The following discussion should be read in conjunction with our financial statements and the notes thereto included elsewhere in our Annual Report on Form 10-K for the fiscal year ended March 31, 2012 (the "Form 10-K").

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 the Form 10-K. The forward-looking statements made in this Form 10-Q related only to events as of the date on which the statements are made. You should read the following discussion in conjunction with the consolidated financial statements and related footnotes and other financial information included in the Form 10-K. 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.

Resultsof 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 income from interest, dividends and fees and its 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, net of applicable income tax expense based on the Company's tax year. The third element is the "Net increase in unrealized appreciation of investments," which is the net change in the market or fair value of the Company's investment portfolio, compared with stated cost. It should be noted that the "Net realized gain (loss) 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 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

For the nine months ended December 31, 2012, total investment income was $9,767,472, a $1,689,264, or 20.9%, increase from the $8,078,208 total investment income for the nine months ended December 31, 2011. This comparable period increase was primarily attributable to interest income accrued on additional debt investments made in Cinatra, Trax, TitanLiner and iMemories in 2012 as well as an increase of $1,391,074 in dividend receivables from Whitmore and Rectorseal.

The Company's principal objective is to achieve capital appreciation. Therefore, a significant portion of the investment portfolio is structured to maximize the potential return from equity participation and provides minimal current yield in the form of interest or dividends. The Company also earns interest income from the short-term investment of cash funds, and the annual amount of such income varies based upon the average level of funds invested during the year and fluctuations in short-term interest rates. During the nine months ended December 31, 2012 and 2011, the Company also had interest income from temporary cash investments of $50,400 and $35,421, respectively.

The Company also receives management fees primarily from its controlled affiliates, which aggregated $456,850 and $420,100 for the nine months ended December 31, 2012 and 2011, respectively.

During the nine months ended December 31, 2012 and 2011, the Company recorded dividend income from the following sources:

                                          Nine Months Ended
                                            December 31,
                                        2012            2011
Alamo Group, Inc.                    $   509,814     $   509,694
CapitalSouth Partners Fund III           198,647          79,459
Encore Wire Corporation                  134,235         245,205
The RectorSeal Corporation             5,315,372       4,202,512
TCI Holdings, Inc.                        60,953          60,953
The Whitmore Manufacturing Company     1,328,842       1,050,628
                                     $ 7,547,863     $ 6,148,451

Due to the nature of its business, the majority of the Company's operating expenses are related to employee and director compensation, office expenses, legal, professional and accounting fees and the net pension benefit. Total operating expenses, increased by $2,148,141 or 60% during the nine months ended December 31, 2012 as compared to the nine months ended December 31, 2011. Of the $2,148,141 increase, $1,657,303 is related to the establishment of bonus and phantom option accruals during the quarter ended December 31, 2012. The remainder of the increase is due primarily to compensation adjustments that went into effect in July 2012 as well as staff growth during the nine months ended December 31, 2012.

Net Realized Gain (Loss) on Investments

During the nine months ended December 31, 2012, we sold 2,774,250 shares of common stock in Encore Wire Corporation held by our subsidiary, CSVC, to Encore Wire generating a capital gain of $66,037,485. We also sold 50,000 shares of common stock of Hologic, Inc. generating a capital gain of $850,548. In addition, we sold all investment ownership in Extreme International, Inc. generating net cash proceeds of $11,890,630 and a realized gain of $7,600,125. We also received cash proceeds in the amount of $2,823 from Palm Harbor Home Liquidating Trust. These gains were offset by a $4,926,289 realized loss associated with sales of all investment ownership in VIA holdings., $760,742 realized loss related to liquidation of Sterling Group Partners, L.P., $150,594 realized loss related to liquidation of StarTech Seed Fund I, L.P. , and $7,000 capital loss adjustment related to a final true-up of the Lifemark Group, Inc. divesture from June 2010. The net realized gain for the nine months ended December 31, 2012 was $68,646,356. We declared and paid a cash dividend in the amount of $66,825,782 or $17.59 per share of common stock in June 2012. In total, we recognized net realized gains of $1,820,574 for the nine months ended December 31, 2012.

