Edgar Filing: CAPITAL SOUTHWEST CORP

SCHEDULE 14A
INFORMATION Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934

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Capital Southwest Corporation
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June 2, 2006

To the Shareholders of Capital Southwest Corporation:

Our annual meeting of shareholders will be held on July 17, 2006, at
10:00 a.m. in the North Dallas Bank Tower Meeting Room #210, 12900 Preston Road,
Dallas, Texas.

A notice of the annual meeting, a proxy and a proxy statement
containing information about matters to be acted upon are enclosed. Holders of
our common stock are entitled to vote on the basis of one vote for each share
held. If you attend the annual meeting, you retain the right to vote in person
even though you previously voted by the enclosed proxy.

It is important that your shares be represented at the meeting whether
or not you are personally in attendance. Please review the proxy statement and
sign, date and return it at your earliest convenience. I look forward to meeting
with you and discussing our business.

Very truly yours,

/s/ William R. Thomas

William R. Thomas
President and Chairman of the Board

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JULY 17, 2006

To the Shareholders of Capital Southwest Corporation:

NOTICE IS HEREBY GIVEN that our annual meeting of shareholders will be
held on Monday, July 17, 2006, at 10:00 a.m., Dallas time, in Meeting Room #210
of the North Dallas Bank Tower, 12900 Preston Road, Dallas, Texas, for the
following purposes:

1. To elect six directors to serve until the next annual meeting of
shareholders or until their respective successors shall be elected and
qualified.

2. To ratify the appointment by our Audit Committee of Grant Thornton LLP as
our independent auditors.

3. To transact such other business as may properly come before the meeting or
any adjournment thereof.

Only record holders of our common stock at the close of business on June 1, 2006
will be entitled to notice of, and to vote at, the meeting and any adjournment
thereof.

If you do not expect to attend in person, please sign, date and return
the proxy in the enclosed envelope. No postage is required for mailing in the
United States.

By Order of the Board of Directors

SUSAN K. HODGSON
Secretary
Dallas, Texas
June 2, 2006

PROXY STATEMENT

ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JULY 17, 2006

This proxy statement is furnished in connection with the solicitation
by the Board of Directors of Capital Southwest Corporation, a Texas corporation,
with principal executive offices at 12900 Preston Road, Suite 700, Dallas, Texas
75230, of proxies to be voted at the annual meeting of shareholders to be held
on July 17, 2006 or any adjournment thereof. The date on which this proxy
statement and the enclosed form of proxy are first being sent or given to our
shareholders is on or about June 2, 2006.

PURPOSES OF THE MEETING

The annual meeting of shareholders is to be held for the purposes of
(1) electing six persons to serve as our directors until the next annual meeting
of shareholders, or until their respective successors shall be elected and
qualified; (2) ratifying the appointment by our Audit Committee of Grant
Thornton LLP as our independent auditors; and (3) transacting such other
business as may properly come before the meeting or any adjournment thereof.

VOTING AT THE MEETING

The record date for holders of our common stock entitled to notice of,
and to vote at, the annual meeting of shareholders is the close of business on
June 1, 2006, at which time we had outstanding and entitled to vote at the
meeting 3,860,251 shares of common stock.

The presence, in person or by proxy, of the holders of a majority of
the shares of common stock outstanding and entitled to vote at the annual
meeting is necessary to constitute a quorum. Each shareholder is entitled to one
vote, in person or by proxy, for each share of common stock held in its name at
the close of business on the record date. Shareholders who are present, in
person or by proxy, but abstain from voting on any matter will be counted as
present at the meeting for purposes of constituting a quorum, but not for
purposes of determining the final vote on any matter. Similarly, nominees (such
as broker-dealers) who are present, in person or by proxy, but abstain or
refrain from voting on any item, will be counted as present at the meeting, but
not voting on any such item.

To be elected a director, each nominee must receive the favorable vote
of the holders of a majority of the shares of common stock entitled to vote and
represented at the annual meeting. In order to ratify the appointment of Grant
Thornton LLP as our independent auditors for the year ending March 31, 2007, the
ratification proposal must receive the favorable vote of a majority of the
shares of common stock entitled to vote and represented at the annual meeting.

Each proxy delivered to us, unless the shareholder otherwise specifies
therein, will be voted FOR the election as directors of the persons nominated as
directors and FOR the ratification of the appointment by the Audit Committee of
our Board of Directors of Grant Thornton LLP as independent auditors. In each
case where the shareholder has appropriately specified how the proxy is to be
voted, it will be voted in accordance with the specification. As to any other
matter or business which may be properly brought before the meeting, a vote may
be cast pursuant to the accompanying proxy in accordance with the judgment of
the person or persons voting the same, but neither management nor our board of
directors knows of any such other matter or business.

You may vote shares held directly in your name in person at the
meeting. If you want to vote shares that you hold in street name at the meeting,
you must request a legal proxy from your broker, bank or other nominee that
holds your shares.

You may revoke your proxy and change your vote at any time before the
final vote at the meeting. You may do this by signing a new proxy card with a
later date, voting on a later date by proxy, or by attending the meeting and
voting in person. However, your attendance at the meeting will not automatically
revoke your proxy. You must specifically revoke your proxy.

PROPOSAL 1: ELECTION OF DIRECTORS

Six directors, including the five now serving, are proposed to be
elected at the meeting to serve until the next annual meeting of shareholders or
until their respective successors shall be elected and qualified. Each of the
named persons currently serves as our director except Donald W. Burton, who has
extensive venture capital experience and whose Burton Partnership owns 13,548
shares of our stock.

