<DOCUMENT>
<TYPE>EX-13.1
<SEQUENCE>7
<FILENAME>capitalsw10kex131033103.txt
<DESCRIPTION>ANNUAL REPORT TO SHAREHOLDERS
<TEXT>

                                                                    EXHIBIT 13.1

                   Twelve Largest Investments - March 31, 2003

================================================================================
Palm Harbor Homes, Inc.                                     $70,696,000
--------------------------------------------------------------------------------

     Palm  Harbor  Homes,  Dallas,  Texas,  is an  integrated  manufacturer  and
retailer of manufactured  and modular housing  produced in 19 plants and sold in
29 states by 153 company-owned  retail stores and over 100 independent  dealers.
The company provides  financing through its subsidiary,  CountryPlace  Mortgage,
and through its jointly-owned mortgage banking company, BSM Financial, and sells
insurance through its subsidiary,  Standard Casualty. Palm Harbor's high-quality
homes are designed to meet the need for attractive, affordable housing.

     During the year ended March 28, 2003, Palm Harbor earned  $3,221,000 ($0.14
per share) on net sales of  $573,130,000,  compared with earnings of $19,448,000
($0.85 per share) on net sales of  $627,380,000  in the previous year. The March
31, 2003 closing  Nasdaq bid price of Palm Harbor's  common stock was $14.19 per
share.

     At March 31, 2003,  the  $10,931,955  investment  in Palm Harbor by Capital
Southwest  and its  subsidiary  was valued at  $70,696,000  ($9.00  per  share),
consisting  of  7,855,121  restricted  shares of common  stock,  representing  a
fully-diluted equity interest of 34.1%.

================================================================================
The RectorSeal Corporation                                  $55,000,000
--------------------------------------------------------------------------------

     The RectorSeal Corporation,  Houston, Texas, with two plants in Texas and a
plant in New York,  manufactures  specialty  chemical  products  including  pipe
thread sealants,  firestop sealants,  plastic cements and other formulations for
plumbing and industrial applications.  RectorSeal's subsidiary,  Jet-Lube, Inc.,
with  plants  in Texas,  England  and  Canada,  produces  anti-seize  compounds,
specialty  lubricants  and  other  products  used in  industrial  and oil  field
applications. Another subsidiary produces a line of automotive chemical products
sold  under the Cargo and Blue Magic  trade  names.  RectorSeal  also owns a 20%
equity interest in The Whitmore Manufacturing Company (described on page 9).

     During the year ended  March 31,  2003,  RectorSeal  earned  $6,799,000  on
revenues of  $63,161,000,  compared  with  earnings of $5,277,000 on revenues of
$57,338,000 in the previous year.  RectorSeal's  earnings do not reflect its 20%
equity in The Whitmore Manufacturing Company.

     At March 31, 2003,  Capital  Southwest  owned 100% of  RectorSeal's  common
stock having a cost of $52,600 and a value of $55,000,000.

================================================================================
Skylawn Corporation                                         $38,000,000
--------------------------------------------------------------------------------

     Skylawn  Corporation,  Hayward,  California,  owns and operates cemeteries,
mausoleums and mortuaries. Skylawn's operations, all of which are in California,
include a major cemetery in San Mateo,  a mausoleum and an adjacent  mortuary in
Oakland and  cemeteries,  mausoleums and  mortuaries in Hayward,  Sacramento and
Napa.  The company  recently  acquired a funeral home in San Bruno and will soon
begin  building a major  funeral  home on the  grounds  of its San Mateo  County
cemetery. Its insurance company and funeral and cemetery trusts enable Skylawn's
clients to make pre-need arrangements.

     For the fiscal year ended March 31,  2003,  Skylawn  earned  $3,299,000  on
revenues of  $24,871,000,  compared  with  earnings of $3,772,000 on revenues of
$26,928,000 in the previous year.

     At March 31, 2003,  Capital  Southwest owned 100% of Skylawn  Corporation's
common stock, which had a cost of $4,510,400 and was valued at $38,000,000.

================================================================================
Alamo Group Inc.                                            $22,570,000
--------------------------------------------------------------------------------

     Alamo Group Inc.,  Seguin,  Texas, is a leading designer,  manufacturer and
distributor  of  heavy-duty,   tractor-mounted   mowing  and  other   vegetation
maintenance equipment,  street-sweeping equipment and replacement parts. Founded
in  1969,   Alamo  Group  operates  13   manufacturing   facilities  and  serves
governmental,  industrial and agricultural  markets in the U.S., Europe,  Canada
and Australia.

     For the year ended December 31, 2002, Alamo reported  consolidated earnings
of  $6,382,000  ($0.65 per share) on net sales of  $259,435,000,  compared  with
earnings of $10,812,000  ($1.11 per share) on net sales of  $246,047,000  in the
previous  year.  The March 31, 2003 closing NYSE market price of Alamo's  common
stock was $11.66 per share.

     At March 31, 2003, the $2,065,047  investment in Alamo by Capital Southwest
and its subsidiary was valued at  $22,570,000  ($8.00 per share),  consisting of
2,821,300 restricted shares of common stock, representing a fully-diluted equity
interest of 27.2%.

<PAGE>

================================================================================
Encore Wire Corporation                                     $13,623,000
--------------------------------------------------------------------------------

     Encore Wire  Corporation,  McKinney,  Texas,  manufactures  a broad line of
copper  electrical  building  wire and cable  including  non-metallic  sheathed,
underground  feeder  and THHN  wire and cable for  residential,  commercial  and
industrial  construction.   Encore's  products  are  sold  through  large-volume
distributors and building materials retailers.

     For the year  ended  December  31,  2002,  Encore  reported  net  income of
$5,964,000  ($0.39 per share) on net sales of  $285,207,000,  compared  with net
income of  $9,130,000  ($0.60  per  share) on net sales of  $281,010,000  in the
previous year.  The March 31, 2003 closing  Nasdaq bid price of Encore's  common
stock was $8.50 per share.

     At March  31,  2003,  the  $5,800,000  investment  in  2,724,500  shares of
Encore's  restricted  common stock by Capital  Southwest and its  subsidiary was
valued at $13,623,000  ($5.00 per share),  representing a  fully-diluted  equity
interest of 17.1%.

================================================================================
Media Recovery, Inc.                                        $10,000,000
--------------------------------------------------------------------------------

     Media  Recovery,  Inc.,  Graham,  Texas,  distributes  computer  and office
automation  supplies and accessories to corporate  customers  through its direct
sales force with 27 offices in 22 states. Its Shockwatch  division  manufactures
impact and tilt monitoring  devices used to detect mishandled  shipments.  Media
Recovery's  subsidiary,   The  Damage  Prevention  Company,   Denver,  Colorado,
manufactures  dunnage  products  used to prevent  damage in  trucking,  rail and
export container shipments.

     During the year ended  September  30,  2002,  Media  Recovery  reported net
income of  $1,817,000 on net sales of  $97,866,000,  compared with net income of
$3,007,000 on net sales of $110,840,000 in the previous year.

     At March 31, 2003, the  $5,415,000  investment in Media Recovery by Capital
Southwest and its subsidiary was valued at $10,000,000,  consisting of 4,800,000
shares of Series A convertible  preferred  stock,  representing a  fully-diluted
equity interest of 71.2%.

================================================================================
The Whitmore Manufacturing Company                          $10,000,000
--------------------------------------------------------------------------------

     The Whitmore  Manufacturing  Company,  with plants in  Rockwall,  Texas and
Cleveland,  Ohio,  manufactures specialty lubricants for heavy equipment used in
surface  mining,  railroads  and  other  industries,  and  produces  water-based
coatings  for  the  automotive  and  primary   metals   industries.   Whitmore's
subsidiary,  Fluid  Protection  Corporation,  manufactures  fluid  contamination
control devices.

     During the year  ended  March 31,  2003,  Whitmore  reported  net income of
$149,000 on net sales of $12,521,000, compared with net income of $88,000 on net
sales of  $12,151,000  in the previous year. The company is owned 80% by Capital
Southwest and 20% by Capital Southwest's subsidiary,  The RectorSeal Corporation
(described on page 8).

     At March 31, 2003, the direct  investment in Whitmore by Capital  Southwest
was valued at $10,000,000 and had a cost of $1,600,000.

================================================================================
All Components, Inc.                                         $8,700,000
--------------------------------------------------------------------------------

     All  Components,  Inc.,  Farmers  Branch,  Texas,  distributes and produces
memory and other components for personal computer  manufacturers,  retailers and
value-added  resellers.  Through its Dallas-based sales and distribution  center
and its contract  manufacturing  plants in Austin,  Texas and Boise,  Idaho, the
company serves over 2,000 customers throughout the United States.

     During the year ended August 31, 2002, All  Components  reported net income
of  $1,605,000  on net  sales  of  $135,936,000,  compared  with net  income  of
$5,220,000 on net sales of $152,757,000 in the previous year.

     At March 31, 2003,  the $150,000  investment  in All  Components by Capital
Southwest's  subsidiary was valued at $8,700,000 consisting of 150,000 shares of
Series A convertible preferred stock,  representing a 29.0% fully-diluted equity
interest.

<PAGE>

================================================================================
Liberty Media Corporation                                    $6,859,747
--------------------------------------------------------------------------------

     Liberty Media Corporation, Englewood, Colorado, acquired by AT&T as part of
Tele-Communications,  Inc.  in 1999 and now an  independent  company,  produces,
acquires and distributes  entertainment,  sports and  informational  programming
services  and  electronic  retailing  services,  which are  delivered  via cable
television and other technologies to viewers in the United States and overseas.

     For the year ended December 31, 2002,  Liberty Media reported a net loss of
$5.330 billion ($2.06 per share) on net sales of $2.084 billion, compared with a
net loss of $6.203  billion  ($2.40 per share) on net sales of $2.059 billion in
the  previous  year.  The March 31, 2003  closing  NYSE market price of Series A
common stock was $9.73 per share.

     At March 31, 2003, Capital Southwest owned 705,010  unrestricted  shares of
Series A common  stock,  having a total cost of $165,613  and a market  value of
$6,859,747 ($9.73 per share).


================================================================================
PETsMART, Inc.                                               $5,723,171
--------------------------------------------------------------------------------

     PETsMART,  Inc.,  Phoenix,  Arizona,  is the largest specialty  retailer of
services and solutions for the lifetime needs of pets. The company operates more
than 500 pet  superstores  in the United  States  and Canada and is the  leading
direct  marketer of pet  products  through its  e-commerce  site and its pet and
equine catalog business.

     For the year ended February 2, 2003, PETsMART,  Inc. reported net income of
$88,855,000 ($0.63 per share) on net sales of $2.695 billion,  compared with net
income of  $39,567,000  ($0.35 per share) on net sales of $2.501  billion in the
previous year. The March 31, 2003 closing Nasdaq bid price of PETsMART's  common
stock was $12.60 per share.

     At March 31, 2003,  Capital  Southwest  and its  subsidiary  owned  454,220
unrestricted  shares of common stock,  having a cost of $1,995,524  and a market
value of $5,723,171 ($12.60 per share).

================================================================================
AmPro Mortgage Corporation                                   $5,029,167
--------------------------------------------------------------------------------

     AmPro Mortgage Corporation,  Dallas, Texas, is a newly formed company which
acquired the  production  facility (but not the servicing  operations) of Matrix
Financial   Services   Corporation   ("Matrix")  on  February  28,  2003.  AmPro
originates, acquires, sells and services residential mortgage loans through nine
traditional  wholesale offices and one wholesale  sub-prime office in Santa Ana,
California.  The wholesale offices are located in Sacramento,  Dallas,  Houston,
Chicago, St Louis, Phoenix,  Denver,  Atlanta and Jacksonville.  In 2002, Matrix
originated over $3.6 billion in mortgages.

