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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended June 30, 2006

or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period  to

Commission File Number 0-19509



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EQUUS II INCORPORATED

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 76-0345915                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|2727 Allen Parkway, 13thFloor Houston, Texas                   |  | 77019                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

Registrants telephone number, including area code: (713) 529-0900



---

Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has
been subject to such filing requirements for the past 90 days.    Yes  x    No ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.



|                         |  |                    |  |                         
|------------------------ |  | ------------------ |  | ------------------------
|Large accelerated filer ̈ |  | Accelerated filer ̈ |  | Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell
company.    Yes ̈No  x



There were 8,106,365 shares of the registrants common stock, $.001 par value, outstanding, as
of August 14, 2006. The net asset value of a share at June 30, 2006 was $10.40.



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EQUUS II INCORPORATED

(A Delaware Corporation)

INDEX



|                              |  |         |  |                                                                                         |  |     
|----------------------------- |  | ------- |  | --------------------------------------------------------------------------------------- |  | ----
|                              |  |         |  |                                                                                         |  | PAGE
|PART I. FINANCIAL INFORMATION |  |        
|                              |  |         | 
|                              |  | Item 1. |  | Financial Statements                                                                    |  |     
|                              |  |         | 
|                              |  |         |  | Balance Sheets - June 30, 2006 and December 31, 2005                                    |  | 3   
|                              |  |         | 
|                              |  |         |  | Statements of Operations - For the three months ended June 30, 2006 and 2005            |  | 4   
|                              |  |         | 
|                              |  |         |  | Statements of Operations - For the six months ended June 30, 2006 and 2005              |  | 5   
|                              |  |         | 
|                              |  |         |  | Statements of Changes in Net Assets - For the three months ended June 30, 2006 and 2005 |  | 6   
|                              |  |         | 
|                              |  |         |  | Statements of Cash Flows - For the six months ended June 30, 2006 and 2005              |  | 8   
|                              |  |         | 
|                              |  |         |  | Selected Per Share Data and Ratios - For the six months ended June 30, 2006 and 2005    |  | 9   
|                              |  |         | 
|                              |  |         |  | Schedule of Portfolio Securities - June 30, 2006                                        |  | 14  
|                              |  |         | 
|                              |  |         |  | Notes to Financial Statements                                                           |  | 15  
|                              |  |         | 
|                              |  | Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations   |  | 20  
|                              |  |         | 
|                              |  | Item 3. |  | Quantitative and Qualitative Disclosure about Market Risk                               |  | 25  
|                              |  |         | 
|                              |  | Item 4. |  | Controls and Procedures                                                                 |  | 26  
|                              | 
|PART II. OTHER INFORMATION    |  |        
|                              |  |         | 
|                              |  | Item 6. |  | Exhibits                                                                                |  | 27  
|                              | 
|SIGNATURE                     |  | 28     



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EQUUS II INCORPORATED

BALANCE SHEETS

JUNE 30, 2006 AND DECEMBER 31, 2005

(Unaudited)