Nominees for Director

Principal Other
Term of Office Occupation(s) Directorships
Name, Address* Position(s) and Length of During Past 5 Held by
and Age Held Time Served Years Nominee
---------------------- ----------- --------------- ------------------ -------------
Interested Persons
----------------------
Gary L. Martin Vice One year; Vice President of The
Age 59 President President since Whitmore
and 1984 and Manufacturing
Director director since Company and
1988 Vice President of
the Company
Not Interested Persons
----------------------
Donald W. Burton Director One year Chairman, Symbion, Inc.,
Age 62 nominee President and Knology, Inc.
General Partner and Cluster A
of various South Mutual Funds
Atlantic managed by
Partnership Merrill Lynch
entities; General Investment
Partner of The Managers
Burton
Partnership, LP

Graeme W. Henderson Director One year; Self-employed as
Age 72 director since a private investor
1976 and consultant

Samuel B. Ligon Director One year; Chairman of
Age 67 director since Jokari/US, Inc.;
2003 Chairman and
CEO of Smith
Abrasives, Inc.

John H. Wilson Director One year; President of U.S. Encore Wire
Age 63 director since Equity Corporation,
1988 Corporation, a Palm Harbor
venture capital Homes, Inc. and
investment firm Xponential,
Inc.

*The business address of each director is 12900 Preston Road, Suite 700, Dallas,
Texas 75230.

Our Nominating Committee has determined that Messrs. Thomas and Martin,
who are our employees, are "interested persons" as defined in the Investment
Company Act of 1940 and are not "independent" as defined by the Nasdaq Stock
Market Listing Standards. The Committee has determined that Messrs. Burton,
Henderson, Ligon and Wilson are "independent" as defined by the Nasdaq Stock
Market Listing Standards and they are not "interested persons" as defined by the
Investment Company Act of 1940.

MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS

During our fiscal year ended March 31, 2006, our Board of Directors
held nine meetings. The Board of Directors has established an Audit Committee, a
Compensation Committee and a Nominating Committee to assist the Board in
carrying out its duties. During the year, our Audit Committee held five meetings
and our Compensation Committee held two meetings. Our Nominating Committee,
which was formed April 19, 2004, held two meetings. No director attended less
than 75% of the total number of board and committee meetings on which the
directors served. All directors who were serving at the time attended our 2005
annual meeting of shareholders.

Audit Committee

The Audit Committee members are Messrs. Ligon (Chairman), Henderson and
Wilson. The Audit Committee assists the Board in fulfilling its responsibilities
for general oversight of: (1) our accounting and financial reporting processes
and the integrity of our financial statements; (2) our systems of internal
accounting and financial controls; (3) the independence, qualification and
performance of our independent auditors; and (4) our compliance with ethics
policies and legal and regulatory requirements relating to financial statements
and reporting. The committee has the responsibility for selecting our
independent auditors and pre-approving audit and non-audit services. Among other
things, the Audit Committee prepares a report for inclusion in the annual proxy
statement; reviews the Audit Committee charter and the committee's performance;
approves the scope of the annual audit; reviews our corporate policies with
respect to financial reporting and valuation of our investments. The committee
also oversees investigations into complaints concerning financial matters. The
Audit Committee has the authority to obtain advice and assistance from outside
legal, accounting or other advisors as the Audit Committee deems necessary to
carry out its duties.

Compensation Committee

The Compensation Committee members are Messrs. Wilson (Chairman),
Henderson and Ligon. The Compensation Committee (1) discharges the Board's
responsibilities to establish the compensation of our executives; (2) produces
an annual report on executive compensation for inclusion in our annual proxy
statement; and (3) provides general oversight for our compensation structure,
including our equity compensation plans and benefits programs. Other specific
duties and responsibilities of the committee include reviewing and approving
objectives relative to executive officers' compensation; approving and amending
our incentive compensation and stock option programs (subject to shareholder
approval if required); and annually evaluating the committee's performance and
its charter.

Nominating Committee

The Nominating Committee members are Messrs. Wilson (Chairman),
Henderson and Ligon. The Nominating Committee has the responsibility to (1)
determine and recommend to the Board the slate of director nominees to be
proposed to our shareholders; (2) identify and recommend to the Board
individuals qualified to become Board members; and (3) insure that the Board and
its committees are appropriately constituted. The Nominating Committee will

consider director nominations made by shareholders, who should send nominations
to our corporate secretary, Susan K. Hodgson. Shareholder nominations proposed
for consideration by the Nominating Committee must include the nominee's name
and qualifications for Board membership. See "Shareholder Proposals" on page 18.

The Nominating Committee seeks to identify, and the Board of Directors
selects, director candidates who (1) have significant experience that is
relevant and beneficial to the Board of Directors and the Company, (2) are
willing and able to make sufficient time commitments to the Company's affairs in
order to perform their duties as directors, including regular attendance of
Board and committee meetings, (3) have a record of character and integrity, and
(4) represent the interests of the Company's shareholders. The evaluation
process for nominees is the same regardless of the source of the recommendation.
A copy of the Nominating Committee Charter is available via the Internet at our
website (www.capitalsouthwest.com).

Committee Member Independence

All of the members of the Audit Committee, the Compensation Committee
and the Nominating Committee are "independent" as defined by the Nasdaq Stock
Market Listing Standards and the Sarbanes-Oxley Act of 2002. Nominating
Committee members are not "interested persons" as defined by the Investment
Company Act of 1940.

