1,616,497 $ 893,052 $ 3,278,407 $ 2,133,707 ============ =========== ============ =========== Proceeds from disposition of investments $ 31,578,052 $ 7,791,129 $ 42,020,132 $27,677,133 Cost of investments sold 12,046,678 1,474,330 12,872,995 10,184,203 ------------ ----------- ------------ ----------- Realized gain on investments before income taxes 19,531,374 6,316,799 29,147,137 17,492,930 Income tax expense 6,726,027 2,185,228 10,098,046 6,180,039 ------------ ----------- ------------ ----------- Net realized gain on investments 12,805,347 4,131,571 19,049,091 11,312,891 ------------ ----------- ------------ ----------- Increase in unrealized appreciation of investments before income taxes 132,210,244 15,009,434 124,061,543 45,975,188 Increase in deferred income taxes on appreciation of investments 46,023,000 5,254,000 43,017,000 16,092,000 ------------ ----------- ------------ ----------- Net increase in unrealized appreciation of investments 86,187,244 9,755,434 81,044,543 29,883,188 ------------ ----------- ------------ ----------- Net realized and unrealized gain on investments $ 98,992,591 $13,887,005 $100,093,634 $41,196,079 ============ =========== ============ =========== Increase in net assets from operations $100,609,088 $14,780,057 $103,372,041 $43,329,786 ============ =========== ============ ===========
(See Notes to Consolidated Financial Statements) 4
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES Consolidated Statements of Changes in Net Assets ------------------------------------------------ Nine Months Ended Year Ended December 31, 2006 March 31, 2006 ----------------- -------------- (Unaudited) Operations Net investment income $ 3,278,407 $ 2,389,256 Net realized gain on investments 19,049,091 13,115,874 Net increase in unrealized appreciation of investments 81,044,543 80,685,303 ------------ ------------ Increase in net assets from operations 103,372,041 96,190,433 Distributions from: Undistributed net investment income (2,323,150) (2,314,231) Capital share transactions Exercise of employee stock options 1,794,850 208,000 Stock option expense 125,417 -- ------------ ------------ Increase in net assets 102,969,158 94,084,202 Net assets, beginning of period 396,618,109 302,533,907 ------------ ------------ Net assets, end of period $499,587,267 $396,618,109 ============ ============
(See Notes to Consolidated Financial Statements) 5
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows ------------------------------------- (Unaudited) Three Months Ended Nine Months Ended December 31 December 31 ----------- ----------- 2006 2005 2006 2005 ---- ---- ---- ---- Cash flows from operating activities Increase in net assets from operations $100,609,088 $14,780,057 $103,372,041 $ 43,329,786 Adjustments to reconcile increase in net assets from operations to net cash provided by operating activities: Proceeds from disposition of investments 31,578,052 7,791,129 42,020,132 27,677,133 Purchases of securities (4,500) (1,209,231) (374,730) (14,194,097) Maturities of securities -- -- 884,936 375,000 Depreciation and amortization 4,426 3,968 12,313 11,817 Net pension benefit (36,237) (29,187) (108,708) (87,560) Realized gain on investments before income taxes (19,531,374) (6,316,799) (29,147,137) (17,492,930) Deferred taxes on realized gain on investments 6,726,027 2,185,228 10,098,046 6,180,039 Net increase in unrealized appreciation of investments (86,187,244) (9,755,434) (81,044,543) (29,883,188) Stock option expense 43,586 -- 125,417 -- (Increase) decrease in receivables (105,087) 144,240 (152,372) 24,448 (Increase) decrease in other assets 3,391 5,353 (14,597) 21,050 Increase (decrease) in and other liabilities 38,330 11,529 (46,526) (148,156) Decrease in accrued pension cost (36,567) (38,669) (107,602) (116,005) Deferred income taxes 12,700 10,200 38,100 30,600 ------------ ----------- ------------ ------------ Net cash provided by operating activities 33,114,591 7,582,384 45,554,770 15,727,937 ------------ ----------- ------------ ------------ Cash flows from financing activities Decrease in note payable to portfolio company -- -- -- (5,000,000) Distributions from undistributed net investment income (1,551,100) (1,542,821) (2,323,150) (2,314,231) Proceeds from exercise of employee options 697,350 -- 1,794,850 -- ------------ ----------- ------------ ------------ Net cash used in financing activities (853,750) (1,542,821) (528,300) (7,314,231) ------------ ----------- ------------ ------------ Net increase in cash and cash equivalents 32,260,841 6,039,563 45,026,470 8,413,706 Cash and cash equivalents at beginning of period 24,269,495 7,479,078 11,503,866 5,104,935 ------------ ----------- ------------ ------------ Cash and cash equivalents at end of period $ 56,530,336 $13,518,641 $ 56,530,336 $ 13,518,641 ============ =========== ============ ============ Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 133,749 $ 104,287 $ 458,953 $ 319,147 Income taxes $ -- $ -- $ 20,000 $ 7,500
(See Notes to Consolidated Financial Statements) 6
