I will miss Bill Thomas’s letters and I thank John for introducing me to them in the first place.

Annual Report, Capital Southwest Corporation

Heelys, Inc., producer of patented “wheel in the heel” stealth skate footwear, completed a public offering on December 8, 2006 of 7,393,750 shares at $21 per share, including 3,125,000 shares sold by Heelys and 4,268,750 shares from selling shareholders. Our Company sold 1,591,790 shares, realizing a gain of $31,070,149 and now owns 9,317,310 shares having a cost of $102,490 [$0.010999 per share] and a value (at $21 per share) of $195,664,000.

[Gotta love that cost basis — HLYS closed at $29.35 yesterday so tack on another $78,000,000.]

Six of our major holdings – Heelys, Inc., The RectorSeal Corporation, Palm Harbor Homes, Inc., Encore Wire Corporation, Alamo Group Inc. and Media Recovery, Inc. – represent 77.3% of the value of our investment portfolio. At March 31, 2007, our investments in these companies had an aggregate cost of $24,367,092 and a value of $526,797,000

[The power of non-diversification.]

Our minority interests in four publicly-owned companies are the cornerstones of our net asset value. We financed each of these companies at its inception and have continued to hold their stocks and positions on their boards for many years after they went public. These companies (and the years of our original investments) are Heelys, Inc. (2000), Palm Harbor Homes, Inc. (1977), Encore Wire Corporation (1989) and Alamo Group Inc. (1969). (Collectively, their value is $383.8 million.)

[Closely watched eggs in one basket.]

Be sure to read Thomas’s take on “disgustingly high” CEO compensation, and consider his comments on globalization (though he’s wrong of course, there’s nothing “inevitable” about his grandchildren not being able to match their grandparents’ standard of living).