Communication with Directors

Shareholders who wish to send communications to independent members of
the Board should address such communications to John H. Wilson, independent
director, at 1500 Three Lincoln Centre, 5430 LBJ Freeway, Dallas, TX 75240.

Compensation of Directors

In addition to reimbursement of travel expenses for attendance at Board
meetings, a director who is not our employee receives an annual fee of $24,000
for service as a director and $10,000 for service as chairman of the Audit
Committee or the Compensation Committee, as applicable. In addition,
non-employee directors receive $1,000 for each directors' meeting attended
(excluding telephone meetings) and $500 for each Audit Committee or Compensation
Committee meeting attended, as applicable, subject to a maximum of $8,000 per
year in aggregate meeting fees. We pay no fees for telephone meetings of the
Board or its committees.

Compensation Committee Interlocks and Insider Participation

None of our executive officers served as a member of the Compensation
Committee of the Board of Directors or as a director of any other entity, one of
whose executive officers served as a member of our Compensation Committee.

Vote Required

Nominees who receive the affirmative vote of the holders of a majority
of the shares of common stock entitled to vote and represented at the annual
meeting shall be re-elected as our directors. Abstentions will have no effect on
the election of directors. If you hold your shares through a broker, bank or
other nominee and you do not instruct them how to vote on this proposal, your
broker may have authority to vote your shares. You may give each nominee one
vote for each share you hold. The proxy holders intend to vote the shares
represented by proxies to elect the six nominees to the board set forth in
Proposal 1.

Board Recommendation

The Board recommends that you vote "For" each of the nominees to the
Board set forth in this Proposal 1.

STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of May 1, 2006 by (1) each person,
so far as is known to our management, who is the beneficial owner (as that term
is defined in the rules and regulations of the SEC) of more than 5% of our
outstanding common stock, (2) each executive officer named in the Summary
Compensation Table, (3) each nominee for director, and (4) all directors and
executive officers as a group. Unless otherwise indicated below, each of the
persons named in the table has sole voting and investment power with respect to
the shares indicated to be beneficially owned.

Name and Address of Shares Owned Percent of
Beneficial Owner Beneficially Class
---------------- ------------ -----

William R. Thomas................................. 953,246 (1)(2) 24.7%
12900 Preston Rd., Suite 700
Dallas, Texas 75230

Artisan Partners Limited Partnership ............. 294,834 (4) 7.6
875 East Wisconsin Avenue, Suite 800
Milwaukee, Wisconsin 53202

Third Avenue Management LLC....................... 272,617 (5) 7.1
622 Third Avenue, 32nd Floor
New York, New York 10017

First Manhattan Company .......................... 240,712 (6) 6.2
437 Madison Avenue
New York, New York 10022

Gary L. Martin ................................... 199,930 (2) 5.2
12900 Preston Rd., Suite 700
Dallas, Texas 75230

Patrick F. Hamner ................................ 138,708 (2)(3) 3.6

Name and Address of Shares Owned Percent of
Beneficial Owner Beneficially Class
---------------- ------------ -----

Donald W. Burton ................................. 13,548 (7) 0.4

William M. Ashbaugh .............................. 6,000 (3) 0.2

Graeme W. Henderson .............................. 4,100 0.1

Samuel B. Ligon .................................. 2,000 0.1

John H. Wilson ................................... 2,000 0.1

All directors and executive officers as a group
(9 persons)....................................... 1,128,809 (8) 29.0

----------------------
(1) Mr. Thomas has sole voting and investment power with respect to 617,000
shares, which include 75,948 shares owned by his two children and 206,525
shares owned by Thomas Heritage Partners, Ltd., in which Mr. Thomas has a
38.6% limited partnership interest. Mr. Thomas holds a majority interest in
and is President and sole manager of Thomas Heritage Company, LLC, the sole
general partner of Thomas Heritage Partners, Ltd.

(2) Mr. Thomas is a trustee of certain trusts pursuant to ESOPs for our
employees and employees of our wholly-owned portfolio companies owning
248,102 shares, with the power as trustee to vote such shares. Mr. Thomas
also participates in the power to direct the trustees in the voting of
88,144 shares owned by a trust pursuant to a pension plan for our employees
and certain of our wholly-owned portfolio companies. Accordingly, Mr.
Thomas has shared voting and investment power with respect to the 336,246
shares, representing 8.7% of our outstanding common stock, owned by the
aforementioned trusts. Under the rules and regulations of the SEC, Mr.
Thomas is deemed to be the beneficial owner of such 336,246 shares, which
are included in the shares beneficially owned by Mr. Thomas.

Mr. Martin serves as trustee, with Mr. Thomas, of one of the aforementioned
trusts owning 25,694 shares and participates in the power to direct the
trustees in the voting of 88,144 shares owned by the other aforementioned
trust. Accordingly, Mr. Martin has shared voting and investment power with
respect to the 113,838 shares. Under the rules and regulations of the SEC,
Mr. Martin is deemed to be the beneficial owner of such 113,838 shares,
which are included in the shares beneficially owned by Mr. Martin. Of the
shares owned by a trust pursuant to the aforementioned ESOPs, 4,505 were
allocated to Mr. Martin, all of which were vested.

Mr. Hamner, with Messrs. Thomas and Martin, participates in the power to
direct the trustees in the voting of 88,144 shares owned by one of the
aforementioned trusts. Under the rules and regulations of the SEC, Mr.
Hamner is deemed to be the beneficial owner of such 88,144 shares, which
are included in the shares beneficially owned by Mr. Hamner.