     At March 31, 2003, the investment in AmPro by Capital  Southwest was valued
at its cost of  $5,029,167  and consisted of 5,000 shares of Series A cumulative
preferred  stock and  29,167  shares of Series A common  stock,  representing  a
fully-diluted equity interest of 29.2%.

================================================================================
Texas Capital Bancshares, Inc.                               $5,000,006
--------------------------------------------------------------------------------

     Texas Capital Bancshares, Inc. of Dallas, Texas, formed in 1998, has raised
a total of $133.2  million  through three private  placements  and now has total
assets of approximately $1.8 billion.  With banks in Dallas,  Fort Worth, Austin
and San Antonio,  Texas  Capital  Bancshares  conducts its business  through its
wholly-owned  subsidiary,  Texas Capital Bank,  N.A.,  which  primarily  targets
middle market commercial and wealthy private client customers in Texas.

     For the year ended December 31, 2002,  Texas Capital reported net income of
$7,343,000 ($0.32 per share),  compared with net income of $5,844,000 ($0.30 per
share) in the previous year.

     At March 31, 2003,  the  investment in Texas Capital  Bancshares by Capital
Southwest was valued at its cost of $5,000,006,  consisting of 689,656 shares of
common stock, representing a fully-diluted equity interest of 2.9%.

<PAGE>
<TABLE>
<CAPTION>

                    Portfolio of Investments - March 31, 2003


         Company                                     Equity (a)        Investment (b)                      Cost           Value (c)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>       <C>                                 <C>              <C>
+AT&T CORP.                                              <1%       ++26,649 shares common
   New York, New York                                                stock (acquired 3-9-99)           $        12      $    431,714
   Major provider of voice
   and data communications services
   including business and consumer
   long distance and Internet.
------------------------------------------------------------------------------------------------------------------------------------

+AT&T WIRELESS SERVICES, INC.                            <1%       ++42,878 shares common stock
   Redmond, Washington                                               (acquired 7-9-01)                          10           282,995
   Provider of wireless voice and data
   services and products in the cellular
   and PCS markets.
------------------------------------------------------------------------------------------------------------------------------------

+ALAMO GROUP INC.                                      27.2%       2,821,300 shares common stock
   Seguin, Texas                                                     (acquired 4-1-73 thru 10-4-99)      2,065,047        22,570,000
   Tractor-mounted mowing and vegetation
   maintenance equipment for governmental,
   industrial and agricultural markets;
   street-sweeping equipment for municipalities.
------------------------------------------------------------------------------------------------------------------------------------

ALL COMPONENTS, INC.                                   29.0%       150,000 shares Series A convertible
   Farmers Branch, Texas                                             preferred stock, convertible into
   Distribution and production of memory and                         600,000 shares of common stock
   other components for personal computer                            at $0.25 per share
   manufacturers, retailers and value-added                          (acquired 9-16-94)                    150,000         8,700,000
   resellers; electronics contract manufacturing.
------------------------------------------------------------------------------------------------------------------------------------

+ALLTEL CORPORATION                                      <1%       ++8,880 shares common stock
   Little Rock, Arkansas                                             (acquired 7-1-98)                     108,355           397,469
   Wireline and wireless communications
   and  information services.
------------------------------------------------------------------------------------------------------------------------------------

AMPRO MORTGAGE CORPORATION                             29.2%       5,000 shares Series A cumulative
   Dallas, Texas                                                     preferred stock
   Originator and banker of residential                              (acquired 2-28-03)                  5,000,000         5,000,000
   mortgage loans.                                                 29,167 shares Series A common stock
                                                                     (acquired 2-28-03)                    29,167            29,167
                                                                                                         ---------         ---------
                                                                                                         5,029,167         5,029,167
------------------------------------------------------------------------------------------------------------------------------------

BALCO, INC.                                            89.7%       445,000 shares common stock
   Wichita, Kansas                                                   and 60,920 shares Class B
   Specialty architectural products                                  non-voting common stock
   used in the construction and remodeling                           (acquired 10-25-83 and 5-30-02)       624,920         5,000,000
   of commercial and institutional buildings.
------------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company                                            ++Unrestricted securities as defined in Note (b)


<PAGE>


         Company                                     Equity (a)        Investment (b)                      Cost           Value (c)
------------------------------------------------------------------------------------------------------------------------------------

BOXX TECHNOLOGIES, INC.                                16.3%       3,125,354 shares Series B
   Austin, Texas                                                     convertible preferred stock,
   Workstations for computer graphics                                convertible into 3,125,354
   imaging and design.                                               shares of common stock at
                                                                     $0.50 per share (acquired
                                                                     8-20-99 thru 8-8-01)              $ 1,500,000      $         2
                                                                   Warrants to purchase 80,000
                                                                     shares of Series B preferred
                                                                     stock at $0.50 per share,
                                                                     expiring 2005 (acquired 8-24-00)         --                --
                                                                                                       -----------      ------------
                                                                                                         1,500,000                 2
------------------------------------------------------------------------------------------------------------------------------------

CMI HOLDING COMPANY, INC.                              14.0%       1,745,744 shares Series
   Richardson, Texas                                                 A preferred stock
   Owns Chase Medical, which develops                                (acquired 8-21-02)                  3,000,000         3,000,000
   and sells devices used in cardiac surgery
   including proprietary devices for surgical
   intervention to relieve congestive
   heart failure.
------------------------------------------------------------------------------------------------------------------------------------

CASHWORKS, INC.                                        33.8%       1,500,000 shares Series
   Dallas, Texas                                                     B convertible preferred stock,
   Provides an ATM based system to convenience                       convertible into 1,500,000
   stores and other retail outlets for paycheck                      shares of common stock at $2.00
   cashing and other financial  services.                            per share (acquired 1-31-03)        3,000,000         3,000,000
                                                                   Warrant to purchase 375,000 shares
                                                                     of Series B preferred
                                                                     stock at $0.85 per share,
                                                                     expiring 2007
                                                                     (acquired 1-31-03)                       --                --
                                                                                                       -----------      ------------
                                                                                                         3,000,000         3,000,000
------------------------------------------------------------------------------------------------------------------------------------

+COMCAST CORPORATION                                     <1%       ++43,104 shares common stock                 21         1,234,068
   Philadelphia, PA                                                  (acquired 11-18-02)
   Development, management and operation of
   broadband cable networks, electronic
   retailing and programming.
------------------------------------------------------------------------------------------------------------------------------------

+CONCERT INDUSTRIES LTD.                                7.5%       2,833,485 shares common stock
   Vancouver, British Columbia                                       (acquired 5-31-00 thru 6-1-01)      9,131,224           443,000
   Manufacture and sale of latex,                                  Warrants to purchase 373,758 shares
   thermal and multi-bonded air-laid                                 of common stock at C$8.00
   nonwoven fabrics having superabsorbent                            (US$5.442) per share, expiring
   properties.                                                       2003 (acquired 6-1-01)                188,900              --
                                                                                                       -----------      ------------
                                                                                                         9,320,124           443,000
------------------------------------------------------------------------------------------------------------------------------------

DENNIS TOOL COMPANY                                    66.8%       20,725 shares 5% convertible preferred
   Houston, Texas                                                    stock, convertible into 20,725 shares
   Polycrystalline diamond compacts                                  of common stock at $48.25 per share
   (PDCs) used in oil field drill                                    (acquired 8-10-98)                    999,981           999,981
   bits and in mining and industrial                               140,137 shares common stock
   applications.                                                     (acquired 3-7-94 and 8-10-98)       2,329,963           500,000
                                                                                                       -----------      ------------
                                                                                                         3,329,944         1,499,981
------------------------------------------------------------------------------------------------------------------------------------

+ENCORE WIRE CORPORATION                               17.1%       2,724,500 shares common stock
   McKinney, Texas                                                   (acquired 7-16-92 thru 10-7-98)     5,800,000        13,623,000
   Electric wire and cable for residential
   and commercial use.
------------------------------------------------------------------------------------------------------------------------------------

EXOPACK HOLDING CORP.                                   1.5%       5,190 shares common stock
   Spartanburg, South Carolina                                       (acquired 7-27-01 and 8-8-02)         523,830           523,830
   Paper and plastic flexible packaging for products
   such as pet food, building  materials, chemicals
   and other commodities.
------------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company                                            ++Unrestricted securities as defined in Note (b)

<PAGE>

         Company                                     Equity (a)        Investment (b)                      Cost           Value (c)
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EXTREME INTERNATIONAL, INC.                            43.6%       12% subordinated notes,
   Sugar Land, Texas                                                 payable 2003 to 2004
   Owns Bill Young Productions, Texas                                (acquired 10-21-96 thru 4-30-01)  $ 4,176,750      $  1,551,750
   Video and Post, and Extreme Communications,                     375 shares 8% Series A convertible
   which produce radio and television                                preferred stock, convertible into
   commercials and corporate communications videos.                  1,500,000 shares of common stock at
                                                                     $0.25 per share (acquired 10-21-96)   375,000              --
                                                                   Warrants to purchase 1,303,500 shares
                                                                     of common stock at $0.25 per share,
                                                                     expiring 2005 and 2008 (acquired
                                                                     8-11-98 thru 12-31-01)                   --                --
                                                                                                       -----------         ---------
                                                                                                         4,551,750         1,551,750
------------------------------------------------------------------------------------------------------------------------------------

+FMC CORPORATION                                         <1%       ++6,430 shares common stock
   Chicago, Illinois                                                 (acquired 6-6-86)                      66,726           100,821
   Chemicals for agricultural, industrial
   and consumer markets.
------------------------------------------------------------------------------------------------------------------------------------

+FMC TECHNOLOGIES, INC.                                  <1%       ++11,057 shares common stock
   Chicago, Illinois                                                 (acquired 1-2-02)                      57,051           212,294
   Equipment and systems for the energy,
   food processing and air transportation
   industries.
------------------------------------------------------------------------------------------------------------------------------------

HEELING, INC.                                          43.0%       10% subordinated debenture due 2006
   Carrollton, Texas                                                 (acquired 10-30-00 thru 12-7-00)    1,800,000         1,800,000
   Heelys stealth skate shoes ("one wheel in                       1,745,455 shares Series A preferred
   the heel") sold through specialty skate,                          stock (acquired 5-26-00)              480,000           480,000
   lifestyle and sporting goods stores,                            436,364 shares Series B convertible
   footwear chains, department stores                                preferred stock, convertible into
   and over the Internet at Heelys.com.                              436,364 shares of common stock at
                                                                     $0.275 per share (acquired 5-26-00)   120,000           120,000
                                                                                                       -----------         ---------
                                                                                                         2,400,000         2,400,000
------------------------------------------------------------------------------------------------------------------------------------

+HOLOGIC, INC.                                           <1%       ++158,205 shares common stock
   Bedford, Massachusetts                                            (acquired 8-27-99)                    220,000         1,370,055
   Medical instruments including bone
   densitometers, mammography devices
   and digital radiography systems.
------------------------------------------------------------------------------------------------------------------------------------

+KIMBERLY-CLARK CORPORATION                              <1%       ++77,180 shares common stock
   Dallas, Texas                                                     (acquired 12-18-97)                 2,396,926         3,508,603
   Manufacturer of tissue, personal care
   and health care products.
------------------------------------------------------------------------------------------------------------------------------------