|                                                                                                                      |  |      |             |   |      |   |             |  
|--------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                                                                      |  | 2006 |             |   | 2005 |  
|Assets                                                                                                                |  |      |             |   |      |   |             |  
|Investments in portfolio securities at fair value (cost $58,231,600 and $51,091,265, respectively)                    |  | $    | 49,566,265  |   |      | $ | 65,134,527  |  
|Restricted cash & temporary investments, at cost which approximates fair value                                        |  |      | 30,275,186  |   |      |   | 50,445,006  |  
|Cash                                                                                                                  |  |      | 40,092      |   |      |   | 67,470      |  
|Temporary cash investments, at cost which approximates fair value                                                     |  |      | 35,051,318  |   |      |   | 25,578,157  |  
|Accounts receivable                                                                                                   |  |      | 49,654      |   |      |   | 49,654      |  
|Accrued interest and dividends receivable                                                                             |  |      | 1,292,746   |   |      |   | 502,151     |  
|Escrowed receivables, at fair value                                                                                   |  |      | 96,684      |   |      |   | 2,207,333   |  
|                                                                                                                      |  |      |             |   |      |   |             |  
|Total assets                                                                                                          |  | $    | 116,371,945 |   |      | $ | 143,984,298 |  
|                                                                                                                      |  |      |             |   |      |   |             |  
|Liabilities and net assets                                                                                            |  |      |             |   |      |   |             |  
|Liabilities:                                                                                                          |  |      |             |   |      |   |             |  
|Accounts payable and accrued liabilities                                                                              |  | $    | 282,110     |   |      | $ | 298,357     |  
|Due to adviser                                                                                                        |  |      | 1,807,073   |   |      |   | 1,138,053   |  
|Borrowing under margin account                                                                                        |  |      | 29,975,432  |   |      |   | 49,945,550  |  
|                                                                                                                      |  |      |             |   |      |   |             |  
|Total liabilities                                                                                                     |  |      | 32,064,615  |   |      |   | 51,381,960  |  
|                                                                                                                      |  |      |             |   |      |   |             |  
|Commitments and contingencies                                                                                         |  |      |             |   |      |   |             |  
|                                                                                                                      |  |     
|Net assets:                                                                                                           |  |      |             |   |      |   |             |  
|Preferred stock, $.001 par value, 5,000,000 shares authorized, no shares outstanding                                  |  |      |            |   |      |   |            |  
|Common stock, $.001 par value, 25,000,000 shares authorized, 8,106,365 and 7,376,592 shares outstanding, respectively |  |      | 8,106       |   |      |   | 7,377       |  
|Additional paid-in capital                                                                                            |  |      | 96,921,785  |   |      |   | 91,456,960  |  
|Undistributed net investment losses                                                                                   |  |      | (22,362,881 | ) |      |   | (3,146,578  | )
|Undistributed net capital gains (losses)                                                                              |  |      | 18,405,655  |   |      |   | (9,758,683  | )
|Unrealized (depreciation) appreciation of portfolio securities, net                                                   |  |      | (8,665,335  | ) |      |   | 14,043,262  |  
|                                                                                                                      |  |      |             |   |      |   |             |  
|Total net assets                                                                                                      |  | $    | 84,307,330  |   |      | $ | 92,602,338  |  
|                                                                                                                      |  |      |             |   |      |   |             |  
|Net assets per share                                                                                                  |  | $    | 10.40       |   |      | $ | 12.55       |  
|                                                                                                                      |  |      |             |   |      |   |             |  

The accompanying notes are an integral part of these financial statements.



3



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EQUUS II INCORPORATED

STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30, 2006 AND 2005

(Unaudited)



|                                                                    |  |      |             |   |      |   |            |  
|------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ---------- | -
|                                                                    |  | 2006 |             |   | 2005 |  
|Investment income:                                                  |  |      |             |   |      |   |            |  
|Interest income from portfolio securities                           |  | $    | 816,634     |   |      | $ | 333,953    |  
|Dividend income from portfolio securities                           |  |      | 162,316     |   |      |   | 157,416    |  
|Interest from temporary cash investments                            |  |      | 351,631     |   |      |   | 82,760     |  
|Other income                                                        |  |      |            |   |      |   |           |  
|                                                                    |  |      |             |   |      |   |            |  
|Total investment income                                             |  |      | 1,330,581   |   |      |   | 574,129    |  
|                                                                    |  |      |             |   |      |   |            |  
|Expenses:                                                           |  |      |             |   |      |   |            |  
|Management fee                                                      |  |      | 421,537     |   |      |   | 420,519    |  
|Incentive fee                                                       |  |      | 169,509     |   |      |   |           |  
|Director fees and expenses                                          |  |      | 130,640     |   |      |   | 142,519    |  
|Professional fees                                                   |  |      | 290,110     |   |      |   | 255,934    |  
|Administrative fees                                                 |  |      | 112,500     |   |      |   | 12,500     |  
|Mailing, printing and other expenses                                |  |      | 113,954     |   |      |   | 139,755    |  
|Interest expense                                                    |  |      | 31,035      |   |      |   | 25,167     |  
|Compensation expense                                                |  |      |            |   |      |   | 283,259    |  
|Franchise taxes and excise taxes                                    |  |      | 132,420     |   |      |   | 117,546    |  
|Special administrative fees                                         |  |      |            |   |      |   | 535,000    |  
|                                                                    |  |      |             |   |      |   |            |  
|Total expenses                                                      |  |      | 1,401,705   |   |      |   | 1,932,199  |  
|                                                                    |  |      |             |   |      |   |            |  
|Net investment loss                                                 |  |      | (71,124     | ) |      |   | (1,358,070 | )
|                                                                    |  |      |             |   |      |   |            |  
|Net realized gain on portfolio securities                           |  |      | 742,285     |   |      |   | 15,711     |  
|                                                                    |  |      |             |   |      |   |            |  
|Net unrealized (depreciation) appreciation of portfolio securities: |  |      |             |   |      |   |            |  
|End of period                                                       |  |      | (8,665,335  | ) |      |   | 3,148,818  |  
|Beginning of period                                                 |  |      | (12,236,291 | ) |      |   | 477,614    |  
|                                                                    |  |      |             |   |      |   |            |  
|Net change in unrealized appreciation of portfolio securities       |  |      | 3,570,956   |   |      |   | 2,671,204  |  
|                                                                    |  |      |             |   |      |   |            |  
|Net increase in net assets resulting from operations                |  | $    | 4,242,117   |   |      | $ | 1,328,845  |  
|                                                                    |  |      |             |   |      |   |            |  
|Net increase in net assets from operations per share:               |  |      |             |   |      |   |            |  
|Basic                                                               |  | $    | 0.52        |   |      | $ | 0.20       |  
|                                                                    |  |      |             |   |      |   |            |  
|Diluted                                                             |  | $    | 0.52        |   |      | $ | 0.20       |  
|                                                                    |  |      |             |   |      |   |            |  
|Weighted average shares outstanding, in thousands                   |  |      |             |   |      |   |            |  
|Basic                                                               |  |      | 8,106       |   |      |   | 6,516      |  
|                                                                    |  |      |             |   |      |   |            |  
|Diluted                                                             |  |      | 8,106       |   |      |   | 6,516      |  
|                                                                    |  |      |             |   |      |   |            |  