(3) Includes 6,000 and 15,500 shares subject to immediately exercisable stock
options held by Messrs. Ashbaugh and Hamner, respectively.

(4) As reported to us by Artisan Partners Limited Partnership ("Artisan
Partners") or Artisan Investment Corporation or Andrew A. Ziegler,
individually, or Carlene Murphy Ziegler, individually, had sole voting and
dispositive power with respect to none of such shares and shared voting and
dispositive power with respect to 294,834 shares by reasons of advisory and
other relationships with the persons who own the shares. Artisan Partners
is an investment adviser; Artisan Corp. is the General Partner of Artisan
Partners; and Mr. Ziegler and Ms. Ziegler are the principal stockholders of
Artisan Corp.

(5) As reported to us by Third Avenue Management LLC, Third Avenue or Martin J.
Whitman, individually, had shared voting and dispositive power with respect
to 22,642 shares, sole voting power with respect to 246,505 shares and sole
dispositive power with respect to 249,975 shares by reasons of advisory and
other relationships with the persons who own the shares. Third Avenue and
Martin J. Whitman beneficially own 245,561 and 27,056, respectively, of
such shares.

(6) As reported to us by First Manhattan Co., First Manhattan had sole voting
and dispositive power with respect to 100 shares, shared voting power with
respect to 238,629 shares and shared dispositive power with respect to
240,612 shares by reasons of advisory and other relationships with the
persons who own the shares.

(7) Mr. Burton has sole voting and investment power with respect to 13,548
shares owned by Burton Partnership, LP, in which Mr. Burton is the general
partner.

(8) Includes (a) the shares owned by the partnership and trusts referred to in
notes (1), (2) and (7), respectively, to the above table, (b) 29,500 shares
subject to immediately exercisable stock options (including those referred
to in note (3) to the above table) and (c) 75,948 shares owned by immediate
family members of Mr. Thomas.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our officers and directors and persons who beneficially own more than
10% of our common stock to file reports of securities ownership and changes in
such ownership with the SEC. Officers, directors and greater than 10% beneficial
owners also are required by rules promulgated by the SEC to furnish us with
copies of all Section 16(a) forms they file with the SEC. Based solely upon a
review of the copies of such forms furnished to us, we believe that each of our
officers, directors and greater than 10% beneficial owners complied with all
Section 16(a) filing requirements applicable to them during the fiscal year
ended March 31, 2006.

EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth summary information regarding the
compensation (excluding Mr. Thomas' retirement benefit described on page 12)
earned by or paid to William R. Thomas, President and Chairman of the Board, and

the next three most highly compensated executive officers who received a total
annual salary and bonus in excess of $100,000 for the fiscal year ended March
31, 2006.

Long-term Compensation
Annual Compensation Awards
------------------------------------- ---------------------
Name and Fiscal Other Annual Securities Underlying All Other
Principal Position Year Salary Bonus Compensation(1) Options (#) Compensation(2)
------------------ ------ ------ ----- --------------- --------------------- ---------------

William R. Thomas 2006 $250,000 $ 10,417 $21,000 - $ -
President and 2005 250,000 10,417 20,500 - -
Chairman of the Board 2004 250,000 - 20,000 6,000 -

Patrick F. Hamner 2006 207,500 108,750 6,424 20,000 14,576
Senior Vice President 2005 196,250 48,333 5,799 20,000 14,701
2004 185,000 47,708 6,792 20,000 13,208

William M. Ashbaugh 2006 207,500 58,750 6,424 15,000 14,576
Senior Vice President 2005 195,000 48,333 5,799 15,000 14,701
2004 177,500 47,500 6,792 15,000 13,208

Gary L. Martin 2006 196,154 63,846 - - 18,928
Vice President 2005 196,250 133,846 (3) - - 18,693
2004 185,000 42,135 - - 5,600

------------------------
(1) Represents amounts accrued for each executive officer in lieu of a
contribution to his account in an ESOP.

(2) Represents amounts contributed to the ESOP accounts of each executive
officer.

(3) Includes a $70,000 phantom stock option payment.

The aggregate amount of perquisites and other personal benefits
provided to each of Messrs. Thomas, Hamner, Ashbaugh and Martin was less than
10% of the total of his annual salary and bonus.

In accordance with our established policy, our officers and employees
are required to remit to us all compensation received for serving as a director
of any of our portfolio companies.

Additional Compensation Information

The following table sets forth additional compensation information for
the fiscal year ended March 31, 2006 for each of the three highest-paid
executive officers whose compensation exceeded $60,000 and for all other
directors (Graeme W. Henderson, Samuel B. Ligon and John H. Wilson), who are not
our employees.

Pension or Retirement Estimated Annual
Aggregate Benefits Accrued Corporation's
Name and Position Compensation as Part of Expenses Retirement
----------------- -------------- --------------------- ----------------

William R. Thomas $281,417 (1) (3) (4)
Director, President
and Chairman

Patrick F. Hamner 337,250 (1) (3) (4)
Senior Vice President

William M. Ashbaugh 287,250 (1) (3) (4)
Senior Vice President

Graeme W. Henderson 33,833 (2) None None
Director

Samuel B. Ligon 37,167 (2) None None
Director

John H. Wilson 40,500 (2) None None
Director

---------------
(1) See "Option Exercises and Fiscal Year End Values" for information regarding
stock options exercised during or held at the end of the fiscal year ended
March 31, 2006. See "Retirement Plans" for information on our Retirement
Plan and Retirement Restoration Plan. See "Stock Ownership Plan" for a
description of our ESOP and "Summary Compensation Table" for amounts
contributed to each officer's ESOP account.