Portfolio of Investments - December 31, 2006 -------------------------------------------- Company Investment (a) Cost Value (b) - ------------------------------------------------------------------------------------------------------------------------------------ +AT&T INC. ++20,770 shares common stock (acquired 3-9-99) $ 12 $ 742,528 San Antonio, Texas Global leader in local, long distance, Internet and transaction-based voice and data services. +ALAMO GROUP INC. 2,821,300 shares common stock (acquired Sequin, Texas 4-1-73 thru 10-4-99) 2,065,047 45,141,000 Tractor-mounted mowing and mobile excavation equipment for governmental, industrial and agricultural markets; street-sweeping equipment for municipalities. ALL COMPONENTS, INC. 10% subordinated note due 2008 (acquired Addison, Texas 10-28-03 thru 10-3-05) 3,000,000 3,000,000 Electronics contract manufacturing; 150,000 shares Series A convertible preferred distribution and production of memory stock, convertible into 600,000 shares of and other components for computer common stock at $0.25 per share (acquired manufacturers, retailers and value-added 9-16-94) 150,000 1,000,000 resellers; distribution of automotive ----------- ------------ accessories. 3,150,000 4,000,000 +ALLTEL CORPORATION ++8,880 shares common stock (acquired 7-1-98) 88,699 537,062 Little Rock, Arkansas Owner and operator of the nation's largest wireless network. BALCO, INC. 445,000 shares common stock and 60,920 shares Wichita, Kansas Class B non-voting common stock (acquired Specialty architectural products used in 10-25-83 and 5-30-02) 624,920 2,500,000 the construction and remodeling of commercial and institutional buildings. BOXX TECHNOLOGIES, INC. 3,125,354 shares Series B convertible preferred Austin, Texas stock, convertible into 3,125,354 shares of Workstations for computer graphics common stock at $0.50 per share (acquired imaging and design. 8-20-99 thru 8-8-01) 1,500,000 300,000 CMI HOLDING COMPANY, INC. 10% convertible subordinated notes, convertible Richardson, Texas into 706,144 shares of common stock at $1.32 Owns Chase Medical, which develops and per share, due 2007 (acquired 4-16-04 thru sells devices used in cardiac surgery to 12-17-04) 750,000 750,000 relieve congestive heart failure; develops 2,327,658 shares Series A convertible preferred and supports cardiac imaging systems. stock, convertible into 2,327,658 shares of common stock at $1.72 per share (acquired 8-21-02 and 6-4-03) 4,000,000 2,000,000 Warrants to purchase 109,012 shares of common stock at $1.72 per share, expiring 2012 (acquired 4-16-04) - - ----------- ------------ 4,750,000 2,750,000 7 Company Investment (a) Cost Value (b) - ------------------------------------------------------------------------------------------------------------------------------------ +COMCAST CORPORATION ++43,104 shares common stock (acquired 11-18-02) $ 21 $ 1,821,575 Philadelphia, Pennsylvania Leading provider of cable, entertainment and communications products and services. DENNIS TOOL COMPANY 20,725 shares 5% convertible preferred stock, Houston, Texas convertible into 20,725 shares of common stock Polycrystalline diamond compacts (PDCs) at $48.25 per share (acquired 8-10-98) 999,981 999,981 used in oil field drill bits and in mining 140,137 shares common stock (acquired 3-7-94 and industrial applications. and 8-10-98) 2,329,963 2 ----------- ------------ 3,329,944 999,983 +DISCOVERY HOLDING COMPANY ++70,501 shares Series A common stock Englewood, Colorado (acquired 7-21-05) 20,262 1,134,361 Provider of creative content, media management and network services worldwide. +EMBARQ CORPORATION ++4,500 shares common stock (acquired 5-17-06) 46,532 236,520 Overland Park, Kansas Local exchange carrier that provides local voice and data services, including high-speed Internet. +ENCORE WIRE CORPORATION 4,086,750 shares common stock (acquired McKinney, Texas 7-16-92 thru 10-7-98) 5,800,000 61,301,000 Electric wire and cable for residential and commercial use. EXTREME INTERNATIONAL, INC. 39,359.18 shares Series C convertible preferred Sugar Land, Texas stock, convertible into 157,436.72 shares of Owns Bill Young Productions, Texas common stock at $25.00 per share (acquired Video and Post, and Extreme Communica- 9-30-03) 2,625,000 5,314,000 tions, which produce radio and television 3,750 shares 8% Series A convertible preferred commercials and corporate communica- stock, convertible into 15,000 shares of tions videos. common stock at $25.00 per share (acquired 9-30-03) 375,000 506,000 Warrants to purchase 13,035 shares of common stock at $25.00 per share, expiring 2008 (acquired 8-11-98 thru 9-30-03) - 133,000 ----------- ------------ 3,000,000 5,953,000 +FMC CORPORATION ++6,430 shares common stock (acquired 6-6-86) 66,726 492,217 Philadelphia, Pennsylvania Chemicals for agricultural, industrial and consumer markets. +FMC TECHNOLOGIES, INC. ++11,057 shares common stock (acquired 1-2-02) 57,051 681,443 Houston, Texas Equipment and systems for the energy, food processing and air transportation industries. +HEELYS, INC. 9,317,310 shares common stock (acquired 5-26-00) 102,490 195,664,000 Carrollton, Texas Heelys stealth skate shoes sold through sporting goods chains, department stores, footwear retailers and on-line at Heelys.com. 8 Company Investment (a) Cost Value (b) - ------------------------------------------------------------------------------------------------------------------------------------ HIC-STAR CORPORATION 10% subordinated note due 2007 (acquired Dallas, Texas 10-19-04 and 1-13-05) $ 352,646 $ 352,646 Holding company previously engaged in 12% subordinated notes due 2008 (acquired mortgage banking operations, which have 3-25-05 thru 2-27-06) 717,523 354,738 now been sold. 12% demand note (acquired 12-15-06) 4,500 4,500 Warrants to purchase 463,162 shares of Series A common stock at $1.00 per share, expiring 2014 (acquired 3-31-04 thru 1-13-05) - - ----------- ------------ 1,074,669 711,884 +HOLOGIC, INC. ++316,410 shares common stock (acquired 8-27-99) 220,000 14,940,880 Bedford, Massachusetts Medical instruments including bone densitometers, mammography devices and digital radiography systems. +KIMBERLY-CLARK CORPORATION ++77,180 shares common stock (acquired 12-18-97) 2,358,518 5,244,381 Dallas, Texas Manufacturer of tissue, personal care and health care products. +LIBERTY GLOBAL, INC. ++42,463 shares Series A common stock Englewood, Colorado (acquired 6-15-05) 106,553 1,237,796 Owns interests in broadband, distribution ++42,463 shares Series C common stock and content companies. (acquired 9-6-05) 100,870 1,188,964 ----------- ------------ 207,423 2,426,760 +LIBERTY MEDIA CORPORATION ++35,250 shares of Liberty Capital Series A Englewood, Colorado common stock (acquired 5-9-06) 51,829 3,452,738 Holding company owning interests in ++176,252 shares of Liberty Interactive Series A electronic retailing, media, communications common stock (acquired 5-9-06) 66,424 3,799,993 and entertainment businesses. ----------- ------------ 118,253 7,252,731 LIFEMARK GROUP 1,449,026 shares common stock (acquired 7-16-69) 4,510,400 40,000,000 Hayward, California Cemeteries, mausoleums and mortuaries located in northern California. MEDIA RECOVERY, INC. 800,000 shares Series A convertible preferred Graham, Texas stock, convertible into 800,000 shares of common Computer and office automation supplies stock at $1.00 per share (acquired 11-4-97) 800,000 7,000,000 and accessories; impact and tilt monitoring 4,000,000 shares common stock (acquired 11-4-97) 4,615,000 35,000,000 devices to detect mishandled shipments; ----------- ------------ dunnage for protecting shipments. 