+LIBERTY MEDIA CORPORATION                               <1%       ++705,010 shares Series A
   Englewood, Colorado                                               common  stock (acquired 3-9-99
   Global media and entertainment company                            thru 12-12-02)                        165,613         6,859,747
   owning interests in video programming
   and communications businesses.
------------------------------------------------------------------------------------------------------------------------------------

+MAIL-WELL, INC.                                        3.8%       ++2,096,588 shares common stock
   Englewood, Colorado                                               (acquired 2-18-94 thru 11-10-98)    2,986,870         4,256,074
   Envelopes and commercial printing.
------------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company                                            ++Unrestricted securities as defined in Note (b)

<PAGE>


         Company                                     Equity (a)        Investment (b)                      Cost           Value (c)
------------------------------------------------------------------------------------------------------------------------------------

MEDIA RECOVERY, INC.                                   71.2%       4,800,000 shares Series A convertible
   Graham, Texas                                                     preferred stock, convertible
   Computer and office automation supplies                           into 4,800,000 shares of common
   and accessories; impact and tilt monitoring                       stock at $1.00 per share
   devices to detect mishandled                                      (acquired 11-4-97)                $ 5,415,000      $ 10,000,000
   shipments; dunnage for protecting shipments.
------------------------------------------------------------------------------------------------------------------------------------

ORGANIZED LIVING, INC.                                  6.1%       3,333,335 shares Series D
   Lenexa, Kansas                                                    convertible preferred stock,
   Specialty retailer of products designed                           convertible into 3,333,335
   to provide home and office storage and                            shares of common stock at
   organization solutions.                                           $1.80 per share
                                                                     (acquired 1-7-00 and 10-30-00)      6,000,000                 1
------------------------------------------------------------------------------------------------------------------------------------

PALLET ONE, INC.                                        8.8%       150,000 shares common stock
   Bartow, Florida                                                   (acquired 10-18-01)                   150,000           150,000
   Wood pallet manufacturer with 12                                1,485,000 shares Series A
   manufacturing facilities.                                         preferred stock
                                                                     (acquired 10-18-01)                 1,350,000         1,350,000
                                                                                                       -----------      ------------
                                                                                                         1,500,000         1,500,000
------------------------------------------------------------------------------------------------------------------------------------

+PALM HARBOR HOMES, INC.                               34.1%       7,855,121 shares common stock
   Dallas, Texas                                                     (acquired 1-3-85 thru 7-31-95)     10,931,955        70,696,000
   Integrated manufacturing, retailing,
   financing and insuring of manufactured
   housing and modular homes.
------------------------------------------------------------------------------------------------------------------------------------

+PETSMART, INC.                                          <1%       ++454,220 shares common stock
   Phoenix, Arizona                                                  (acquired 6-1-95)                   1,995,524         5,723,171
   Retail chain of more than 500 stores selling
   pet foods, supplies and services.
------------------------------------------------------------------------------------------------------------------------------------

THE RECTORSEAL CORPORATION                            100.0%       27,907 shares common stock
   Houston, Texas                                                    (acquired 1-5-73 and 3-31-73)          52,600        55,000,000
   Specialty chemical products for plumbing,
   HVAC, electrical, construction, industrial,
   oil field and automotive applications;
   owns 20% of Whitmore Manufacturing Company.

------------------------------------------------------------------------------------------------------------------------------------
SKYLAWN CORPORATION                                   100.0%       1,449,026 shares common stock
   Hayward, California                                               (acquired 7-16-69)                  4,510,400        38,000,000
   Cemeteries, mausoleums and mortuaries
   located in northern California.
------------------------------------------------------------------------------------------------------------------------------------

+SPRINT CORPORATION - FON Group                          <1%       ++72,000  shares common stock
   Westwood, Kansas                                                  (acquired 6-20-84)                    449,654           846,000
   Diversified telecommunications  company.
------------------------------------------------------------------------------------------------------------------------------------

+SPRINT CORPORATION - PCS Group                          <1%       ++36,000 shares common stock
   Overland Park, Kansas                                             (acquired 11-23-98)                    53,991           156,960
   Domestic wireless telephony services.
------------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company                                            ++Unrestricted securities as defined in Note (b)

<PAGE>

         Company                                     Equity (a)        Investment (b)                      Cost           Value (c)
------------------------------------------------------------------------------------------------------------------------------------

TCI  HOLDINGS, INC.                                        -       21 shares 12% Series C cumulative
   Denver, Colorado                                                  compounding preferred stock
   Cable television systems and                                      (acquired 1-30-90)                $      --        $    677,250
   microwave relay systems.
------------------------------------------------------------------------------------------------------------------------------------

TEXAS CAPITAL BANCSHARES, INC.                          2.9%       689,656 shares common stock
   Dallas, Texas                                                     (acquired 5-1-00)                   5,000,006         5,000,006
   Regional bank holding company with
   banking operations in four Texas cities.
------------------------------------------------------------------------------------------------------------------------------------

TEXAS PETROCHEMICAL HOLDINGS, INC.                      5.1%       30,000 shares common stock
   Houston, Texas                                                    (acquired 6-27-96)                  3,000,000                 1
   Butadiene for synthetic rubber, MTBE for
   gasoline octane enhancement and
   butylenes for varied applications.
------------------------------------------------------------------------------------------------------------------------------------

TEXAS SHREDDER, INC.                                   53.3%       750 shares Series B convertible
   San Antonio, Texas                                                preferred stock, convertible
   Design and manufacture of heavy-duty                              into 750,000 shares  of common
   shredder systems for recycling steel                              stock at $0.10 per share
   and other materials from junk automobiles.                        (acquired 3-6-91)                      75,000         1,800,000
------------------------------------------------------------------------------------------------------------------------------------

VOCALDATA, INC.                                         2.8%       1,300,002 shares Series A convertible
   Richardson, Texas                                                 preferred stock, convertible into
   Hardware and software for customer                                1,300,002 shares of common
   premises telephony  equipment based                               stock at $0.875 per share
   on Voice Over Internet Protocol.                                  (acquired 11-4-99 and 12-3-99)      1,137,500                 1
                                                                   200,287 shares Series B convertible
                                                                     preferred stock, convertible into
                                                                     200,287 shares of common stock
                                                                     at $1.759 per share
                                                                     (acquired 10-26-00)                   352,305                 1
                                                                                                       -----------      ------------
                                                                                                         1,489,805                 2
------------------------------------------------------------------------------------------------------------------------------------

THE WHITMORE MANUFACTURING COMPANY                     80.0%       80 shares common stock
   Rockwall, Texas                                                   (acquired 8-31-79)                  1,600,000        10,000,000
   Specialized mining and industrial lubricants;
   automotive transit coatings.
------------------------------------------------------------------------------------------------------------------------------------

MISCELLANEOUS                                            --        Diamond State Ventures, L.P.
                                                                     - 1.9% limited partnership
                                                                     interest (acquired 10-12-99
                                                                     thru 1-3-03)                          184,375           184,375
                                                         --        First Capital Group of Texas III,
                                                                     L.P. - 3.3% limited partnership
                                                                     interest (acquired 12-26-00
                                                                     thru 11-14-02)                        400,000           400,000
                                                      100.0%      Humac Company - 1,041,000 shares
                                                                     common stock (acquired 1-31-75
                                                                     and 12-31-75)                           --             128,000
                                                         --        STARTech Seed Fund I - 12.6% limited
                                                                     partnership interest
                                                                     (acquired 4-17-98 thru 1-5-00)        178,066                 1
                                                         --        STARTech Seed Fund II - 3.1% limited
                                                                     partnership interest
                                                                     (acquired 4-28-00 thru 2-28-02)       750,000           375,000
                                                         --        Sterling Group Partners I, L.P. -
                                                                     1.7% limited partnership
                                                                     interest (acquired 4-20-01
                                                                     thru 2-19-03)                         579,100           579,100
------------------------------------------------------------------------------------------------------------------------------------

TOTAL INVESTMENTS                                                                                      $91,461,842      $287,060,437
                                                                                                       ===========      ============
------------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company                                            ++Unrestricted securities as defined in Note (b)
</TABLE>

<PAGE>

                        Notes to Portfolio of Investments


(a)  The  percentages  in the  "Equity"  column  express  the  potential  equity
interests held by Capital  Southwest  Corporation and Capital  Southwest Venture
Corporation (together, the "Company") in each issuer. Each percentage represents
the amount of the  issuer's  common  stock the Company  owns or can acquire as a
percentage of the issuer's total outstanding common shares, plus shares reserved
for all outstanding warrants, convertible securities and employee stock options.
The symbol "<1%" indicates that the Company holds a potential equity interest of
less than one percent.

(b) Unrestricted  securities  (indicated by ++) are freely marketable securities
having readily available market quotations.  All other securities are restricted
securities  which are subject to one or more  restrictions on resale and are not
freely  marketable.   At  March  31,  2003,  restricted  securities  represented
approximately 91.2% of the value of the consolidated investment portfolio.

(c) Under the  valuation  policy of the  Company,  unrestricted  securities  are
valued at the closing sale price for listed  securities  and at the lower of the
closing bid price or the last sale price for Nasdaq  securities on the valuation
date. Restricted  securities,  including securities of publicly-owned  companies
which are  subject  to  restrictions  on  resale,  are  valued at fair  value as
determined by the Board of Directors.  Fair value is considered to be the amount
which the Company may reasonably  expect to receive for portfolio  securities if
such securities were sold on the valuation date. Valuations as of any particular
date, however, are not necessarily indicative of amounts which may ultimately be
realized as a result of future sales or other dispositions of securities.

     Among the factors  considered by the Board of Directors in determining  the
fair value of restricted  securities  are the financial  condition and operating
results of the issuer,  the  long-term  potential of the business of the issuer,
the market for and recent sales prices of the issuer's securities, the values of
similar securities issued by companies in similar businesses,  the proportion of
the issuer's securities owned by the Company,  the nature and duration of resale
restrictions  and the nature of any rights  enabling  the Company to require the
issuer to register  restricted  securities under applicable  securities laws. In
determining  the fair value of  restricted  securities,  the Board of  Directors
considers  the  inherent  value  of  such  securities   without  regard  to  the
restrictive  feature and  adjusts for any  diminution  in value  resulting  from
restrictions on resale.

(d) Agreements  between certain issuers and the Company provide that the issuers
will bear  substantially  all costs in connection with the disposition of common
stocks,  including those costs involved in registration under the Securities Act
of 1933 but excluding underwriting discounts and commissions.  These agreements,
which cover common stocks owned at March 31, 2003 and common stocks which may be
acquired  thereafter  through  exercise of warrants and conversion of debentures
and  preferred  stocks,  apply to  restricted  securities  of all issuers in the
investment  portfolio of the Company except securities of the following issuers,
which are not  obligated to bear  registration  costs:  Humac  Company,  Skylawn
Corporation and The Whitmore Manufacturing Company.

(e) The  descriptions  of the companies and ownership  percentages  shown in the
portfolio of investments were obtained from published  reports and other sources
believed to be reliable,  are  supplemental and are not covered by the report of
independent  auditors.  Acquisition  dates  indicated  are  the  dates  specific
securities  were acquired.  Certain  securities were received in exchange for or
upon conversion or exercise of other securities previously acquired.