(2) Directors who are not our employees are compensated as described under
"Compensation of Directors" and are not participants in our retirement plan
or ESOP.

(3) As described in note 7 to our Consolidated Financial Statements, the
Retirement Plan was overfunded and therefore generated a benefit for the
year ended March 31, 2006. After deducting the expense of the unfunded
Retirement Restoration Plan, our net benefit attributable to both plans was
$116,747 for the year ended March 31, 2006. Our net benefit is not
allocated to individual plan participants.

(4) Individual retirement benefits are based on formulas relating benefits to
average final compensation and years of credited service. See "Retirement
Plans" which includes both a table of estimated annual retirement benefits
and a description of the retirement benefits currently payable to Mr.
Thomas.

Option Exercises and Fiscal Year End Values

The following table discloses, for the named executive officers,
information regarding stock options exercised during, or held at the end of,
fiscal 2006.

Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at 3/31/06 at 3/31/06(2)
Acquired on Value ------------------------------------- -------------------------------------
Name Exercise (#) Realized (1) Exercisable (#) Unexercisable (#) Exercisable Unexercisable
---- ------------ ------------ ----------------- ----------------- ----------------- -----------------

Patrick F. Hamner - $ - 15,500 4,500 $382,750 $107,250
William M. Ashbaugh - - 6,000 9,000 178,800 268,200

(1) Value realized is calculated as the fair market value on the date of
exercise, net of the option exercise price, but before any tax liabilities
or transaction costs.

(2) Value of unexercised options is calculated at the closing market price on
March 31, 2006 ($95.50), net of the option exercise price, but before any
tax liabilities or transaction costs.

Retirement Plans

The foregoing Summary Compensation Table does not include any
contribution, payment or accrual under a qualified non-contributory retirement
plan (retirement plan maintained by us and certain of our wholly-owned portfolio
companies), as such amounts cannot readily be separately or individually
calculated. Messrs. Ashbaugh, Hamner and Martin now participate in the
retirement plan, and Mr. Thomas is currently receiving retirement benefit
payments. An eligible employee or his survivor will be entitled under the
retirement plan to receive, upon retirement, death or disability, monthly
payments based upon formulas relating benefits to salary and years of credited
service, which is generally determined by averaging the five consecutive years
of highest compensation prior to retirement. Salaries and bonuses (excluding
other annual compensation) reported in the foregoing Summary Compensation Table
are substantially identical to compensation covered by the retirement plan
(covered compensation). Payment of benefits is funded by the company.

The following table sets forth, for purposes of illustration, the
estimated annual retirement benefit payable under the retirement plan as a
straight life annuity upon retirement to participants of specified covered
compensation and years of credited service who are fully vested (five years of
service). Messrs. Ashbaugh, Hamner and Martin had 4, 24, and 33 years,
respectively, of credited service under the plan as of May 1, 2006. All
calculations assume retirement in 2006 at age 65 (normal retirement age).

Total Covered Estimated Annual Benefits
Compensation Based on Service of
------------- ----------------------------------------------------
15 Years 20 Years 25 Years 30 Years 35 Years
-------- -------- -------- -------- --------
$125,000............... $ 30,865 $ 41,154 $ 51,442 $ 61,731 $ 72,019
150,000............... 37,990 50,654 63,317 75,981 88,644
175,000............... 45,115 60,154 75,192 90,231 105,269
200,000............... 52,240 69,654 87,067 104,481 121,894
225,000............... 59,365 79,154 98,942 118,731 138,519
250,000............... 66,490 88,654 110,817 132,981 155,144
300,000............... 80,740 107,654 134,567 161,481 188,394
350,000............... 94,990 126,654 158,317 189,981 221,644
400,000............... 109,240 145,654 182,067 218,481 254,894

Certain of the amounts in the above table are subject to reduction
because applicable federal regulations limit the amount of annual benefits
payable to certain higher-paid participants under a tax-qualified retirement
plan, such as the retirement plan. The extent of such reductions will vary in
individual cases according to circumstances existing at the time pension
payments commence. Consequently, we and certain of our wholly-owned portfolio
companies have adopted an unfunded benefit equalization plan (the retirement
restoration plan) to compensate our employees and chief executive officers of
certain of our wholly-owned portfolio companies for the loss of retirement
benefits resulting from such limitations. This retirement restoration plan
provides for the payment, upon retirement, of the difference between the maximum
annual payment permissible under the retirement plan pursuant to federal
limitations and the amount which would otherwise have been payable.

Mr. Thomas is entitled to a substantially increased annual retirement
benefit as a result of his service beyond the normal retirement age and to an
additional annual retirement benefit as a result of his credited service prior
to April 1972 under a retirement benefit formula of our retirement plan which
was modified for credited service subsequent to April 1972. Although Mr. Thomas
is a full-time employee, Section 401(a)(9) of the Internal Revenue Code required
that he begin receiving monthly retirement benefit payments on April 1, 2000
because of his age and ownership of more than 5% of our common stock. Retirement
benefits payable (for life only) to Mr. Thomas under the retirement plan and
retirement restoration plan total $440,342 per annum.