5,415,000 42,000,000 PALLETONE, INC. 12.3% senior subordinated notes due 2012 Bartow, Florida (acquired 9-25-06) 1,553,150 2,000,000 Wood pallet manufacturer with 17 150,000 shares common stock (acquired 10-18-01) 150,000 1,714,000 pallet manufacturing facilities. Warrant to purchase 15,294 shares of common stock at $1.00 per share, expiring 2011 (acquired 2-17-06) 45,746 159,000 ----------- ------------ 1,748,896 3,873,000 +PALM HARBOR HOMES, INC. 7,855,121 shares common stock (acquired 1-3-85 Dallas, Texas thru 7-31-95) 10,931,955 70,696,000 Integrated manufacturing, retailing, financing and insuring of manufactured housing and modular homes. 9 Company Investment (a) Cost Value (b) - ------------------------------------------------------------------------------------------------------------------------------------ +PETSMART, INC. ++300,000 shares common stock (acquired 6-1-95) $ 1,318,771 $ 8,658,000 Phoenix, Arizona Retail chain of more than 885 stores selling pet foods, supplies and services. PHARMAFAB, INC. 6% convertible subordinated notes, $4,205,616 Grand Prairie, Texas principal amount, convertible into Series A or Contract manufacturer of branded and B convertible preferred stock, convertible into generic pharmaceutical drugs; developer 560,750 shares of common stock at $7.50 per of drug delivery technology. share, due 2013 (acquired 2-28-06) 4,000,000 2 Warrants to purchase 16,668 shares of Series A or B convertible preferred stock at $100.00 per share, convertible into 222,240 shares of common stock at $7.50 per share, expiring 2012 and 2013 (acquired 6-16-05 and 2-28-06) - - ----------- ------------ 4,000,000 2 THE RECTORSEAL CORPORATION 27,907 shares common stock (acquired 1-5-73 Houston, Texas and 3-31-73) 52,600 98,000,000 Specialty chemicals for plumbing, HVAC, electrical, construction, industrial, oil field and automotive applications; smoke containment systems for building fires; owns 20% of Whitmore Manufacturing Company. +SPRINT NEXTEL CORPORATION ++90,000 shares common stock (acquired 6-20-84) 457,113 1,700,100 Reston, Virginia Diversified telecommunications company. TCI HOLDINGS, INC. 21 shares 12% Series C cumulative compounding Denver, Colorado preferred stock (acquired 1-30-90) - 677,250 Cable television systems and microwave relay systems. +TEXAS CAPITAL BANCSHARES, INC. ++489,656 shares common stock (acquired 5-1-00) 3,550,006 9,729,465 Dallas, Texas Regional bank holding company with banking operations in six Texas cities. VIA HOLDINGS, INC. 9,118 shares Series B preferred stock Sparks, Nevada (acquired 9-19-05) 4,559,000 2,300,000 Designer, manufacturer and distributor of high-quality office seating. WELLOGIX, INC. 4,417,815 shares Series A-1 convertible Houston, Texas participating preferred stock, convertible into Developer and supporter of software used 4,417,815 shares of common stock at $1.1318 per by the oil and gas industry to control share (acquired 8-19-05 thru 9-15-06) 5,000,000 2 drilling and maintenance expenses. THE WHITMORE MANUFACTURING COMPANY 80 shares common stock (acquired 8-31-79) 1,600,000 26,000,000 Rockwall, Texas Specialized mining, industrial and railroad lubricants; coatings for automobiles and primary metals; fluid contamination control devices. 10 Company Investment (a) Cost Value (b) - ------------------------------------------------------------------------------------------------------------------------------------ +WINDSTREAM CORPORATION ++9,181 shares common stock (acquired 7-17-06) $ 19,656 $ 130,554 Little Rock, Arkansas Provider of voice, broadband and entertain- ment services. MISCELLANEOUS - BankCap Partners Fund I, L.P. - 6.2% limited partnership interest (acquired 7-14-06) 167,080 167,080 - Diamond State Ventures, L.P. - 1.9% limited partnership interest (acquired 10-12-99 thru 8-26-05) 146,000 146,000 - First Capital Group of Texas III, L.P. - 3.3% limited partnership interest (acquired 12-26-00 thru 8-12-05) 964,604 964,604 - Humac Company - 1,041,000 shares common stock (acquired 1-31-75 and 12-31-75) - 169,000 - STARTech Seed Fund I - 12.1% limited partnership interest (acquired 4-17-98 thru 1-5-00) 178,066 1 - STARTech Seed Fund II - 3.2% limited partnership interest (acquired 4-28-00 thru 2-23-05) 950,000 1 - Sterling Group Partners I, L.P. - 1.7% limited partnership interest (acquired 4-20-01 thru 1-24-05) 1,064,042 1,064,042 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS $75,213,756 $661,106,426 =========== ============ - ------------------------------------------------------------------------------------------------------------------------------------ +Publicly-owned company ++Unrestricted securities as defined in Note (a)