The accompanying notes are an integral part of these financial statements.



4



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##### Table of Contents

EQUUS II INCORPORATED

STATEMENTS OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005

(Unaudited)



|                                                                             |  |      |             |   |      |   |            |  
|---------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ---------- | -
|                                                                             |  | 2006 |             |   | 2005 |  
|Investment income:                                                           |  |      |             |   |      |   |            |  
|Interest income from portfolio securities                                    |  | $    | 1,527,216   |   |      | $ | 649,777    |  
|Dividend income from portfolio securities                                    |  |      | 323,332     |   |      |   | 313,732    |  
|Interest from temporary cash investments                                     |  |      | 760,936     |   |      |   | 172,407    |  
|Other income                                                                 |  |      |            |   |      |   | 3,335      |  
|                                                                             |  |      |             |   |      |   |            |  
|Total investment income                                                      |  |      | 2,611,484   |   |      |   | 1,139,251  |  
|                                                                             |  |      |             |   |      |   |            |  
|Expenses:                                                                    |  |      |             |   |      |   |            |  
|Management fee                                                               |  |      | 821,541     |   |      |   | 798,392    |  
|Incentive fee                                                                |  |      | 1,385,537   |   |      |   |           |  
|Director fees and expenses                                                   |  |      | 223,291     |   |      |   | 247,348    |  
|Professional fees                                                            |  |      | 393,222     |   |      |   | 377,106    |  
|Administrative fees                                                          |  |      | 225,000     |   |      |   | 25,000     |  
|Mailing, printing and other expenses                                         |  |      | 138,922     |   |      |   | 159,253    |  
|Interest expense                                                             |  |      | 51,349      |   |      |   | 63,659     |  
|Non-cash compensation expense (benefit)                                      |  |      |            |   |      |   | 552,760    |  
|Franchise taxes and excise taxes                                             |  |      | 147,445     |   |      |   | 164,371    |  
|Special administrative fees                                                  |  |      |            |   |      |   | 535,000    |  
|                                                                             |  |      |             |   |      |   |            |  
|Total expenses                                                               |  |      | 3,386,307   |   |      |   | 2,922,889  |  
|                                                                             |  |      |             |   |      |   |            |  
|Net investment loss                                                          |  |      | (774,823    | ) |      |   | (1,783,638 | )
|                                                                             |  |      |             |   |      |   |            |  
|Net realized gain on portfolio securities                                    |  |      | 28,164,337  |   |      |   | 2,282,765  |  
|                                                                             |  |      |             |   |      |   |            |  
|Net unrealized (depreciation) appreciation of portfolio securities:          |  |      |             |   |      |   |            |  
|End of period                                                                |  |      | (8,665,335  | ) |      |   | 3,148,818  |  
|Beginning of period                                                          |  |      | 14,043,262  |   |      |   | (4,573,310 | )
|                                                                             |  |      |             |   |      |   |            |  
|Net change in unrealized (depreciation) appreciation of portfolio securities |  |      | (22,708,597 | ) |      |   | 7,722,128  |  
|                                                                             |  |      |             |   |      |   |            |  
|Net increase in net assets resulting from operations                         |  | $    | 4,680,917   |   |      | $ | 8,221,255  |  
|                                                                             |  |      |             |   |      |   |            |  
|Net increase in net assets from operations per share:                        |  |      |             |   |      |   |            |  
|Basic                                                                        |  | $    | 0.60        |   |      | $ | 1.26       |  
|                                                                             |  |      |             |   |      |   |            |  
|Diluted                                                                      |  | $    | 0.60        |   |      | $ | 1.26       |  
|                                                                             |  |      |             |   |      |   |            |  
|Weighted average shares outstanding, in thousands                            |  |      |             |   |      |   |            |  
|Basic                                                                        |  |      | 7,780       |   |      |   | 6,511      |  
|                                                                             |  |      |             |   |      |   |            |  
|Diluted                                                                      |  |      | 7,780       |   |      |   | 6,511      |  
|                                                                             |  |      |             |   |      |   |            |  

The accompanying notes are an integral part of these financial statements.