<PAGE>

                        Portfolio Changes During the Year

New Investments and Additions to Previous Investments


                                                                 Amount
                                                              -----------
AmPro Mortgage Corporation ................................   $ 5,029,167
CMI Holding Company, Inc. .................................     3,000,000
CashWorks, Inc. ...........................................     3,000,000
Diamond State Ventures, L.P. ..............................        18,750
Exopack Holding Corp. .....................................        73,830
First Capital Group of Texas III, L.P. ....................       152,071
Liberty Media Corporation .................................       165,588
Sterling Group Partners I, L.P. ...........................       260,000
StarTech Seed Fund II .....................................       150,000
Miscellaneous .............................................        55,233
                                                              -----------

                                                              $11,904,639
                                                              ===========


Dispositions

                                                                        Amount
                                                            Cost       Received
                                                         ----------   ----------
Concert Industries Ltd. .........                        $   47,525   $     --
Drew Scientific Group PLC........                           182,689       11,168
MESC Holdings ...................                              --         56,678
Mylan Laboratories, Inc.........                            200,000    2,697,985
PETsMART, Inc. ..................                           441,604    1,448,052
Photon Dynamics, Inc. ...........                              --         20,280
Sprockets.com, Inc. .............                         1,300,000         --
Texas Shredder, Inc. ............                           329,600      329,600
Miscellaneous ...................                            55,233         --
                                                         ----------   ----------
                                                         $2,556,651   $4,563,763
                                                         ==========   ==========

Repayments Received .............                                     $   80,000
                                                                      ==========


<PAGE>

                 Capital Southwest Corporation and Subsidiaries
                 Consolidated Statements of Financial Condition

                                                               March 31
                                                     ---------------------------
Assets                                                   2003           2002
                                                     ------------   ------------

Investments at market or fair value (Notes
  1, 2 and 10)
  Companies more than 25% owned
     (Cost: 2003 - $23,114,865,
     2002 - $23,194,865) ........................    $202,893,981   $243,024,999
   Companies 5% to 25% owned
     (Cost: 2003 - $30,120,124,
     2002 - $27,167,649) ........................      18,566,004     34,943,003
   Companies less than 5% owned
     (Cost: 2003 - $38,226,853,
     2002 - $31,831,341) ........................      65,600,452     69,513,064
                                                     ------------   ------------

Total investments
     (Cost: 2003 - $91,461,842,
     2002 - $82,193,855) ........................     287,060,437    347,481,066
Cash and cash equivalents .......................       4,650,388      1,977,180
Receivables .....................................         297,664      1,753,297
Other assets (Note 8) ...........................       6,481,383      5,971,361
                                                     ------------   ------------




   Totals........................................    $298,489,872   $357,182,904
                                                     ============   ============



<TABLE>
<CAPTION>

                                                               March 31
                                                    ------------------------------
Liabilities and Shareholders' Equity                    2003              2002
                                                    -------------    -------------
<S>                                                 <C>              <C>
Note payable to bank (Note 4) ...................   $  15,500,000    $   6,500,000
Notes payable to portfolio company (Note 4) .....       7,500,000        2,500,000
Accrued interest and other liabilities (Note 8) .       1,868,991        2,018,140
Deferred income taxes (Note 3) ..................      67,153,906       90,673,722
Subordinated debenture (Note 5) .................            --          5,000,000
                                                    -------------    -------------
                    Total liabilities ...........      92,022,897      106,691,862
                                                    -------------    -------------

Shareholders' equity (Notes 3 and 6)
   Common stock, $1 par value: authorized,
     5,000,000 shares; issued, 4,266,416
     shares at March 31, 2003 and
     March 31, 2002 .............................       4,266,416        4,266,416
   Additional capital ...........................       6,935,497        6,935,497
   Undistributed net investment
     income .....................................       3,299,659        3,297,838
   Undistributed net realized gain on
     investments ................................      71,190,108       69,844,380
   Unrealized appreciation of investments -
     net of deferred income taxes ...............     127,808,597      173,180,213
   Treasury stock - at cost
     (437,365 shares) ...........................      (7,033,302)      (7,033,302)
                                                    -------------    -------------
   Net assets at market or fair value, equivalent
     to $53.92 per share at March 31, 2003,
     and $65.42 per share at March 31, 2002,
     on the 3,829,051 shares outstanding ........     206,466,975      250,491,042
                                                    -------------    -------------


   Totals .......................................   $ 298,489,872    $ 357,182,904
                                                    =============    =============
</TABLE>

                 See Notes to Consolidated Financial Statements


<PAGE>
<TABLE>
<CAPTION>

                 Capital Southwest Corporation and Subsidiaries
                      Consolidated Statements of Operations

                                                                                                  Years Ended March 31
                                                                                       --------------------------------------------
                                                                                           2003            2002            2001
                                                                                       ------------    ------------    ------------
<S>                                                                                    <C>             <C>             <C>
Investment income (Note 9):
   Interest ........................................................................   $    204,490    $    322,521    $    542,241
   Dividends .......................................................................      3,360,990       3,293,633       2,955,833
   Management and directors' fees ..................................................        495,900         530,400         530,400
                                                                                       ------------    ------------    ------------
                                                                                          4,061,380       4,146,554       4,028,474
                                                                                       ------------    ------------    ------------

Operating expenses:
   Salaries ........................................................................        911,671         894,612         850,959
   Net pension benefit (Note 8) ....................................................       (387,923)       (504,536)       (486,174)
   Other operating expenses (Notes 7 and 11) .......................................        626,106         633,254         614,861
                                                                                       ------------    ------------    ------------
                                                                                          1,149,854       1,023,330         979,646
                                                                                       ------------    ------------    ------------
Income before interest expense and income taxes ....................................      2,911,526       3,123,224       3,048,828
Interest expense ...................................................................        476,761         929,372       1,144,337
                                                                                       ------------    ------------    ------------
Income before income taxes .........................................................      2,434,765       2,193,852       1,904,491
Income tax expense (Note 3) ........................................................        135,513         151,956         181,991
                                                                                       ------------    ------------    ------------
Net investment income ..............................................................   $  2,299,252    $  2,041,896    $  1,722,500
                                                                                       ============    ============    ============

Proceeds from disposition of investments ...........................................   $  4,563,763    $  5,923,165    $  7,657,377
Cost of investments sold (Note 1) ..................................................      2,556,651       6,685,279      12,782,870
                                                                                       ------------    ------------    ------------
Realized gain (loss) on investments before income taxes (Note 9) ...................      2,007,112        (762,114)     (5,125,493)
Income tax expense (benefit) .......................................................        661,384        (224,180)     (1,894,506)
                                                                                       ------------    ------------    ------------
Net realized gain (loss) on investments ............................................      1,345,728        (537,934)     (3,230,987)
                                                                                       ------------    ------------    ------------
Increase (decrease) in unrealized appreciation of investments before income taxes ..    (69,688,616)     36,971,348     (10,310,835)
Increase (decrease) in deferred income taxes on appreciation of investments (Note 3)    (24,317,000)     12,797,000      (3,841,000)
                                                                                       ------------    ------------    ------------
Net increase (decrease) in unrealized appreciation of investments ..................    (45,371,616)     24,174,348      (6,469,835)
                                                                                       ------------    ------------    ------------

Net realized and unrealized gain (loss) on investments .............................   $(44,025,888)   $ 23,636,414    $ (9,700,822)
                                                                                       ============    ============    ============

Increase (decrease) in net assets from operations ..................................   $(41,726,636)   $ 25,678,310    $ (7,978,322)
                                                                                       ============    ============    ============
</TABLE>

                 See Notes to Consolidated Financial Statements

<PAGE>
<TABLE>
<CAPTION>

                 Capital Southwest Corporation and Subsidiaries
                Consolidated Statements of Changes in Net Assets

                                                                                    Years Ended March 31
                                                                      -----------------------------------------------
                                                                           2003             2002             2001
                                                                      -------------    -------------    -------------
<S>                                                                   <C>              <C>              <C>
Operations
  Net investment income ...........................................   $   2,299,252    $   2,041,896    $   1,722,500
  Net realized gain (loss) on investments .........................       1,345,728         (537,934)      (3,230,987)
  Net increase (decrease) in unrealized appreciation of investments     (45,371,616)      24,174,348       (6,469,835)
                                                                      -------------    -------------    -------------
  Increase (decrease) in net assets from operations ...............     (41,726,636)      25,678,310       (7,978,322)

Distributions from:
  Undistributed net investment income .............................      (2,297,431)      (2,294,631)      (2,289,031)

Capital share transactions
  Exercise of employee stock options ..............................            --            498,750             --
                                                                      -------------    -------------    -------------


    Increase (decrease) in net assets .............................     (44,024,067)      23,882,429      (10,267,353)
Net assets, beginning of year .....................................     250,491,042      226,608,613      236,875,966
                                                                      -------------    -------------    -------------

Net assets, end of year ...........................................   $ 206,466,975    $ 250,491,042    $ 226,608,613
                                                                      =============    =============    =============
</TABLE>




                 See Notes to Consolidated Financial Statements


<PAGE>
<TABLE>
<CAPTION>

                 Capital Southwest Corporation and Subsidiaries
                      Consolidated Statements of Cash Flows

                                                                                     Years Ended March 31
                                                                        --------------------------------------------
                                                                            2003            2002            2001
                                                                        ------------    ------------    ------------
<S>                                                                     <C>             <C>             <C>
Cash flows from operating activities
Increase (decrease) in net assets from operations ...................   $(41,726,636)   $ 25,678,310    $ (7,978,322)
Adjustments to reconcile increase (decrease) in net assets from
   operations to net cash provided by (used in) operating activities:
   Depreciation and amortization ....................................         21,668          26,258          29,891
   Net pension benefit ..............................................       (387,923)       (504,536)       (486,174)
   Net realized and unrealized (gain) loss on investments ...........     44,025,888     (23,636,414)      9,700,822
   (Increase) decrease in receivables ...............................      1,455,633      (1,488,920)        (25,783)
   Increase in other assets .........................................        (29,447)        (17,922)         (8,923)
   Decrease in accrued interest and other liabilities ...............        (96,188)        (44,479)        (27,179)
   Decrease in accrued pension cost .................................       (167,280)       (199,280)       (209,947)
   Deferred income taxes ............................................        135,800         176,600         170,400
                                                                        ------------    ------------    ------------
Net cash provided by (used in) operating activities .................      3,231,515         (10,383)      1,164,785
                                                                        ------------    ------------    ------------
Cash flows from investing activities
Proceeds from disposition of investments ............................      4,563,763       5,923,165       7,657,377
Purchases of securities .............................................    (11,904,639)     (3,545,458)    (15,922,079)
Maturities of securities ............................................         80,000       2,267,970         540,000
                                                                        ------------    ------------    ------------
Net cash provided by (used in) investing activities .................     (7,260,876)      4,645,677      (7,724,702)
                                                                        ------------    ------------    ------------
Cash flows from financing activities
Increase (decrease) in notes payable to bank ........................      9,000,000       1,500,000     (55,000,000)
Increase (decrease) in notes payable to portfolio companies .........      5,000,000      (3,500,000)      1,000,000
Decrease in subordinated debenture ..................................     (5,000,000)           --              --
Distributions from undistributed net investment income ..............     (2,297,431)     (2,294,631)     (2,289,031)
Proceeds from exercise of employee stock options ....................           --           498,750            --
                                                                        ------------    ------------    ------------
Net cash provided by (used in) financing activities .................      6,702,569      (3,795,881)    (56,289,031)
                                                                        ------------    ------------    ------------
Net increase (decrease) in cash and cash equivalents ................      2,673,208         839,413     (62,848,948)
Cash and cash equivalents at beginning of year ......................      1,977,180       1,137,767      63,986,715
                                                                        ------------    ------------    ------------
Cash and cash equivalents at end of year ............................   $  4,650,388    $  1,977,180    $  1,137,767
                                                                        ============    ============    ============
Supplemental disclosure of cash flow information:
Cash paid during the year for: Interest .............................   $    606,722    $    922,011    $  1,144,558
                               Income taxes .........................   $       --      $        287    $     11,591
</TABLE>


                 See Notes to Consolidated Financial Statements

<PAGE>

                   Notes to Consolidated Financial Statements

1.   Summary of Significant Accounting Policies

     Capital Southwest  Corporation  ("CSC") is a business  development  company
subject  to  regulation  under  the  Investment  Company  Act of  1940.  Capital
Southwest Venture Corporation  ("CSVC"), a wholly-owned  subsidiary of CSC, is a
Federal  licensee  under  the Small  Business  Investment  Act of 1958.  Capital
Southwest Management Corporation ("CSMC"), a wholly-owned  subsidiary of CSC, is
the  management  company  for  CSC and  CSVC.  The  following  is a  summary  of
significant  accounting policies followed in the preparation of the consolidated
financial statements of CSC, CSVC and CSMC (together, the "Company"):

     Principles of  Consolidation.  The consolidated  financial  statements have
been prepared on the value method of accounting  in accordance  with  accounting
principles  generally  accepted in the United  States of America for  investment
companies.  All significant  intercompany  accounts and  transactions  have been
eliminated in consolidation.