Notes to Portfolio of Investments --------------------------------- (a) 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 December 31, 2006, restricted securities represented approximately 91.6% of the value of the consolidated investment portfolio. (b) Under the valuation policy of the Company, unrestricted securities are valued at the closing sale price for listed securities and at the lower of the closing bid price or the last sale price for Nasdaq securities on the valuation date. Restricted securities, including securities of publicly-owned companies which are subject to restrictions on resale, are valued at fair value as determined by the Board of Directors. Fair value is considered to be the amount which the Company may reasonably expect to receive for portfolio securities if such securities were sold on the valuation date. Valuations as of any particular date, however, are not necessarily indicative of amounts which may ultimately be realized as a result of future sales or other dispositions of securities. Among the factors considered by the Board of Directors in determining the fair value of restricted securities are the financial condition and operating results of the issuer, the long-term potential of the business of the issuer, the market for and recent sales prices of the issuer's securities, the values of similar securities issued by companies in similar businesses, the proportion of the issuer's securities owned by the Company, the nature and duration of resale restrictions and the nature of any rights enabling the Company to require the issuer to register restricted securities under applicable securities laws. In determining the fair value of restricted securities, the Board of Directors considers the inherent value of such securities without regard to the restrictive feature and adjusts for any diminution in value resulting from restrictions on resale. 11 CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements ------------------------------------------ (Unaudited) 1. Basis of Presentation Principles of Consolidation. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for investment companies. Under rules and regulations applicable to investment companies, we are precluded from consolidating any entity other than another investment company. An exception to this general principle occurs if the investment company has an investment in an operating company that provides services to the investment company. Our consolidated financial statements include our management company. The financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Article 6 of Regulation S-X. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended March 31, 2006. Certain information and footnotes normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted, although we believe that the disclosures are adequate for a fair presentation. The information reflects all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the results of operations for the interim periods. 2. Stock-Based Compensation In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (revised 2004), Share-Based Payment ("SFAS 123R"), which revised SFAS 123. SFAS 123R also supersedes APB 25 and amends SFAS No. 95, Statement of Cash Flows. SFAS 123R eliminates the alternative to account for employee stock options under APB 25 and requires the fair value of all share-based payments to employees, including the fair value of grants of employee stock options, be recognized in the income statement, generally over the vesting period. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 107, which provides additional implementation guidance for SFAS 123R. Among other things, SAB 107 provides guidance on share-based payment valuations, income statement classification and presentation, capitalization of costs and related income tax accounting. Effective April 1, 2006, we adopted SFAS 123R using the modified prospective transition method. We recognize compensation cost over the straight-line method for all share-based payments granted on or after that date and for all awards granted to employees prior to April 1, 2006 that remain unvested on that date. The fair value of stock options are determined on the date of grant using the Black-Scholes pricing model and are expensed over the vesting period of the related stock options. Accordingly, for the quarter and nine months ended December 31, 2006, we recognized compensation expense of $43,586 and $125,417, respectively. The following table illustrates the effect on net asset value and net asset value per share for the nine months ended December 31, 2006 if we had applied the fair value recognition provisions of FASB Statement No. 123 to stock-based compensation for options granted prior to the implementation of FASB Statement No. 123. 12 Notes to Consolidated Financial Statements (continued) December 31, December 31, 2006 2005 ---- ---- Net asset value, as reported $499,587,267 $343,549,462 Deduct: Total fair value computed stock-based compensation - 113,202 ------------ ------------ Pro forma net asset value $499,587,267 $343,436,260 ============ ============ Net asset value per share: Basic - as reported $128.56 $89.07 ======= ====== Basic - pro forma $ - $89.04 ======= ====== Diluted - as reported $128.43 $88.90 ======= ====== Diluted - pro forma $ - $88.87 ======= ====== As of December 31, 2006, the total remaining unrecognized compensation cost related to non-vested stock options was $1,215,039, which will be amortized over the weighted-average service period of approximately 7.78 years. 