During the nine months ended December 31, 2011, we sold all of our shares of preferred stock (Series A, Series B and Series C) in Phi Health, Inc, generating net cash proceeds of $38,959 and a realized loss of $5,910,655; we sold all of our shares of Series A convertible preferred stock, along with warrants to purchase additional shares of common stock of All Components, Inc. in a management buy-out generating cash proceeds of $18,000,000 and a realized gain of $17,850,000; we received $500,000 in cash proceeds from Essex Capital Corporation as settlement for an unsecured promissory note generating a gain of $500,000, which was the by-product of an option exercise agreement; we sold all of our shares of common stock of Texas Capital BancShares, Inc., generating net cash proceeds of $13,416,341 and a realized gain of $9,866,335; we sold our warrants in PalletOne, Inc. generating cash proceeds of $459 and a realized loss of $45,287; and we recognized a loss of $10,820,624 when Palm Harbor Homes, Inc. was officially declared bankrupt. In total, we recognized net realized gains of $11,328,436 for the nine months ended December 31, 2011.

Management does not attempt to maintain a consistent level of realized gains from year to year, but instead attempts to maximize total investment portfolio appreciation. This strategy often dictates the long-term holding of portfolio securities in pursuit of increased values and increased unrealized appreciation, but may at opportune times dictate realizing gains or losses through the disposition of certain portfolio investments.

Net Increase/(Decrease) in Unrealized Appreciation of Investments

For the nine months ended December 31, 2012, we recognized a $5,903,931 decrease in net change in unrealized appreciation of investments. The largest decreases in unrealized appreciation were attributable to Encore Wire Corporation, which decreased $81,089,460 primarily due to our recent sale of CSVC's interest in Encore Wire Corporation; Hologic, Inc. decreased $1,957,514 attributable primarily to recent sales of 50,000 shares; Media Recovery, Inc. decreased $5,400,000; and Cinatra Clean Technologies, Inc. decreased $4,107,390 due to slowdowns in their respective business segments. Offsetting these decreases were Alamo Group, Inc. which increased $7,258,374 due to an increase in stock price; The Rectorseal Corporation, which increased $63,300,000; KBI Biopharma, which increased $2,200,000; Trax Holdings, Inc., which increased $8,800,000; The Whitmore Manufacturing Company, which increased $4,200,000; and Instawares Holding Company, LLC, which increased $829,000. All of these increases were attributable to increases in the entities' respective earnings and recent transaction prices.

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,
                                                2012             2011             2012               2011
Alamo Group, Inc.                          $ (3,277,112 )   $ 14,161,500     $   7,258,374      $   (664,075 )
Cinatra Clean Technologies, Inc.             (1,720,997 )     (3,598,835 )      (4,107,390 )      (6,192,538 )
Encore Wire Corporation                       1,365,000       19,412,063       (81,089,460 )*     13,281,938
Hologic, Inc.                                  (122,334 )      1,449,158        (1,957,514 )      (2,967,926 )
Instawares Holding Company, LLC                  94,000                -           829,000                 -
KBI Biopharma, Inc.                                   -          300,000         2,200,000        (2,300,000 )
Media Recovery, Inc.                          1,200,000        2,200,000        (5,400,000 )         500,000
The RectorSeal Corporation                   21,000,000       12,400,000        63,300,000         9,000,000
Trax Holdings, Inc.                           6,400,000                -         8,800,000            41,970
Whitmore Manufacturing Company               (5,700,000 )      1,400,000         4,200,000         5,400,000

* Gain of $66,037,485 was realized on the sale of 2,774,250 shares of common stock during the nine months ended December 31, 2012.

A description of the investments listed above and other material components of the investment portfolio are included elsewhere in this report under the caption "Consolidated Schedule of Investments - December 31, 2012 and March 31, 2012."

Portfolio Investments

During the nine months ended December 31, 2012, we invested $5,950,000 into a new investment, TitanLiner, Inc., and $3,090,849 in existing portfolio companies.

We have agreed, subject to certain conditions, to invest up to $8,456,366 in nine portfolio companies as of December 31, 2012.

Financial Liquidity and Capital Resources

At December 31, 2012, the Company had cash and cash equivalents of approximately $67.6 million. Pursuant to the SBA regulations, cash and cash equivalents of $14.7 million held by CSVC may not be transferred or advanced to CSW without the consent of the SBA.

Management believes that the Company's cash and cash equivalents and cash available from other sources described above are adequate to meet its expected requirements. Consistent with the long-term strategy of the Company, the disposition of investments from time to time may also be an important source of funds for future investment activities.

Application of Critical Accounting Policies and Accounting Estimates

There have been no changes during the quarter ended December 31, 2012 to the critical accounting policies or the areas that involve the use of significant judgments or estimates we described in the Form 10-K.