Net asset value at June 30, 2009 was $424,337,993, equivalent to $113.41 per share. Assuming reinvestment of all dividends and tax credits on retained long-term capital gains, the June 30, 2009 net asset value reflects a decrease of 20.6% during the past twelve months.

                                             June 30,         June 30,
                                               2009             2008
               Net assets                 $424,337,993     $581,836,149
               Shares outstanding            3,741,638        3,882,666
               Net assets per share            $113.41          $149.85

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 $322,808 for the three months ended June 30, 2009 decreased
from $349,852 in the year-ago period due to a decrease in excess cash and
interest rates. During the three months ended June 30, 2009 and 2008, we
recorded dividend income from the following sources:

                                                     Three Months Ended
                                                            June
                                                      2009          2008
           Alamo Group Inc.                          $169,817     $169,818
           Dennis Tool Company                         12,500       12,500
           Encore Wire Corporation                     81,735       81,735
           Kimberly-Clark Corporation                       0       44,764
           The RectorSeal Corporation                 240,000      240,000
           TCI Holdings, Inc.                          20,318       20,318
           The Whitmore Manufacturing Company          60,000       60,000
           Other                                            0       28,345
                                                     $584,370     $657,480

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

(continued)

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
                                              June 30
                                        2009           2008
All Components, Inc.                 $3,000,000     $         -
Balco, Inc.                           1,400,000               -
Encore Wire Corporation                       -      14,303,625
Heelys, Inc.                          2,329,328               -
Palm Harbor Homes, Inc.                       1       3,927,561
The RectorSeal Corporation                    -     (15,000,000 )
Texas Capital Bancshares, Inc.        2,066,348        (430,897 )

During the three months ended June 30, 2009, the value of our investments in All Components, Inc. and Balco, Inc. increased by $3,000,000 and $1,400,000, respectively. The increase in All Components, Inc. is the result of debt reduction on its senior credit facility; while the increase in our value of Balco, Inc. is due to strong results for its fiscal year ended June 30, 2009. Additionally, our investments in Heelys, Inc. and Texas Capital Bancshares, Inc. increased $2,329,328 and $2,066,348, respectively, due primarily to the increases in their respective stock prices at June 30, 2009.

Portfolio Investments

During the quarter ended June 30, 2009, we made investments of $5,963,588 in existing portfolio companies.

We have agreed, subject to certain conditions, to invest up to $10,219,482 in eight portfolio companies.

Financial Liquidity and Capital Resources

At June 30, 2009, we had cash and cash equivalents of approximately $10.5 million. Pursuant to Small Business Administration (SBA) regulations, cash and cash equivalents of $5.3 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 the SBA's approval of its credit application, CSVC would be entitled to borrow up to $20.6 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 $16.6 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.

(continued)

Application of Critical Accounting Policies and Accounting Estimates

There have been no changes during the first quarter of 2009 to the critical accounting policies or the areas that involve the use of significant judgments and estimates we described in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009.

Recent Developments

On July 13, 2009, we made a $4,000,000 investment in iMemories, Inc., a privately held Scottsdale, AZ company providing a consumer marketplace, through its website, for preserving, storing and sharing digitized personal videos and photos.

On July 20, 2009, our shareholders approved the Capital Southwest Corporation 2009 Stock Incentive Plan (the "Plan"), as described in footnote 11 of our Notes to Consolidated Financial Statements.

Forward-Looking Statements

The information contained herein may contain "forward-looking statements" based on our current expectations, assumptions and estimates about us and our industry. These forward-looking statements involve risks and uncertainties. Words such as "believe," "anticipate," "estimate," "expect," "intend," "plan," "will," "may," "might," "could," "continue" and other similar expressions identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of several factors more fully described in "Risk Factors" and elsewhere in this Form 10-Q, and in our Form 10-K for the year ended March 31, 2009. The forward-looking statements made in this Form 10-Q related only to events as of the date on which the statements are made. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.