3. Employee Stock Option Plan On July 19, 1999, shareholders approved the 1999 Stock Option ("Plan"), which provides for the granting of stock options to employees and officers and authorizes the issuance of common stock upon the exercise of such options for up to 140,000 shares of common stock. All options are granted at or above market price and generally expire ten years from the date of grant and are generally exercisable on or after the first anniversary of the date of grant in five to ten annual installments. At December 31, 2006, there were 58,500 shares available for grant under the Plan. The per share weighted-average fair value of the stock options granted on May 15, 2006 was $31.276 per option using the Black-Scholes pricing model with the following assumptions: expected dividend yield of .64%, risk-free interest rate of 5.08%, expected volatility of 21.1%, and expected life of 7 years. The per share weighted-average fair value of the stock options granted on July 17, 2006 was $33.045 per option using the Black-Scholes pricing model with the following assumptions: expected dividend yield of .61%, risk-free interest rate of 5.04%, expected volatility of 21.2%, and expected life of 7 years. The following summarizes activity in the stock option plan since March 31, 2006: Number Weighted-Average of shares Exercise Price --------- -------------- Balance at March 31, 2006 45,300 $68.411 Granted 57,500 94.136 Exercised (25,800) 69.568 Canceled (24,500) 89.482 ------- ------- Balance at December 31, 2006 52,500 86.184 ======= ======= At December 31, 2006, the range of exercise prices and weighted-average remaining contractual life of outstanding options was $65.00 to $98.44 and 8.03 years, respectively. The total intrinsic value of options exercised during the nine months ended December 31, 2006 was $571,565 with the exercise prices ranging from $65.00 to $77.00 per share. New shares were issued for the $1,794,850 cash received from option exercises for the nine months ended December 31, 2006. 13
Notes to Consolidated Financial Statements (continued) At December 31, 2006, the number of options exercisable was 8,515 and the weighted-average exercise price of those options was $69.15. 4. Summary of Per Share Information Three Months Ended Nine Months Ended December 31 December 31 ----------- ----------- 2006 2005 2006 2005 ---- ---- ---- ---- Investment income $ .58 $ .38 $ 1.37 $ .97 Operating expenses (.13) (.12) (.40) (.33) Interest expense (.04) (.03) (.12) (.08) Income taxes - - (.01) (.01) ------- ------- ------- ------- Net investment income .41 .23 .84 .55 Distributions from undistributed net investment income (.40) (.40) (.60) (.60) Net realized gain on investments 3.29 1.07 4.90 2.93 Net increase in unrealized appreciation of investments after deferred taxes 22.18 2.53 20.86 7.75 Exercise of employee stock options* (.08) - (.21) - Stock option expense .01 - .03 - ------- ------- ------- ------- Increase in net asset value 25.41 3.43 25.82 10.63 Net asset value: Beginning of period 103.15 85.64 102.74 78.44 ------- ------- ------- ------- End of period $128.56 $ 89.07 $128.56 $ 89.07 ======= ======= ======= ======= Increase in deferred taxes on unrealized appreciation $ 11.74 $ 1.36 $ 10.79 $ 4.17 Deferred taxes on unrealized appreciation: Beginning of period 40.70 33.17 41.65 30.36 ------- ------- ------- ------- End of period $ 52.44 $ 34.53 $ 52.44 $ 34.53 ======= ======= ======= ======= Shares outstanding at end of period (000s omitted) 3,886 3,857 3,886 3,857
* Net decrease is due to the exercise of employee stock options at prices less than beginning of period net asset value. 5. Recent Accounting Pronouncements In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48 (FIN48), which clarifies the accounting for uncertainty in income taxes recognized in an entity's financial statements in accordance with FASB Statement 109, "Accounting for Income Taxes". FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We have evaluated the positions in the tax returns we have filed and do not believe that FIN 48 will have a material impact on our financial statements. The state of Texas recently passed House Bill 3 (HB3), which revises the existing franchise tax system to create a new tax on virtually all Texas businesses. Starting in the fiscal year 2007, HB3 changes the franchise tax base, lowers the tax rate and extends coverage to active businesses receiving state law liability protection. We have been subject to an immaterial amount of Texas franchise taxes and expect the HB3 to have some affect, but have not determined the extent of this impact. 14 Notes to Consolidated Financial Statements (continued) In September 2006, the FASB issued Statement of Financial Accounting Standard No. 157, "Fair Value Measurements" (SFAS 157). The standard defines fair value, outlines a framework for measuring fair value, and details the required disclosures about fair value measurements. The standard is effective for years beginning after November 15, 2007. We are evaluating the impact of SFAS 157. In September 2006, the SEC issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" (SAB 108). SAB 108 clarifies the SEC staff's beliefs regarding the process of quantifying financial statement misstatements and is effective for fiscal years ending after November 15, 2006. We do not expect SAB 108 to have a material impact on our financial statements. In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans." SFAS No. 158 requires employers to fully recognize the obligations associated with single-employer defined benefit pension, retiree healthcare and other post-retirement plans in their financial statements. The provisions of SFAS No. 158 are effective for us as of the end of our fiscal year ending March 31, 2007. We are evaluating the impact of the provisions of this statement on our consolidated financial position, results of operations and cash flows. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Net asset value at December 31, 2006 was $499,587,267 equivalent to $128.56 per share after deducting an allowance of $52.44 per share for deferred taxes on net unrealized appreciation of investments. Assuming reinvestment of all dividends and tax credits on retained long-term capital gains, the December 31, 2006 net asset value reflects increases of 27.8% during the preceding three months and 48.4% during the past twelve months. December 31, December 31, 2006 2005 ---- ---- Net assets $499,587,267 $343,549,462 Shares outstanding 3,886,051 3,857,051 Net assets per share $128.56 $89.07 Results of Operations The composite measure of our financial performance in the Consolidated Statements of Operations is captioned "Increase in net assets from operations" and consists of three elements. The first is "Net investment income", which is the difference between our income from interest, dividends and fees and our 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", which is the net change in the market or fair value of our investment portfolio, compared with stated cost, net of an increase in deferred income taxes which would become payable if the unrealized appreciation were realized through the sale or other disposition of the investment portfolio. It should be noted that the "Net realized gain on investments" and "Net increase in unrealized appreciation of investments" are directly related in that when an appreciated portfolio security is sold to realize a gain, a corresponding decrease in net unrealized appreciation occurs 15
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 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 Interest income of $1,624,418 in the nine months ended December 31, 2006 increased from $342,806 in the year-ago period due to an increase in excess cash and interest rates and a $631,000 interest payment from a portfolio company for prior interest that had been on a non-accrual basis. During the nine months ended December 31, 2006 and 2005, we recorded dividend income from the following sources: Nine Months Ended December 31 ----------- 2006 2005 ---- ---- Alamo Group Inc. $ 507,834 $ 507,834 Balco, Inc. - 252,960 Dennis Tool Company 62,499 49,999 Kimberly-Clark Corporation 113,455 104,193 Lifemark Group 450,000 450,000 PalletOne, Inc. 89,842 134,764 The RectorSeal Corporation 1,629,947 866,893 TCI Holdings, Inc 60,953 60,953 The Whitmore Manufacturing Company 180,000 180,000 Other 72,673 132,767 ---------- ---------- $3,167,203 $2,740,363 ========== ========== Net Realized Gain on Investments During the nine months ended December 31, 2006, we reported a realized gain before income taxes of $29,147,137 which included a gain of $31,070,149 on our sale of 1,591,790 shares of Heelys, Inc. and a gain of $8,884,936 on our sale of 500,000 shares of Cenveo, Inc. which were offset by losses of $6,529,167 on Hic-Star Corporation and $5,500,000 on PharmaFab, Inc. Net Increase in Unrealized Appreciation of Investments Set forth in the following table are the significant increases and decreases in unrealized appreciation (before the related change in deferred income taxes and excluding the effect of gains or losses realized during the periods) by portfolio company: Three Months Ended Nine Months Ended December 31 December 31 ----------- ----------- 2006 2005 2006 2005 ---- ---- ---- ---- Encore Wire Corporation $ (28,608,000) $20,433,000 $ (20,434,000) $28,607,000 Heelys, Inc. 140,040,908 4,250,000 170,040,908 12,000,000 Palm Harbor Homes, Inc. (3,928,000) - (27,493,000) 15,710,000 The RectorSeal Corporation 10,500,000 - 10,500,000 2,100,000
On December 8, 2006, we realized a significant gain on the sale of a small fraction of our Heelys investment, and during the nine months ended December 31, 2006, the value of our remaining Heelys stock increased from the March 31, 2006 value by $170,040,908. This was attributable to the dramatic increases in the company's sales and earnings during 2006 and the very strong market interest in the initial public offering of Heelys common stock, which 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) attracted a severalfold over-subscription. This producer of specialty footwear with a removable wheel housed in the heel of the shoe completed the initial public offering of its stock on December 8, 2006, selling a total of 7,393,750 shares at $21.00 per share. A total of 4,268,750 shares were sold by selling stockholders including 1,591,790 shares sold by our Company. Offsetting part of the major increase in Heelys' value during the nine months ended December 31, 2006 were significant decreases in the values of the restricted stocks of two of our major holdings, which experienced earnings declines in the face of unfavorable industry conditions. These included Palm Harbor Homes and Encore Wire, which decreased in value by $27,493,000 and $20,434,000 respectively. Portfolio Investments During the quarter ended December 31, 2006, we made an additional investment of $4,500 in an existing portfolio company. We have agreed, subject to certain conditions, to invest up to $10,319,820 in three portfolio companies. Financial Liquidity and Capital Resources At December 31, 2006, we had cash and cash equivalents of approximately $56.5 million. Pursuant to Small Business Administration ("SBA") regulations, cash and cash equivalents of $2.2 million held by Capital Southwest Venture Corporation ("CSVC") may not be transferred or advanced to us without the consent of the SBA. Under current SBA regulations and subject to SBA's approval of its credit application, CSVC would be entitled to borrow up to $16.4 million. We also have an unsecured $25.0 million revolving line of credit from a commercial bank, of which $17.0 million was available at December 31, 2006. With the exception of a capital gain distribution made in the form of a distribution of the stock of a portfolio company in the fiscal year ended March 31, 1996, we have elected to retain all gains realized during the past 38 years. Retention of future gains is viewed as an important source of funds to sustain our investment activity. Approximately $55.7 million of our investment portfolio is represented by unrestricted publicly-traded securities which represent a source of liquidity. On June 30, 2006, we borrowed $150 million from JPMorgan Chase in order to maintain our tax status as a regulated investment company. On July 3, 2006, we repaid the $150 million note payable to bank from our cash and cash equivalents. On January 2, 2007, we repaid the $8 million note payable to bank from our cash and cash equivalents. Funds to be used by us for operating or investment purposes may be transferred in the form of dividends, management fees or loans from Lifemark Group, The RectorSeal Corporation and The Whitmore Manufacturing Company, wholly-owned portfolio companies, to the extent of their available cash reserves and borrowing capacities. Management believes that our cash and cash equivalents and cash available from other sources described above are adequate to meet our expected requirements. Consistent with our long-term strategy, the disposition of investments from time to time may also be an important source of funds for future investment activities. 