     Cash and Cash Equivalents. All temporary cash investments having a maturity
of three months or less when purchased are considered to be cash equivalents.

     Investments.  Investments are stated at market or fair value  determined by
the Board of Directors as described in the Notes to Portfolio of Investments and
Note 2 below. The average cost method is used in determining cost of investments
sold.  Investments are recorded on a trade date basis.  Dividends are recognized
on the ex-dividend date and interest income is accrued daily.

     Segment  Information.  The Company  operates  and manages its business in a
singular  segment.  As an investment  company,  the Company invests in portfolio
companies  in  various  industries  and  geographic  areas as  presented  in the
portfolio of investments.

     Stock-Based   Compensation.   The  Company  accounts  for  its  stock-based
compensation   plans  under  the  recognition  and  measurement   principles  of
Accounting  Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to
Employees",  and related  Interpretations.  No stock-based  compensation cost is
reflected in net asset value,  as all options  granted  under those plans had an
exercise price equal to the market value of the  underlying  common stock on the
date of grant.

     In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation  - Transition  and  Disclosure - an amendment of FASB Statement No.
123." SFAS No. 148 provides  alternative  methods of transition  for a voluntary
change to the fair value based method of  accounting  for  stock-based  employee
compensation and amends the related existing disclosure requirements.  Since the
Company  accounts for its  stock-based  compensation  under the  recognition and
measurement  principles of Accounting  Principles Board Opinion No. 25, SFAS 148
does not have an impact on the Company's operating results or financial position
for the years ended March 31, 2003, 2002 and 2001.

     The following table illustrates the effect on net asset value and net asset
value per share if the Company had applied the fair value recognition provisions
of FASB  Statement  No.  123,  "Accounting  for  Stock-Based  Compensation",  to
stock-based compensation.

                                                 Years Ended March 31
                                   ---------------------------------------------
                                        2003            2002            2001
                                   -------------   -------------   -------------

Net asset value, as reported       $ 206,466,975   $ 250,491,042   $ 226,608,613
Deduct: Total fair value computed
  stock-based compensation               179,440          59,216          59,216
                                   -------------   -------------   -------------

Pro forma net asset value          $ 206,287,535   $ 250,431,826   $ 226,549,397
                                   =============   =============   =============

Net asset value per share:
  Basic - as reported              $       53.92   $       65.42   $       59.40
                                   =============   =============   =============
  Basic - pro forma                $       53.87   $       65.40   $       59.38
                                   =============   =============   =============

  Diluted - as reported            $       53.79   $       65.20   $       59.14
                                   =============   =============   =============
  Diluted- pro forma               $       53.74   $       65.19   $       59.12
                                   =============   =============   =============

     The  diluted  net asset  value per share  calculation  assumes  all  vested
outstanding  options for which the market price exceeds the exercise  price have
been exercised.


<PAGE>

     Effective  April 1, 2003,  the  Company  adopted  the fair value  method of
recording  compensation expense related to all stock options granted after March
31, 2003, in accordance with SFAS Nos. 123 and 148. Accordingly,  the fair value
of stock  options as  determined  on the date of grant  using the  Black-Scholes
option-pricing  model will be expensed  over the  vesting  period of the related
stock options.

2.   Valuation of Investments

     The consolidated financial statements as of March 31, 2003 and 2002 include
securities  valued  at  $261,680,466  (91.2%  of the  value of the  consolidated
investment  portfolio) and $317,137,082  (91.3% of the value of the consolidated
investment  portfolio),  respectively,  whose values have been determined by the
Board of  Directors  in the  absence of  readily  ascertainable  market  values.
Because  of the  inherent  uncertainty  of  valuation,  these  values may differ
significantly  from the values that would have been used had a ready  market for
the securities existed, and the differences could be material.

3.   Income taxes

     For the tax years ended  December  31,  2002,  2001 and 2000,  CSC and CSVC
qualified  to  be  taxed  as  regulated   investment  companies  ("RICs")  under
applicable  provisions of the Internal  Revenue Code. As RICs, CSC and CSVC must
distribute  at least 90% of their  taxable  net  investment  income  (investment
company  taxable  income) and may either  distribute or retain their taxable net
realized gain on investments  (capital gains).  Both CSC and CSVC intend to meet
the  applicable  qualifications  to be taxed as RICs in future  years;  however,
either company's ability to meet certain portfolio diversification  requirements
of RICs in future years may not be controllable by such company.

     No material  provision was made for Federal  income taxes on the investment
company taxable income of CSC and CSVC for the 2003, 2002 and 2001 fiscal years.
Such income was  distributed to  shareholders  in the form of cash dividends for
which CSC and CSVC  receive a tax  deduction.  With  respect  to net  investment
income,  the income tax expense for each of the three years ended March 31, 2003
includes a deferred tax provision related to the net pension benefit.

     CSC and CSVC may not qualify or elect to be taxed as RICs in future  years.
Therefore,  consolidated  deferred  Federal  income  taxes  of  $67,790,000  and
$92,107,000 have been provided on net unrealized  appreciation of investments of
$195,598,595  and  $265,287,211 at March 31, 2003 and 2002,  respectively.  Such
appreciation is not included in taxable income until  realized.  Deferred income
taxes on net unrealized  appreciation  of investments  have been provided at the
then currently  effective maximum Federal corporate tax rate on capital gains of
35% at March 31, 2003 and 2002.

4.   Notes Payable

     The note  payable to bank at March 31, 2003 and 2002 was from an  unsecured
revolving line of credit of $25,000,000 and $15,000,000,  respectively, of which
$15,500,000 and $6,500,000,  respectively, had been drawn. The revolving line of
credit bears  interest at the bank's base rate less .50% or LIBOR plus 1.25% and
matures on July 31, 2004.

     The notes  payable to  portfolio  company were demand  promissory  notes to
Skylawn Corporation with interest payable at the greater of prime minus 2.25% or
the  Applicable  Federal  Rate  established  by the  Internal  Revenue  Service.
Interest  expense  on these  portfolio  company  notes was  $75,531  in 2003 and
$216,280 in 2002.

5.   Subordinated Debenture

     The subordinated  debenture of $5,000,000 outstanding at March 31, 2002 was
payable to others and guaranteed by the Small Business  Administration  ("SBA"),
bore interest at 8.0% and was repaid June 3, 2002.

6.   Employee Stock Option Plan

     Under the 1984  Incentive  Stock Option Plan,  options to purchase  28,000,
28,000 and 42,000  shares of common stock at $35.625 per share (the market price
at the time of grant) were  outstanding  and exercisable at March 31, 2003, 2002
and 2001, respectively, and expire July 2003. During the three years ended March
31, -0- options were  exercised in 2003,  14,000 were  exercised in 2002 and -0-
were exercised in 2001. The 1984 Incentive Stock Option Plan expired in 1994.

     On July  19,  1999,  shareholders  approved  the  1999  Stock  Option  Plan
("Plan"),  which  provides  for the granting of stock  options to employees  and
officers of the Company and  authorizes  the  issuance of common  stock upon the
exercise of such options for up to 140,000  shares of common stock.  All options
are granted at or above  market  price and  generally  expire ten years from the
date of grant and are generally exercisable on or after the first anniversary of
the date of grant in five to ten annual installments.

<PAGE>

     At March 31, 2003, there were 85,500  additional shares available for grant
under the Plan.  The per share  weighted  average  fair  value of stock  options
granted  during  2002 was  $20.76 on the date of grant  using the Black  Scholes
option-pricing model with the following assumptions:  expected dividend yield of
.92%,  risk-free  interest  rate of 5.14%,  expected  volatility  of 20.6%,  and
expected life of 7 years.

     The following  summarizes  activity in the stock option plans for the years
ended March 31, 2003, 2002 and 2001:

                                       Number     Weighted Average
                                     of shares     Exercise Price
                                     ---------     --------------
Balance at April 1, 2000               80,000         $55.856
     Granted                             --              --
     Exercised                           --              --
     Forfeited                           --              --
     Expired                             --              --
                                      -------         -------
Balance at March 31, 2001              80,000          55.856
     Granted                           44,000          65.239
     Exercised                        (14,000)         35.625
     Forfeited                        (27,500)         65.000
     Expired                             --              --
                                      -------         -------
Balance at March 31, 2002              82,500          58.336
     Granted                             --              --
     Exercised                           --              --
     Forfeited                           --              --
     Expired                             --              --
                                      -------         -------
Balance at March 31, 2003              82,500         $58.336
                                      =======         =======

     At March 31,  2003,  the range of  exercise  prices  and  weighted  average
remaining  contractual life of outstanding options was $35.625 - $84.70 and 4.80
years, respectively.

     At March 31, 2003,  2002 and 2001,  the number of options  exercisable  was
44,750, 36,100 and 49,750,  respectively and the weighted average exercise price
of those options was $50.61, $45.93, $42.63, respectively.

7.   Employee Stock Ownership Plan

     The  Company  and one of its  wholly-owned  portfolio  companies  sponsor a
qualified  employee  stock  ownership  plan ("ESOP") in which certain  employees
participate. Contributions to the plan, which are invested in Company stock, are
made at the discretion of the Board of Directors.  A  participant's  interest in
contributions to the ESOP fully vests after five years of active service. During
the three  years ended March 31, the  Company  made  contributions  to the ESOP,
which were charged against net investment income, of $44,417 in 2003, $28,322 in
2002 and $42,997 in 2001.

8.   Retirement Plans

     The Company sponsors a qualified  defined benefit pension plan which covers
its employees and employees of certain of its wholly-owned  portfolio companies.
The following  information  about the plan  represents  amounts and  information
related to the  Company's  participation  in the plan and is presented as though
the Company  sponsored a  single-employer  plan.  Benefits are based on years of
service and an average of the highest  five  consecutive  years of  compensation
during the last ten years of  employment.  The funding  policy of the plan is to
contribute  annual  amounts  that are  currently  deductible  for tax  reporting
purposes.  No  contribution  was made to the plan  during the three  years ended
March 31, 2003.