Stock Ownership Plan

We maintain an Employee Stock Ownership Plan ("ESOP") for our employees
and one of our wholly-owned portfolio companies in which Messrs. Ashbaugh and
Hamner participate. The Whitmore Manufacturing Company maintains an ESOP for its
employees, in which Mr. Martin participates. Employees who have completed one
year of credited service, as defined in the plan, are eligible to participate in
the ESOP. Contributions to the ESOP are discretionary, within limits established
by the Internal Revenue Code. Funds contributed to the trust established under
the ESOP are applied by the trustees to the purchase, in the open market at
prevailing market prices, of our common stock. A participant's interest in
contributions to the ESOP fully vests after five years of credited service, and
such vested interest is distributed to a participant at retirement, death or
total disability, or after a one year break in service resulting from
termination of employment for any other reason. See note (2) to the table under
"Stock Ownership of Certain Beneficial Owners".

Severance Pay Agreements

Severance Pay Agreements have been established with certain executive
officers of the Company (excluding Mr. Thomas, who elected not to be covered).
The Agreements provide severance benefits for an officer whose employment is
involuntarily terminated without cause or who resigns following a salary
reduction or a significant reduction in job responsibilities subsequent to a
"change in control" of the Company. A change in control is deemed to occur if
(i) the Company becomes a subsidiary of another corporation or is merged or

consolidated with or into another corporation, or substantially all of its
assets are sold to or acquired by another person, corporation or group of
associated persons acting in concert; (ii) the Company becomes a subsidiary of
another corporation or is merged or consolidated with or into another
corporation, or substantially all of the assets or more than 50% of the
outstanding voting stock of the Company are sold to or acquired by another
person, corporation or group of associated persons acting in concert; (iii) a
person who has not owned 10% or more of the common stock for ten years acquires
25% or more of the outstanding common stock; or (iv) there is a change of a
majority of the directors of the Company and such new directors have not been
approved by the incumbent directors. The Agreements provide, subject to the
limitations set forth below, that an officer would be entitled to an amount
equal to the sum of his annual base salary plus, if such officer has completed
more than five years of service, an additional amount equal to his monthly base
salary for each year of completed service in excess of five years. Although it
is not now possible to determine with certainty the amounts which the officers
named in the Summary Compensation Table might receive under the Agreements, such
officers (excluding Mr. Thomas) could receive a lump-sum payment in an amount
not exceeding the lesser of (i) two times his annual compensation, or (ii) 24
times his monthly base salary at the date of termination. The potential cost of
the benefits could discourage future attempts to acquire the Company.

REPORT OF THE COMPENSATION COMMITTEE

The Compensation Committee (1) discharges the Board's responsibilities
to establish the compensation of our executives; (2) produces a report on
executive compensation for inclusion in our annual proxy statement; and (3)
provides general oversight of our compensation structure, including our equity
compensation plans and benefits programs. Other specific duties and
responsibilities of the committee include reviewing and approving objectives
relative to executive officers' compensation and approving and amending our
incentive compensation and stock option programs (subject to shareholder
approval if required). The Compensation Committee, which consists of three
independent directors, met two times in the fiscal year ended March 31, 2006.

The goals of our compensation program are to attract, retain and
motivate competent executive officers who have the experience and ability to
contribute to the success of the company's investment management activities. The
individual judgments made by the Compensation Committee are subjective and are
based largely on the recommendations of the chief executive officer and the
Compensation Committee's perception of each executive's contribution to both the
Company's past performance and long-term growth potential. The principal
elements of compensation for executive officers are base salary, discretionary
bonus payments, stock options granted under the stock option plan and
contributions pursuant to the ESOP.

Base salaries were determined by the Compensation Committee in July
2005 for each of the executive officers on an individual basis, taking into
consideration individual contributions to performance, length of tenure,
compensation levels for comparable positions and internal equities among
positions. In addition to base salaries, certain executive officers received
bonus payments in March 2006, the amounts of which were determined by the
Compensation Committee on a discretionary basis. Year-end bonuses totaled
$198,000.

In July 2005, the Compensation Committee established the base salary of
our chief executive officer, William R. Thomas, at $250,000 per annum, a
continuation of the level established in July 1993. At Mr. Thomas' request, he
was not awarded a year-end bonus in March 2006 or in the six preceding years.

The 1999 Stock Option Plan authorized the issuance of stock options to
acquire an aggregate of 140,000 shares. Options to acquire 3,200 shares of
common stock have been exercised and options to acquire 45,300 shares were
outstanding at March 31, 2006. Options to acquire 50,000 more shares of common
stock were granted on May 15, 2006. The 1999 Stock Option Plan now has 41,500
shares available for issuance. Outstanding stock options which have been granted
and options available for future grants correspond to a 3.4% equity interest.

An additional equity incentive is provided by the ESOP, to which the
Compensation Committee authorized a contribution equivalent to 10% of each
participating employee's covered compensation for the fiscal year ended March
31, 2006, subject to limits imposed by the Internal Revenue Service ("IRS"). To
conform to IRS limits, a maximum of 6.941% of each participating employee's
covered compensation was contributed to the ESOP and 3.059% was paid in cash to
each employee in lieu of an ESOP contribution. The sum of such contributions was
$99,867.

Compensation Committee
John H. Wilson, Chairman
Graeme W. Henderson
Samuel B. Ligon

PERFORMANCE GRAPH

The following graph compares our cumulative total stockholder return
during the last five years (based on the market price of our common stock and
assuming reinvestment of all dividends and tax credits on retained long-term
capital gains) with the Total Return Index for the Nasdaq Stock Market (U.S.
Companies) and with the Total Return Index for Nasdaq Financial Stocks, both of
which indices have been prepared by the Center for Research in Security Prices
at the University of Chicago.