17 Item 3. Quantitative and Qualitative Disclosures About Market Risk We are subject to financial market risks, including changes in marketable equity security prices. We do not use derivative financial instruments to mitigate any of these risks. Our investment performance is a function of our portfolio companies' profitability, which may be affected by economic cycles, competitive forces, foreign currency fluctuations and production costs including labor rates, raw material prices and certain commodity prices. Most of the companies in our investment portfolio do not hedge their exposure to raw material and commodity price fluctuations. However, the portfolio company with the greatest exposure to foreign currency fluctuations generally hedges their exposure. All of these factors may have an adverse effect on the value of our investments and on our net asset value. Our investment in portfolio securities includes fixed rate debt securities which totaled $6,461,886 at December 31, 2006, equivalent to 1.0% of the value of our total investments. Generally these debt securities are below investment grade and have relatively high fixed rates of interest; therefore, minor changes in market yields of publicly-traded debt securities have little or no effect on the values of debt securities in our portfolio and no effect on interest income. Our investments in debt securities are generally held to maturity and their fair values are determined on the basis of the terms of the debt security and the financial condition of the issuer. A portion of our investment portfolio consists of debt and equity securities of private companies. We anticipate little or no effect on the values of these investments from modest changes in public market equity valuations. Should significant changes in market valuations of comparable publicly-owned companies occur, there may be a corresponding effect on valuations of private companies, which would affect the value and the amount and timing of proceeds eventually realized from these investments. A portion of our investment portfolio also consists of restricted common stocks of publicly-owned companies. The fair values of these restricted securities are influenced by the nature of applicable resale restrictions, the underlying earnings and financial condition of the issuers of such restricted securities and the market valuations of comparable publicly-owned companies. A portion of our investment portfolio also consists of unrestricted, freely marketable common stocks of publicly-owned companies. These freely marketable investments, which are valued at the public market price, are directly exposed to equity price risks, in that a change in an issuer's public market equity price would result in an identical change in the value of our investment in such security. Item 4. Controls and Procedures As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our management, including the President and Chairman of the Board and Secretary-Treasurer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934). Based on that evaluation, the President and Chairman of the Board and Secretary-Treasurer concluded that our disclosure controls and procedures are effective to ensure that the information required to be disclosed is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and is accumulated and communicated to management, including the President and Chairman of the Board and Secretary-Treasurer, as appropriate, to allow timely decisions regarding such required disclosure. During the fiscal quarter ended December 31, 2006, there were no changes to the internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting. 18 PART II. OTHER INFORMATION - -------------------------- Item 1A. Risk Factors There have been no material changes to our risk factors as disclosed in Item 1A, "Risk Factors", in our Annual Report on Form 10-K for the fiscal year ended March 31, 2006. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 31.1- Certification of President and Chairman of the Board required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), filed herewith. Exhibit 31.2- Certification of Secretary-Treasurer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act, filed herewith. Exhibit 32.1- Certification of President and Chairman of the Board required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code, furnished herewith. Exhibit 32.2- Certification of Secretary-Treasurer required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code, furnished herewith. (b) Reports on Form 8-K No reports on Form 8-K have been filed during the quarter for which this report is filed. 19 SIGNATURES Pursuant to the requirements 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 Date: February 2, 2007 By: --------------------------- ----------------------------------------- William R. Thomas, President and Chairman of the Board (chief executive officer) /s/ Susan K. Hodgson Date: February 2, 2007 By: --------------------------- ----------------------------------------- Susan K. Hodgson, Secretary-Treasurer (chief financial/accounting officer) 20
                                                                    Exhibit 31.1