     The following tables set forth the qualified plan's benefit obligations and
fair value of plan assets at March 31, 2003, 2002 and 2001:

                                                Years Ended March 31
                                    -----------------------------------------
                                        2003           2002           2001
                                    -----------    -----------    -----------
Change in benefit obligation
Benefit obligation at beginning
     of  year ...................   $ 3,284,463    $ 3,255,669    $ 3,260,366
Service cost ....................        41,142         58,428         50,961
Interest cost ...................       202,424        207,940        205,976
Amendments ......................       346,882           --             --
Actuarial loss ..................       165,560         94,298         59,571
Benefits paid ...................      (363,872)      (331,872)      (321,205)
                                    -----------    -----------    -----------
Benefit obligation at end of year   $ 3,676,599    $ 3,284,463    $ 3,255,669
                                    ===========    ===========    ===========


<PAGE>
<TABLE>
<CAPTION>

                                                    Years Ended March 31
                                         -----------------------------------------
                                             2003           2002           2001
                                         -----------    -----------    -----------
<S>                                      <C>            <C>            <C>
Change in plan assets
Fair value of plan assets at beginning
     of  year ........................   $ 9,410,320    $ 8,758,035    $ 9,837,547
Actual return on plan assets .........    (2,164,725)       984,157       (758,307)
Benefits paid ........................      (363,872)      (331,872)      (321,205)
                                         -----------    -----------    -----------
Fair value of plan assets at end of
     year ............................   $ 6,881,723    $ 9,410,320    $ 8,758,035
                                         ===========    ===========    ===========
</TABLE>

     The  following  table sets forth the  qualified  plan's  funded  status and
amounts  recognized  in  the  Company's  consolidated  statements  of  financial
condition:
<TABLE>
<CAPTION>
                                                                 March 31
                                                       --------------------------
                                                           2003           2002
                                                       -----------    -----------
<S>                                                    <C>            <C>
Actuarial present value of benefit obligations:
     Accumulated benefit obligation ................   $(3,346,711)   $(2,906,821)
                                                       ===========    ===========
Projected benefit obligation for service rendered to
     date ..........................................   $(3,676,599)   $(3,284,463)
Plan assets at fair value* .........................     6,881,723      9,410,320
                                                       -----------    -----------
Excess of plan assets over the projected benefit
     obligation ....................................     3,205,124      6,125,857
Unrecognized net loss from past experience
     different from that assumed and effects of
     changes in assumptions ........................     3,023,057         32,117
Unrecognized prior service costs ...................       217,886       (140,319)
Unrecognized net assets being amortized over
     19 years ......................................      (147,646)      (221,477)
                                                       -----------    -----------
Prepaid pension cost included in other assets ......   $ 6,298,421    $ 5,796,178
                                                       ===========    ===========
</TABLE>
-----------
*Primarily  equities and bonds including  approximately  30,000 shares of common
stock of the Company.

     Components of net pension benefit related to the qualified plan include the
following:
                                                     Years Ended March 31
                                            -----------------------------------
                                               2003         2002         2001
                                            ---------    ---------    ---------
Service cost - benefits earned during
     the year .........................     $  41,142    $  58,428    $  50,961
Interest cost on projected benefit
     obligation .......................       202,424      207,940      205,976
Expected return on assets .............      (641,722)    (783,467)    (762,897)
Net amortization and deferral .........      (104,087)    (114,284)    (131,965)
                                            ---------    ---------    ---------
Net pension benefit from qualified plan     $(502,243)   $(631,383)   $(637,925)
                                            =========    =========    =========

     The Company also sponsors an unfunded Retirement Restoration Plan, which is
a  nonqualified  plan that  provides for the payment,  upon  retirement,  of the
difference  between the maximum annual payment  permissible  under the qualified
retirement  plan  pursuant  to Federal  limitations  and the amount  which would
otherwise have been payable under the qualified plan.



<PAGE>

     The following  table sets forth the Retirement  Restoration  Plan's benefit
obligations at March 31, 2003, 2002 and 2001:
                                                Years Ended March 31
                                      -----------------------------------------
                                          2003           2002           2001
                                      -----------    -----------    -----------
Change in benefit obligation
Benefit obligation at beginning
     of  year ...................     $ 1,778,496      1,758,214    $ 2,026,495
Service cost ....................           5,389          8,573          4,945
Interest cost ...................         104,436        113,779        113,497
Amendments ......................        (347,147)          --             --
Actuarial (gain) loss ...........         (20,507)        97,210       (176,776)
Benefits paid ...................        (167,281)      (199,280)      (209,947)
                                      -----------    -----------    -----------
Benefit obligation at end of year     $ 1,353,386    $ 1,778,496    $ 1,758,214
                                      ===========    ===========    ===========

     The  following  table sets forth the status of the  Retirement  Restoration
Plan and the amounts  recognized  in the  consolidated  statements  of financial
condition:
                                                               March 31
                                                     --------------------------
                                                         2003           2002
                                                     -----------    -----------

Projected benefit obligation .....................   $(1,353,386)   $(1,778,496)
Unrecognized net gain from past ex-
     perience different from that assumed
     and effects of changes in assumptions .......       (54,972)       (34,465)
Unrecognized prior service costs .................      (286,262)        65,380
                                                     -----------    -----------
Accrued pension cost included in other liabilities   $(1,694,620)   $(1,747,581)
                                                     ===========    ===========

     The Retirement  Restoration Plan expenses recognized during the years ended
March 31, 2003, 2002 and 2001 of $114,320, $126,847 and $151,751,  respectively,
are offset against the net pension benefit from the qualified plan.

     The  weighted-average   discount  rate  and  rate  of  increase  in  future
compensation  levels used in  determining  the  actuarial  present  value of the
projected benefit obligation were 6.0% and 5.0%, respectively, at March 31, 2003
and 6.5% and 5.0%, respectively,  at both March 31, 2002 and March 31, 2001. The
expected  long-term  rate of return used to project  estimated  earnings on plan
assets for the  qualified  plan was 6.0% for the year ended  March 31,  2003 and
7.5% for the years  ended March 31, 2002 and March 31,  2001.  The  calculations
also assume retirement at age 65, the normal retirement age.

<PAGE>

9.   Sources of Income

     Income was derived from the following sources:


                                     Investment Income             Realized Gain
Years Ended              ---------------------------------------     (Loss) on
March 31                                                            Investments
--------                                                 Other     Before Income
2003                       Interest     Dividends       Income         Taxes
----                     ---------------------------------------   ------------
Companies more than
   25% owned .........   $     5,600   $ 3,073,770   $   494,900    $      --
Companies 5% to 25%
   owned .............          --            --            --          (47,525)
Companies less than
   5% owned ..........       180,000       287,220         1,000      2,054,637
Other sources,
   including temporary
   investments .......        18,890          --            --             --
                         ------------------------------------------------------
                         $   204,490   $ 3,360,990   $   495,900    $ 2,007,112
                         ======================================================
2002
----
Companies more than
   25% owned .........   $    39,200   $ 2,996,591   $   487,400    $      --
Companies 5% to 25%
   owned .............        99,041          --            --             --
Companies less than
   5% owned ..........       133,549       297,042        43,000       (762,114)
Other sources,
   including temporary
   investments .......        50,731          --            --
                         ------------------------------------------------------
                         $   322,521   $ 3,293,633   $   530,400    $  (762,114)
                         ======================================================

2001
----
Companies more than
   25% owned .........   $    72,800   $ 2,585,386   $   494,900    $      --
Companies 5% to 25%
   owned .............          --            --            --       (3,000,000)
Companies less than
   5% owned ..........       217,080       370,447        35,500     (2,125,493)
Other sources,
   including temporary
   investments .......       252,361          --            --             --
                         ------------------------------------------------------
                         $   542,241   $ 2,955,833   $   530,400    $(5,125,493)
                         ======================================================

10.  Summarized Financial Information of Wholly-Owned Portfolio Companies

     The Company has three significant  wholly-owned  portfolio  companies - The
RectorSeal   Corporation,   The  Whitmore   Manufacturing  Company  and  Skylawn
Corporation - which are neither  investment  companies nor business  development
companies.  Accordingly,  the  accounts  of  such  portfolio  companies  are not
included with those of the Company. Summarized combined financial information of
the three portfolio companies is as follows:

<PAGE>


(all figures in thousands)                                   March 31
                                                  ------------------------------
                                                    2003                  2002
                                                  --------              --------
Condensed Balance Sheet Data
   Assets
   Cash and temporary
     investments ......................           $ 14,885              $ 21,884
   Receivables ........................             31,675                28,092
   Inventories ........................             40,854                38,721
   Property, plant and equipment ......             38,035                38,109
   Other assets .......................             24,598                21,072
                                                  --------              --------
     Totals ...........................           $150,047              $147,878
                                                  ========              ========

   Liabilities and Shareholder's Equity
   Long-term debt .....................           $  5,182              $ 10,594
   Other liabilities ..................             16,319                16,926
   Shareholder's equity ...............            128,546               120,358
                                                  --------              --------
     Totals ...........................           $150,047              $147,878
                                                  ========              ========

Condensed Statements of Income ........             2003       2002       2001
                                                  --------   --------   --------
   Revenues ...........................           $100,553   $ 96,417   $ 93,575
   Costs and operating expenses .......             88,861     83,475     80,952
   Income before income taxes .........             13,105     14,722     14,659
   Income taxes .......................              2,858      5,585      4,829
   Net income .........................             10,247      9,137      9,830

11.  Commitments

     The  Company  has agreed,  subject to certain  conditions,  to invest up to
$2,408,525 in five portfolio companies.

     The Company  leases  office space under an operating  lease which  requires
base annual rentals of  approximately  $74,000 through  February,  2008. For the
three years ended March 31, total rental  expense  charged to investment  income
was $60,482 in 2003, $58,984 in 2002 and $58,145 in 2001.

<PAGE>
<TABLE>
<CAPTION>

                       Selected Per Share Data and Ratios


                                                                                           Years Ended March
                                                                  -----------------------------------------------------------------
                                                                     2003          2002          2001          2000          1999
                                                                  -----------------------------------------------------------------
<S>                                                               <C>           <C>           <C>           <C>           <C>
Per Share Data
Investment income ..............................................  $    1.06     $    1.08     $    1.06     $     .86     $    1.00
Operating expenses .............................................       (.30)         (.27)         (.26)         (.27)         (.40)
Interest expense ...............................................       (.12)         (.24)         (.30)         (.12)         (.11)
Income taxes ...................................................       (.04)         (.04)         (.05)         (.03)         (.03)
                                                                  -----------------------------------------------------------------
Net investment income ..........................................        .60           .53           .45           .44           .46
Distributions from undistributed net investment income .........       (.60)         (.60)         (.60)         (.60)         (.60)
Net realized gain (loss) on investments ........................        .35          (.14)         (.85)         1.58           .26
Net increase (decrease) in unrealized appreciation of
    investments after deferred taxes ...........................     (11.85)         6.31         (1.69)        (6.49)       (10.81)
Exercise of employee stock options* ............................       --            (.08)         --            --            (.30)
                                                                  -----------------------------------------------------------------


Increase (decrease) in net asset value .........................     (11.50)         6.02         (2.69)        (5.07)       (10.99)
Net asset value
  Beginning of year ............................................      65.42         59.40         62.09         67.16         78.15
                                                                  -----------------------------------------------------------------
  End of year ..................................................  $   53.92     $   65.42     $   59.40     $   62.09     $   67.16
                                                                  =================================================================

Increase (decrease) in deferred taxes on unrealized
    appreciation ...............................................  $   (6.35)    $    3.26     $   (1.01)    $   (3.49)    $   (6.04)
Deferred taxes on unrealized appreciation:
  Beginning of year ............................................      24.05         20.79         21.80         25.29         31.33
                                                                  -----------------------------------------------------------------
  End of year ..................................................  $   17.70     $   24.05     $   20.79     $   21.80     $   25.29
                                                                  =================================================================

Ratios and Supplemental Data
Ratio of operating expenses to average net assets ..............        .52%          .42%          .42%          .42%          .55%
Ratio of operating expenses to average net assets plus average
    deferred taxes on unrealized appreciation ..................        .39%          .31%          .31%          .31%          .39%
Ratio of net investment income to average net assets ...........       1.04%          .85%          .74%          .67%          .63%
Portfolio turnover rate ........................................       1.53%         1.05%         2.56%         4.26%          .19%

Shares outstanding at end of period (000s omitted) .............      3,829         3,829         3,815         3,815         3,815
</TABLE>
---------
* Net decrease is due to the exercise of employee  stock  options at prices less
than beginning of period net asset value.