Comparison of Five Year Cumulative Total Returns

[GRAPH OMITTED]

Nasdaq Total Return (U.S.) Nasdaq Financial Stocks Capital Southwest Corporation

2001 100.000 100.000 100.000
2002 100.775 124.424 106.774
2003 73.966 115.431 107.853
2004 109.175 165.954 116.422
2005 109.903 172.521 126.317
2006 129.631 202.705 155.650

REPORT OF THE AUDIT COMMITTEE

The Audit Committee consists of three members of the Company's Board of
Directors. Each member is an independent director as required by Sarbanes-Oxley
and Nasdaq. In addition, the Board of Directors has determined that Samuel B.
Ligon is an Audit Committee Financial Expert as defined by SEC rules. The duties
and responsibilities of the Audit Committee are set forth in the Amended and
Restated Audit Committee Charter, which the Board of Directors adopted on May
27, 2003. A copy of the Amended and Restated Audit Committee Charter is
available on our website at www.capitalsouthwest.com.

The Audit Committee oversees the Company's financial reporting process
on behalf of the Board of Directors. Management has the primary responsibility
for the financial statements and the reporting process, including the Company's
system of internal control. In fulfilling its oversight responsibilities, the
Audit Committee reviewed the audited consolidated financial statements in the
Annual Report with management, including a discussion of the quality, not just
the acceptability, of the accounting principles; the reasonableness of the
valuation of restricted securities and other significant judgments; and the
clarity of disclosures in the financial statements.

The Audit Committee reviewed with Grant Thornton LLP, who is
responsible for expressing an opinion on the conformity of those audited
financial statements with generally accepted accounting principles, its judgment
as to the quality, not just the acceptability, of the Company's accounting
principles and such other matters as are required to be discussed with the Audit
Committee under generally accepted auditing standards. The Audit Committee
discussed with Grant Thornton LLP the matters required to be discussed by
Statement on Auditing Standards No. 61, as amended, Statement on Auditing
Standards No. 99, and SEC Rules discussed in Final Release Nos. 33-8183 and
33-8183a. In addition, the Audit Committee discussed with the independent
auditors the auditors' independence from management and the Company, including
the matters in the written disclosures and letter we received from the
independent auditors as required by the Independence Standards Board Standard
No. 1, and considered the compatibility of non-audit services with the auditors'
independence.

The Audit Committee discussed with Grant Thornton LLP the overall scope
and plans for their audit. The Audit Committee also met with Grant Thornton LLP,
with and without management present, to discuss the results of their audit,
their evaluation of the Company's internal controls and the overall quality of
the Company's financial reporting.

Based on the reviews and discussions referred to above, the Audit
Committee recommended to the Board of Directors (and the board has approved)
that the audited consolidated financial statements be included in the Annual
Report on Form 10-K for the fiscal year ended March 31, 2006 for filing with the
SEC.

Audit Committee
Samuel B. Ligon, Chairman
Graeme W. Henderson
John H. Wilson

PROPOSAL 2: RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS

The Audit Committee has appointed the firm of Grant Thornton LLP as
independent auditors for the fiscal year ending March 31, 2007. We are asking
the shareholders to ratify the appointment of Grant Thornton LLP as our
independent auditors for the fiscal year ending March 31, 2007. Grant Thornton
LLP was appointed by the Audit Committee in accordance with its charter. In
order to ratify the appointment of Grant Thornton LLP as our independent
auditors for the year ending March 31, 2007, the proposal must receive the
favorable vote of a majority of the shares entitled to vote and represented at
the annual meeting. If shareholders fail to ratify the appointment, the Audit
Committee may reconsider the appointment.

A representative of Grant Thornton LLP will be present at the annual
meeting to make a statement regarding our financial statements for the fiscal
year ended March 31, 2006 and to respond to appropriate questions you may have.

The board recommends that you vote "For" the ratification of the
appointment of Grant Thornton LLP as our independent auditors.

AUDIT AND OTHER FEES

The following table sets forth fees for services rendered by Grant
Thornton LLP for the fiscal years ended March 31, 2006 and March 31, 2005.

2006 2005
-------- --------
Audit Fees(1) $100,000 $148,500
Audit-Related Fees(2) -0- -0-
Tax Fees(3) 6,000 5,750
All Other Fees -0- -0-
-------- --------
Total Fees $106,000 $154,250
======== ========
------------------
(1) Represents fees for professional services provided in connection with the
audit of our annual financial statements and internal controls and review
of our quarterly financial statements, advice on accounting matters that
arose during the audit and audit services provided in connection with other
statutory or regulatory filings.
(2) Represents fees for assurance services related to the audit of our
financial statements and for services in connection with audits of our
benefit plans.
(3) Represents fees for services provided in connection with tax compliance,
tax advice and tax planning.

The Audit Committee has determined that the provision of non-audit services by
Grant Thornton LLP is compatible with maintaining Grant Thornton's independence.
In accordance with its charter, the Audit Committee approves in advance all
audit and tax services to be provided by Grant Thornton LLP. In other cases, the
chairman of the Audit Committee has the delegated authority from the committee
to pre-approve certain additional services, and such pre-approvals are
communicated to the full committee at its next meeting. During the fiscal year
2006, all services were pre-approved by the Audit Committee in accordance with
this policy.

OTHER MATTERS

As of the mailing date of this proxy statement, the Board of Directors
knows of no other matters to be presented at the meeting. Should any of the
matters requiring a vote of the shareholders arise at the meeting, the persons
named in the proxy will vote the proxies in accordance with their best judgment.