                                 CERTIFICATIONS

I, William R. Thomas,  President and Chairman of the Board of Capital  Southwest
Corporation, certify that:

1.       I have reviewed this quarterly report on Form 10-Q of Capital Southwest
         Corporation (the "registrant");

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

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

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

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

         b)       Designed such internal  control over financial  reporting,  or
                  caused such internal  control over  financial  reporting to be
                  designed  under  our   supervision,   to  provide   reasonable
                  assurance regarding the reliability of financial reporting and
                  the preparation of financial  statements for external purposes
                  in accordance with generally accepted accounting principles;

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

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

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

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

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



Date: February 2, 2007                      By: /s/ William R. Thomas
      ----------------                          --------------------------------
                                                William R. Thomas, President and
                                                Chairman of the Board

                                                                    Exhibit 31.2
                                 CERTIFICATIONS

I,  Susan K.  Hodgson,  Secretary-Treasurer  of Capital  Southwest  Corporation,
certify that:

1.       I have reviewed this quarterly report on Form 10-Q of Capital Southwest
         Corporation (the "registrant");

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

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

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

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

         b)       Designed such internal  control over financial  reporting,  or
                  caused such internal  control over  financial  reporting to be
                  designed  under  our   supervision,   to  provide   reasonable
                  assurance regarding the reliability of financial reporting and
                  the preparation of financial  statements for external purposes
                  in accordance with generally accepted accounting principles;

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

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

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

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

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





Date: February 2, 2007                By:  /s/ Susan K. Hodgson
      ----------------                     -------------------------------------
                                           Susan K. Hodgson, Secretary-Treasurer

                                                                    Exhibit 32.1
              Certification of President and Chairman of the Board

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


         I,  William R. Thomas,  President  and Chairman of the Board of Capital
Southwest Corporation, certify that, to my knowledge:

         1. the Form 10-Q, filed with the Securities and Exchange  Commission on
February 2, 2007 ("accompanied  report") fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

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


Date: February 2, 2007                      By: /s/ William R. Thomas
      ----------------                          --------------------------------
                                                William R. Thomas, President and
                                                Chairman of the Board



                                                                    Exhibit 32.2
                      Certification of Secretary-Treasurer

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




         I,  Susan  K.  Hodgson,   Secretary-Treasurer   of  Capital   Southwest
Corporation, certify that, to my knowledge:

         1. the Form 10-Q, filed with the Securities and Exchange  Commission on
February 2, 2007 ("accompanied  report") fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

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


Date: February 2, 2007                 By: /s/ Susan K. Hodgson
      ----------------                     -------------------------------------
                                           Susan K. Hodgson, Secretary-Treasurer