<PAGE>

Independent Auditors' Report


The Board of Directors and Shareholders
   Capital Southwest Corporation:



     We have  audited the  accompanying  consolidated  statements  of  financial
condition of Capital Southwest Corporation and subsidiaries as of March 31, 2003
and 2002,  including the portfolio of  investments as of March 31, 2003, and the
related consolidated  statements of operations,  changes in net assets, and cash
flows for each of the years in the  three-year  period  ended March 31, 2003 and
the  selected  per share data and ratios for each of the years in the  five-year
period ended March 31, 2003.  These financial  statements and per share data and
ratios are the responsibility of the Company's management. Our responsibility is
to  express  an opinion  on these  financial  statements  and per share data and
ratios based on our audits.

     We conducted our audits in accordance  with  auditing  standards  generally
accepted in the United States of America.  Those standards  require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and per share data and ratios are free of material  misstatement.  An
audit includes examining,  on a test basis,  evidence supporting the amounts and
disclosures in the financial  statements.  Our procedures  included the physical
examination  of  securities  owned as of March 31,  2003 and  2002,  held by the
custodian.  An audit also includes assessing the accounting  principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

     In our opinion the consolidated financial statements and selected per share
data and ratios referred to above present fairly, in all material respects,  the
financial position of Capital Southwest Corporation and subsidiaries as of March
31,  2003 and 2002,  the results of their  operations,  the changes in their net
assets and their cash flows for each of the years in the three-year period ended
March 31, 2003, and the selected per share data and ratios for each of the years
in the  five-year  period ended March 31, 2003, in  conformity  with  accounting
principles generally accepted in the United States of America.




                                                                        KPMG LLP
Dallas, Texas
April 25, 2003

<PAGE>

                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations


Results of Operations

     The  composite  measure  of  the  Company's  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 the Company's 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.  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 the Company's investment portfolio,  compared with stated cost,
net of an  increase or decrease  in  deferred  income  taxes which would  become
payable if the unrealized  appreciation  were realized through the sale or other
disposition  of the  investment  portfolio.  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 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

     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 three
years  ended  March 31, the Company had  interest  income  from  temporary  cash
investments  of  $17,346  in 2003,  $48,877 in 2002 and  $249,000  in 2001.  The
Company also receives management fees from its wholly-owned  portfolio companies
which  aggregated  $458,400 in each of the years ended March 31, 2003, March 31,
2002 and March 31,  2001.  During the three  years  ended  March 31,  2003,  the
Company recorded dividend income from the following sources:

                                                    Years Ended March 31
                                            ------------------------------------
                                               2003         2002         2001
                                            ----------   ----------   ----------
AT&T Corp. .........................        $   19,987   $   19,987   $   68,621
Alamo Group Inc. ...................           677,112      677,112      677,112
Dennis Tool Company ................            49,999       49,999       49,999
Kimberly-Clark Corporation .........            95,703       87,985       84,126
The RectorSeal Corporation .........           960,000      960,000      960,000
Skylawn Corporation ................         1,146,659    1,069,480      658,275
TCI Holdings, Inc. .................            81,270       81,270       81,270
Texas Shredder, Inc. ...............            33,667       44,506       40,460
The Whitmore Manufacturing Company .           240,000      240,000      240,000
Other ..............................            56,593       63,294       95,970
                                            ----------   ----------   ----------
                                            $3,360,990   $3,293,633   $2,955,833
                                            ==========   ==========   ==========

     Total operating expenses, excluding interest expense, increased by $126,524
or 12.4% and by $43,684 or 4.5%  during the years ended March 31, 2003 and 2002,
respectively.  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  and  accounting  fees and the net  pension  benefit.  Interest
expense  decreased  by  $452,611  during the year ended  March 31, 2003 due to a
decrease in interest rates and the payoff of the subordinated  debenture on June
3, 2002.  For the year ended  March 31,  2002,  interest  expense  decreased  by
$214,965 due to a decrease in interest rates.

Net Realized Gain (Loss) on Investments

     Net realized gain on investments  was $1,345,728  (after income tax expense
of  $661,384)  during the year ended  March 31,  2003,  compared  with a loss of
$537,934  (after  income tax  benefit  of  $224,180)  during  2002 and a loss of
$3,230,987 (after income tax benefit of $1,894,506) during 2001. Management does
not attempt to maintain a comparable  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.

<PAGE>

Net Increase (Decrease) in Unrealized Appreciation of Investments

     For the three  years  ended  March 31, the  Company  recorded  an  increase
(decrease)  in unrealized  appreciation  of  investments  before income taxes of
$(69,688,616),   $36,971,348   and   $(10,310,835)   in  2003,  2002  and  2001,
respectively.  As  explained  in the  first  paragraph  of this  discussion  and
analysis, the realization of gains or losses results in a corresponding decrease
or  increase  in  unrealized  appreciation  of  investments.  Set  forth  in the
following  table are the  significant  increases  and  decreases  in  unrealized
appreciation  (before the related change in deferred  income taxes and excluding
the effect of gains or losses realized during the year) by portfolio company for
securities held at the end of each year.
                                           Years Ended March 31
                                    2003          2002         2001
                               ------------    ------------     ------------

AT&T Corp. .................   $   (426,165)   $   (746,162)    $ (4,681,896)
Alamo Group Inc. ...........     (8,464,000)      2,821,000        2,821,000
All Components, Inc. .......           --           (50,000)       3,450,000
Balco, Inc. ................      2,000,000       1,482,240             --
CDC Technologies, Inc./Drew
     Scientific Group PLC ..           --           (38,098)      (2,592,541)
Concert Industries Ltd. ....     (5,479,000)     (3,740,000)         294,351
Encore Wire Corporation ....    (10,898,000)     10,898,000             --
Liberty Media Corporation ..     (1,868,329)       (921,280)     (10,605,732)
Mail-Well, Inc. ............     (2,557,926)       (524,000)      (6,290,000)
Media Recovery, Inc. .......           --        (8,000,000)      10,000,000
Organized Living, Inc. .....     (2,999,999)     (3,000,000)            --
Palm Harbor Homes, Inc. ....    (39,275,000)     31,420,000       (7,855,000)
PETsMART, Inc. .............       (436,051)      5,298,343          654,220
The RectorSeal Corporation .      5,000,000       2,500,000        5,500,000
Skylawn Corporation ........           --              --          3,000,000
Sprint Corporation-FON Group       (254,880)       (482,400)      (2,952,720)

     As shown in the above table for the year ended March 31, 2003, we sustained
a major  $39,275,000  decrease  in the value of our  investment  in Palm  Harbor
Homes, Inc. This 35.7% decrease in value reflects Palm Harbor's vulnerability to
the  unfavorable   condition  of  the  manufactured   housing  industry  as  the
availability of floor plan financing for retailers has declined and lenders have
withdrawn from manufactured  housing mortgage  financing for retail  purchasers.
The hostile industry  climate has created intense price  competition and reduced
sales volume.  We also  experienced  a  significant  decline in the value of our
investment  in Encore Wire  Corporation,  which was  reduced  during the year by
$10,898,000, equivalent to 44.4%, as overcapacity in the electric wire and cable
industry led to intense  price  competition  and lower profit  margins.  Another
large  decline was in the value of our  investment  in Alamo  Group Inc.,  which
decreased by $8,464,000 - a 27.3% decline  during the year - due to the weakness
of mower sales to  governmental  agencies and the  unfavorable  condition of the
agricultural  equipment  market.  Another  large decline was in the value of our
investment in Concert  Industries  Ltd., which decreased by $5,479,000 - a 92.5%
decline  during  the  year  -  as  the  company  experienced  continuing  losses
attributable to production problems in its new Canadian  manufacturing  facility
and to increased competition in the air-laid nonwoven fabrics market.

     A description of the investments listed above and other material components
of the  investment  portfolio  is included  elsewhere  in this report  under the
caption "Portfolio of Investments - March 31, 2003."

Deferred Taxes on Unrealized Appreciation of Investments

     The Company  provides for deferred  Federal  income taxes on net unrealized
appreciation  of  investments.  Such taxes would become  payable at such time as
unrealized  appreciation  is realized  through the sale or other  disposition of
those  components  of the  investment  portfolio  which would  result in taxable
transactions.  At March 31, 2003  consolidated  deferred Federal income taxes of
$67,790,000  were provided on net  unrealized  appreciation  of  investments  of
$195,598,595  compared  with deferred  taxes of  $92,107,000  on net  unrealized
appreciation of  $265,287,211 at March 31, 2002.  Deferred income taxes at March
31, 2003 and 2002 were provided at the then currently  effective maximum Federal
corporate tax rate on capital gains of 35%.

Portfolio Investments

     During the year ended March 31, 2003, the Company  invested  $11,904,639 in
various  portfolio  securities listed elsewhere in this report under the caption
"Portfolio  Changes During the Year," which also lists dispositions of portfolio
securities.  During the 2002 and 2001 fiscal years, the Company invested a total
of $3,545,458 and $15,922,079, respectively.

<PAGE>

Financial Liquidity and Capital Resources

     At  March  31,  2003,  the  Company  had  cash  and  cash   equivalents  of
approximately $4.7 million.  Pursuant to Small Business  Administration  ("SBA")
regulations,  cash and cash  equivalents of $0.5 million held by CSVC may not be
transferred or advanced to CSC 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 $63.8  million.  The Company  also has an  unsecured
$25,000,000 revolving line of credit from a commercial bank, of which $9,500,000
was  available  at  March  31,  2003.  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,  the  Company has elected to
retain all gains realized during the past 35 years. Retention of future gains is
viewed as an  important  source of funds to  sustain  the  Company's  investment
activity.  Approximately $25.4 million of the Company's  investment portfolio is
represented  by   unrestricted   publicly-traded   securities,   which  have  an
ascertainable market value and represent a source of liquidity.

     Funds to be used by the Company for operating or investment purposes may be
transferred  in the form of  dividends,  management  fees or loans from  Skylawn
Corporation,  The RectorSeal Corporation and The Whitmore Manufacturing Company,
wholly-owned  portfolio  companies  of the  Company,  to  the  extent  of  their
available cash reserves and borrowing capacities. At March 31, 2003, the Company
owed $7,500,000 to Skylawn Corporation.