SHAREHOLDER PROPOSALS FOR 2007 ANNUAL MEETING

Any shareholder who intends to present a proposal at the annual meeting
in the year 2007, and who wishes to have the proposal included in our proxy
statement for that meeting, must deliver the proposal to our corporate
secretary, Susan K. Hodgson, at 12900 Preston Road, Suite 700, Dallas, Texas
75230, no later than February 2, 2007. All proposals must meet the requirements
set forth in the rules and regulations of the SEC in order to be eligible for
inclusion in the proxy statement for that meeting.

Any shareholder who intends to bring business to the annual meeting in
the year 2007, but not include the proposal in our proxy statement, or to
nominate a person to the board of directors, must also give written notice to
our corporate secretary, Susan K. Hodgson at the address set forth in the
preceding paragraph, by February 2, 2007.

EXPENSES OF SOLICITATION OF PROXIES

In addition to the use of the mails, proxies may be solicited by
personal interview and telephone by our directors, officers and employees, who
will not receive additional compensation for such services. We will request
brokerage houses, nominees, custodians and fiduciaries to forward soliciting
materials to the beneficial owners of stock held of record by them and will
reimburse such persons for forwarding materials. The cost of soliciting proxies
will be borne by us.

ANNUAL REPORT

The Annual Report to Shareholders covering the fiscal year ended March
31, 2006 accompanies this proxy statement, but is not deemed a part of the proxy
soliciting material.

A copy of the fiscal 2006 Form 10-K report filed with the SEC will be
mailed to shareholders without charge upon written request to Susan K. Hodgson,
Secretary, Capital Southwest Corporation, 12900 Preston Road, Suite 700, Dallas,
Texas 75230.

A copy of the Form 10-K is available via the Internet at our website
(www.capitalsouthwest.com) and the EDGAR version of such report is available at
the SEC's website (www.sec.gov).

Any complaint regarding accounting, internal accounting controls or
auditing matters should be mailed to John H. Wilson, independent director and
Audit Committee member, at 1500 Three Lincoln Centre, 5430 LBJ Freeway, Dallas,
TX 75240. Written complaints may be submitted anonymously.

Capital Southwest Corporation
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS -- JULY 17, 2006

THIS PROXY IS SOLICITED ON BEHALF OF THE
BOARD OF DIRECTORS OF THE CORPORATION.

The undersigned (1) acknowledges receipt of the Notice of Annual Meeting of
Shareholders of Capital Southwest Corporation, a Texas corporation, (the
"Corporation") to be held on Monday, July 17, 2006, at 10:00 a.m., Dallas time,
in Meeting Room #210 of the North Dallas Bank Tower, 12900 Preston Road, Dallas,
Texas, and the Proxy Statement in connection therewith; and (2) appoints Samuel
B. Ligon, William R. Thomas and John H. Wilson, and each of them, his proxies
with full power of substitution, for and in the name, place and stead of the
undersigned, to vote upon and act with respect to all of the shares of Common
Stock of the Corporation standing in the name of the undersigned, or with
respect to which the undersigned is entitled to vote and act at the meeting and
at any adjournment thereof, and the undersigned directs that this proxy be
voted:

(Continued and to be signed on the reverse side)

ANNUAL MEETING OF SHAREHOLDERS OF

CAPITAL SOUTHWEST CORPORATION

July 17, 2006

Please date, sign and mail
your proxy card in the
envelope provided as soon
as possible.

--------------------------------------------------------------------------------
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR
VOTE IN BLUE OR BLACK INK AS SHOWN HERE __
--------------------------------------------------------------------------------

1. Election of Directors:
NOMINEES:
___ FOR ALL NOMINEES ( ) Donald W. Burton
( ) Graeme W. Henderson
___ WITHOLD AUTHORITY ( ) Samuel B. Ligon
( ) Gary L. Martin
___ FOR ALL EXCEPT ( ) William R. Thomas
(See instructions below) ( ) John H. Wilson

INSTRUCTION: To withhold authority to vote for any individual nominee(s), mark
"FOR ALL EXCEPT" and fill in the circle next to each nominee you wish to
withhold, as shown here:( )

2. Proposal to ratify the appointment by our Audit Committee of Grant Thornton
LLP as our independent auditors.

FOR AGAINST ABSTAIN

___ ___ ___

3. In the discretion of the proxies, on any other matter that may properly
come before the meeting or, subject to the conditions in the Proxy
Statement, any adjournment thereof.

This proxy when properly executed will be voted in the manner directed.
Unless otherwise marked, this proxy will be voted for the election of the
persons named at the left hereof and for the proposal described in (2) above.

If more than one of the proxies named herein shall be present in person or
by substitute at the meeting or at any adjournment thereof, the majority of the
proxies so present and voting, either in person or by substitute, shall exercise
all of the powers hereby given.

The undersigned hereby revokes any proxy or proxies heretofore given to
vote upon or act with respect to such stock and hereby ratifies and confirms all
that the proxies, their substitutes, or any of them, may lawfully do by virtue
hereof.

________________________________________________________________________________
To change the address on your account, please check the box at right and
indicate your new address in the address ____ space above. Please note that
changes to the registered name(s) on the account may not be submitted via this
method.

Signature of
Shareholder: ________________________________________ Date: ___________________
Signature of
Shareholder: ________________________________________ Date: ___________________

NOTE: Please sign exactly as your name or names appear on this Proxy. When
shares are held jointly, each holder should sign. When signing as
executor, administrator, attorney, trustee or guardian, please give
full title as such. If the signer is a corporation, please sign full
corporate name by duly authorized officer, giving full title as such.
If signer is a partnership, please sign in partnership name by
authorized person.