Net asset value at December 31, 2008 was $477,738,322, equivalent to $127.68 per share. Assuming reinvestment of all dividends and tax credits on retained long-term capital gains, the December 31, 2008 net asset value reflects a decrease of 3.71% during the past twelve months.

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)




                                           December 31,     December 31,
                                               2008             2007
                Net assets                 $477,738,322     $541,924,018
                Shares outstanding            3,741,638        3,889,151
                Net assets per share       $     127.68     $     139.34

Results of Operations

The composite measure of our financial performance in the Consolidated Statements of Operations is captioned "Increase (decrease) 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 (loss) on investments", which is the difference between the proceeds received from disposition of portfolio securities and their stated cost. The third element is the "Net increase (decrease) in unrealized appreciation of investments," which is the net change in the market or fair value of our investment portfolio, compared with stated cost. It should be noted that the "Net realized gain (loss) on investments" and "Net increase (decrease) in unrealized appreciation of investments" are directly related in that when an appreciated portfolio security is sold to realize a gain, a corresponding decrease in net unrealized appreciation occurs by transferring the gain associated with the transaction from "unrealized" to "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 $1,052,625 for the nine months ended December 31, 2008
decreased from $1,797,079 in the year-ago period due to a decrease in excess
cash and interest rates. During the nine months ended December 31, 2008 and
2007, we recorded dividend income from the following sources:

                                                          Nine Months Ended
                                                               December
                                                         2008            2007
             Alamo Group Inc.                         $   509,454     $  508,914
             Balco, Inc.                                        0        224,400
             CapitalSouth Partners                         20,519              0
             Dennis Tool Company                           37,499         49,999
             Encore Wire Corporation                      245,205        245,205
             Heelys, Inc.                               9,317,310              0
             Kimberly-Clark Corporation                    89,529        122,716
             Lifemark Group                                     0        571,333
             PETsMart, Inc.                                18,000         27,000
             The RectorSeal Corporation                   480,000        914,133
             TCI Holdings, Inc.                            60,953         60,953
             The Whitmore Manufacturing Company           120,000        228,533
             Other                                         51,039         50,465
                                                      $10,949,508     $3,003,651

Net Realized Gain on Investments

During the nine months ended December 31, 2008, the Company sold certain of its unrestricted marketable securities generating proceeds of $20,655,024, resulting in a net realized gain of $10,716,720; as compared with net realized gains of $240,024 during the nine months ended December 31, 2007.

During the nine months ended December 31, 2008, the Company realized gains of 15,936,664, consisting primarily of $6,646,883 on Petsmart, Inc., $2,487,019 on Liberty Entertainment Group, and $1,991,256 on Kimberly-Clark, Inc. These unrestricted marketable securities were sold in connection with our major share repurchase plan, which was announced on June 12, 2008. It was announced that we would fund our repurchase plan through the use of cash on hand and or proceeds from the sale of our unrestricted marketable securities. Our repurchase plan expired on December 10, 2008.

During the nine months ended December 31, 2007, the Company realized gains of $240,024 consisting of $546,221 of Alltel Corporation, $518,020 of Sterling Group Partners, and $245,950 of Exopack, Inc, which were offset by a realized loss of $1,070,167 from the sale of Hic-Star Corporation.

Net Increase (Decrease) in Unrealized Appreciation of Investments

   Set forth in the following table are the significant increases and decreases
in unrealized appreciation by portfolio company:

                                          Three Months Ended                   Nine Months Ended
                                             December 31                        December 31
                                         2008            2007              2008               2007
Alamo Group Inc.                      $(3,537,875 )   $(9,905,950 )    $(14,859,075 )      $(9,878,840 )
All Components,
Inc.                                   (2,399,999 )             -        (9,599,999 )        5,600,000
Encore Wire
Corporation                             6,130,125     (30,650,750 )      10,216,875        (24,520,750 )
Heelys, Inc.                          (16,305,293 )   (18,634,760 )     (16,305,293 )     (158,394,760 )
Media Recovery,
Inc.                                   (3,600,000 )             -        (9,100,000 )       (9,000,000 )
Palm Harbor
Homes, Inc.                            (9,818,901 )   (11,782,713 )      (5,891,341 )      (19,637,713 )
The RectorSeal
Corporation                            (4,200,000 )    11,150,000       (16,900,000 )       22,000,000

During the nine months ended December 31, 2008, the value of our investments in The RectorSeal Corporation decreased by $16,900,000, All Components, Inc. decreased $9,599,999 and Media Recovery, Inc decreased $9,100,000, due to decreases in their respective sales resulting from slowdowns in segments of their businesses. Additionally, our investments in Alamo Group Inc. decreased $14,859,075; Heelys Inc. decreased $16,305,293; and Palm Harbor Homes, Inc. decreased $5,891,341 due primarily to the decreases in their respective stock prices at December 31, 2008. Offsetting the aforementioned losses during the nine months ended December 31, 2008, was a $10,216,875 increase in the value of Encore Wire Corporation due primarily to an increase in their stock price at December 31, 2008.

Portfolio Investments

During the quarter ended December 31, 2008, we made investments of $4,000,000 in one new portfolio company and investments of $3,646,287 in existing portfolio companies.

We have agreed, subject to certain conditions, to invest up to $9,963,070 in seven portfolio companies.

Financial Liquidity and Capital Resources

At December 31, 2008, we had cash and cash equivalents of approximately $21.6 million. Pursuant to Small Business Administration (SBA) regulations, cash and cash equivalents of $5.2 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 $17.0 million. 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 40 years. Retention of future gains is viewed as an important source of funds to sustain our investment activity. Approximately $14.8 million of our investment portfolio is represented by unrestricted publicly-traded securities, and represent a source of liquidity.

Funds to be used by us for operating or investment purposes may be transferred in the form of dividends, management fees or loans from 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.