     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.

Critical Accounting Policies

Valuation of Investments

     In  accordance  with the  Investment  Company Act of 1940,  investments  in
unrestricted  securities (freely marketable  securities having readily available
market quotations) are valued at market and investments in restricted securities
(securities subject to one or more resale restrictions) are valued at fair value
determined  in good  faith  by the  Company's  Board  of  Directors.  Under  the
valuation  policy of the  Company,  unrestricted  securities  are  valued at the
closing  sale price for listed  securities  and at the lower of the  closing bid
price or the last sale  price  for  Nasdaq  securities  on the  valuation  date.
Restricted  securities,  including securities of publicly-owned  companies which
are  subject to  restrictions  on resale,  are  valued at fair  value,  which is
considered to be the amount the Company may reasonably expect to receive if such
securities  were sold on the valuation  date.  Valuations  as of any  particular
date, however, are not necessarily indicative of amounts which may ultimately be
realized as a result of future sales or other dispositions of securities.

     Among the factors  considered by the Board of Directors in determining  the
fair value of restricted  securities  are the financial  condition and operating
results of the issuer,  the  long-term  potential of the business of the issuer,
the market for and recent sales prices of the issuer's securities, the values of
similar securities issued by companies in similar businesses,  the proportion of
the issuer's securities owned by the Company,  the nature and duration of resale
restrictions  and the nature of any rights  enabling  the Company to require the
issuer to register  restricted  securities under applicable  securities laws. In
determining  the fair  value of  restricted  securities  the Board of  Directors
considers  the  inherent  value  of  such  securities   without  regard  to  the
restrictive  feature and  adjusts for any  diminution  in value  resulting  from
restrictions on resale.

Deferred Income Taxes

     In future  years,  the  Company  may not  qualify or elect to be taxed as a
regulated investment company ("RIC") under applicable provisions of the Internal
Revenue Code. Therefore, deferred Federal income taxes have been provided on net
unrealized appreciation of investments at the then currently effective corporate
tax rate on capital gains.

Impact of Inflation

     The Company does not believe that its  business is  materially  affected by
inflation,  other than the impact  which  inflation  may have on the  securities
markets,  the valuations of business  enterprises  and the  relationship of such
valuations to underlying earnings,  all of which will influence the value of the
Company's investments.

<PAGE>

Risks

     Pursuant to Section  64(b)(1)  of the  Investment  Company  Act of 1940,  a
business  development  company is required to describe the risk factors involved
in an  investment  in the  securities  of such  company due to the nature of the
company's investment portfolio. Accordingly the Company states that:

     The  Company's  objective  is  to  achieve  capital   appreciation  through
investments in businesses  believed to have  favorable  growth  potential.  Such
businesses are often  undercapitalized  small  companies  which lack  management
depth and have not yet attained profitability. The Company's venture investments
often  include  securities  which do not yield  interest  or  dividends  and are
subject  to legal or  contractual  restrictions  on resale,  which  restrictions
adversely affect the liquidity and marketability of such securities.

     Because of the speculative nature of the Company's investments and the lack
of any market for the securities initially purchased by the Company,  there is a
significantly greater risk of loss than is the case with traditional  investment
securities. The high-risk,  long-term nature of the Company's venture investment
activities  may  prevent  shareholders  of  the  Company  from  achieving  price
appreciation and dividend distributions.

<PAGE>
<TABLE>
<CAPTION>

                      Selected Consolidated Financial Data
                (all figures in thousands except per share data)


                                       1993         1994         1995         1996         1997         1998
--------------------------------------------------------------------------------------------------------------
<S>                                 <C>          <C>          <C>          <C>          <C>          <C>
Financial Position  (as of March 31)
Investments at cost .............   $  33,953    $  41,993    $  49,730    $  58,544    $  59,908    $  61,154
Unrealized appreciation .........     113,153      132,212      153,031      198,386      233,383      340,132
                                    ---------    ---------    ---------    ---------    ---------    ---------
Investments at market or
   fair value ...................     147,106      174,205      202,761      256,930      293,291      401,286
Total assets ....................     176,422      270,874      213,811      326,972      310,760      522,324
Notes payable * .................      15,000       15,000       11,000       11,000        5,000        5,000
Deferred taxes on
   unrealized appreciation ......      38,112       45,932       53,247       69,121       81,313      118,674
Net assets ......................     121,455      133,053      147,370      189,048      218,972      296,023
Shares outstanding ..............       3,681        3,715        3,735        3,767        3,767        3,788

--------------------------------------------------------------------------------------------------------------
Changes in Net Assets (years ended March 31)
Net investment income ...........   $   2,189    $   2,870    $   2,447    $   2,855    $   2,574    $   2,726
Net realized gain (loss) on
   investments ..................       5,099         (475)         142       11,174        6,806        6,485
Net increase (decrease) in
   unrealized appreciation
   before distributions .........       8,524       11,160       13,584       38,746       22,804       69,388
                                    ---------    ---------    ---------    ---------    ---------    ---------
Increase (decrease) in net
   assets from operations
   before distributions .........      15,812       13,555       16,173       52,775       32,184       78,599
Cash dividends paid .............      (2,202)      (2,228)      (2,241)      (2,270)      (2,260)      (2,268)
Securities distributed ..........        --           --           --         (9,402)        --           --
Employee stock options
   exercised ....................         322          272          385          575         --            720
                                    ---------    ---------    ---------    ---------    ---------    ---------
Increase (decrease) in net assets      13,932       11,599       14,317       41,678       29,924       77,051

--------------------------------------------------------------------------------------------------------------
Per Share Data (as of March 31)
Deferred taxes on
   unrealized appreciation ......   $   10.35    $   12.36    $   14.26    $   18.35    $   21.59    $   31.33
Net assets ......................       32.99        35.81        39.46        50.18        58.13        78.15
Closing market price ............       36.50       38.125        38.00        60.00       67.875        94.00
Cash dividends paid .............         .60          .60          .60          .60          .60          .60
Securities distributed ..........        --           --           --           2.50         --           --


* Excludes quarter-end borrowing which is repaid on the first business day after
year end.


<PAGE>

                Selected Consolidated Financial Data (continued)
                (all figures in thousands except per share data)




                                       1999         2000         2001         2002         2003
-------------------------------------------------------------------------------------------------

Financial Position  (as of March 31)
Investments at cost .............   $  73,580     $ 85,002    $  87,602    $  82,194    $  91,462
Unrealized appreciation .........     276,698      238,627      228,316      265,287      195,598
                                    ---------    ---------    ---------    ---------    ---------
Investments at market or
   fair value ...................     350,278      323,629      315,918      347,481      287,060
Total assets ....................     360,786      392,586      322,668      357,183      298,490
Notes payable * .................       5,000       10,000       16,000       14,000       23,000
Deferred taxes on
   unrealized appreciation ......      96,473       83,151       79,310       92,107       67,790
Net assets ......................     256,232      236,876      226,609      250,491      206,467
Shares outstanding ..............       3,815        3,815        3,815        3,829        3,829

-------------------------------------------------------------------------------------------------
Changes in Net Assets (years ended March 31)
Net investment income ...........   $   1,762    $   1,663    $   1,723    $   2,042    $   2,299
Net realized gain (loss) on
   investments ..................         995        6,020       (3,231)        (538)       1,346
Net increase (decrease) in
   unrealized appreciation
   before distributions .........     (41,233)     (24,750)      (6,470)      24,174      (45,372)
                                    ---------    ---------    ---------    ---------    ---------
Increase (decrease) in net
   assets from operations
   before distributions .........     (38,476)     (17,067)      (7,978)      25,678      (41,727)
Cash dividends paid .............      (2,280)      (2,289)      (2,289)      (2,295)      (2,297)
Securities distributed ..........        --           --           --           --           --
Employee stock options
   exercised ....................         965         --           --            499         --
                                    ---------    ---------    ---------    ---------    ---------
Increase (decrease) in net assets     (39,791)     (19,356)     (10,267)      23,882      (44,024)

-------------------------------------------------------------------------------------------------
Per Share Data (as of March 31)
Deferred taxes on
   unrealized appreciation ......   $   25.29    $   21.80    $   20.79    $   24.05    $   17.70
Net assets ......................       67.16        62.09        59.40        65.42        53.92
Closing market price ............       73.00        54.75        65.00        68.75        48.15
Cash dividends paid .............         .60          .60          .60          .60          .60
Securities distributed ..........        --           --           --           --           --
</TABLE>


* Excludes quarter-end borrowing which is repaid on the first business day after
year end.


<PAGE>

                            Shareholder Information


Stock Transfer Agent

     American Stock Transfer & Trust Company, 59 Maiden Lane, New York, NY 10038
(telephone  800-937-5449)  serves as  transfer  agent for the  Company's  common
stock.  Certificates to be transferred should be mailed directly to the transfer
agent, preferably by registered mail.

Shareholders

     The Company had  approximately  800 record  holders of its common  stock at
March 31, 2003. This total does not include an estimated 2,300 shareholders with
shares held under beneficial  ownership in nominee name or within  clearinghouse
positions of brokerage firms or banks.

Market Prices

     The  Company's  common  stock  trades on The Nasdaq  Stock Market under the
symbol CSWC.  The  following  high and low selling  prices for the shares during
each quarter of the last two fiscal years were taken from quotations provided to
the Company by Nasdaq:

Quarter Ended                                            High     Low
-------------------------------------------------------------------------
June 30, 2001....................................       $69.00   $ 59.00
September 30, 2001...............................        68.20     60.25
December 31, 2001................................        67.19     57.35
March 31, 2002...................................        69.01     63.28

Quarter Ended                                            High     Low
-------------------------------------------------------------------------
June 30, 2002....................................       $79.24  $  66.31
September 30, 2002...............................        70.25     58.00
December 31, 2002...............................         60.24     45.35
March 31, 2003...................................        53.00     43.00


Dividends

     The payment  dates and amounts of cash  dividends  per share since April 1,
2001 are as follows:

Payment Date                                              Cash Dividend
-----------------------------------------------------------------------
May 31, 2001..............................................    $0.20
November 30, 2001.........................................     0.40
May 31, 2002..............................................     0.20
November 29, 2002.........................................     0.40
May 30, 2003..............................................     0.20

     The  amounts  and timing of cash  dividend  payments  have  generally  been
dictated by requirements of the Internal Revenue Code regarding the distribution
of taxable net  investment  income  (ordinary  income) of  regulated  investment
companies.   Instead  of  distributing   realized  long-term  capital  gains  to
shareholders,  the Company has  ordinarily  elected to retain such gains to fund
future investments.

Automatic Dividend Reinvestment and Optional Cash Contribution Plan

     As a service to its shareholders,  the Company offers an Automatic Dividend
Reinvestment and Optional Cash  Contribution Plan for shareholders of record who
own a minimum of 25 shares.  The Company pays all costs of administration of the
Plan except brokerage  transaction  fees. Upon request,  shareholders may obtain
information on the Plan from the Company, 12900 Preston Road, Suite 700, Dallas,
Texas 75230. Telephone (972) 233-8242.  Questions and answers about the Plan are
on the next page.

Annual Meeting

     The Annual Meeting of Shareholders of Capital Southwest Corporation will be
held on Monday,  July 21,  2003,  at 10:00 a.m.  in the North  Dallas Bank Tower
Meeting Room (first floor), 12900 Preston Road, Dallas, Texas.


</TEXT>
</DOCUMENT>