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EQUUS II INCORPORATED

STATEMENTS OF CHANGES IN NET ASSETS

FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005

(Unaudited)



|                                                                             |  |      |             |   |      |   |            |  
|---------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ---------- | -
|                                                                             |  | 2006 |             |   | 2005 |  
|Operations:                                                                  |  |      |             |   |      |   |            |  
|Net investment loss                                                          |  | $    | (774,823    | ) |      | $ | (1,783,638 | )
|Net realized gain on portfolio securities                                    |  |      | 28,164,337  |   |      |   | 2,282,765  |  
|Net change in unrealized (depreciation) appreciation of portfolio securities |  |      | (22,708,597 | ) |      |   | 7,722,128  |  
|                                                                             |  |      |             |   |      |   |            |  
|Net increase in net assets resulting from operations                         |  |      | 4,680,917   |   |      |   | 8,221,255  |  
|                                                                             |  |      |             |   |      |   |            |  
|Capital transactions:                                                        |  |      |             |   |      |   |            |  
|Dividends declared                                                           |  |      | (18,441,480 | ) |      |   |           |  
|Increase from officers notes settlement                                     |  |      |            |   |      |   | 23,475     |  
|Shares issued in dividend                                                    |  |      | 5,465,555   |   |      |   | (216       | )
|Options exercised by directors and officers                                  |  |      |            |   |      |   | 7,259,592  |  
|                                                                             |  |      |             |   |      |   |            |  
|(Decrease) increase in net assets from capital share transactions            |  |      | (12,975,925 | ) |      |   | 7,282,851  |  
|                                                                             |  |      |             |   |      |   |            |  
|(Decrease) increase in net assets                                            |  |      | (8,295,008  | ) |      |   | 15,504,106 |  
|Net assets, at beginning of period                                           |  |      | 92,602,338  |   |      |   | 68,599,657 |  
|                                                                             |  |      |             |   |      |   |            |  
|Net assets, at end of period                                                 |  | $    | 84,307,330  |   |      | $ | 84,103,763 |  
|                                                                             |  |      |             |   |      |   |            |  

The accompanying notes are an integral part of these financial statements.



6



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EQUUS II INCORPORATED

STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005

(Unaudited)



|                                                           |  |      |             |   |      |   |             |  
|---------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                           |  | 2006 |             |   | 2005 |  
|Cash flows from operating activities:                      |  |      |             |   |      |   |             |  
|Interest and dividends received                            |  | $    | 1,467,853   |   |      | $ | 510,022     |  
|Cash paid to adviser, directors, banks and suppliers       |  |      | (2,733,533  | ) |      |   | (1,961,945  | )
|Purchase of portfolio securities                           |  |      | (8,324,735  | ) |      |   | (1,097,500  | )
|Proceeds from dispositions of portfolio securities         |  |      | 31,760,194  |   |      |   | 3,409,490   |  
|Principal payments from portfolio securities               |  |      | 52,229      |   |      |   | 31,032      |  
|Sales (purchases) of restricted temporary cash investments |  |      | 20,169,819  |   |      |   | (16,160,525 | )
|                                                           |  |      |             |   |      |   |             |  
|Net cash provided by (used in) operating activities        |  |      | 42,391,827  |   |      |   | (15,269,426 | )
|                                                           |  |      |             |   |      |   |             |  
|Cash flows from financing activities:                      |  |      |             |   |      |   |             |  
|Borrowings under margin account                            |  |      | 59,922,631  |   |      |   | 102,923,965 |  
|Repayments under margin account                            |  |      | (79,892,749 | ) |      |   | (86,923,445 | )
|Dividends paid                                             |  |      | (12,975,926 | ) |      |   | (1,589,377  | )
|Payments received on officer notes                         |  |      |            |   |      |   | 23,475      |  
|Exercise of stock options                                  |  |      |            |   |      |   | 6,694,466   |  
|                                                           |  |      |             |   |      |   |             |  
|Net cash (used in) provided by financing activities        |  |      | (32,946,044 | ) |      |   | 21,129,084  |  
|                                                           |  |      |             |   |      |   |             |  
|Net increase in cash and cash equivalents                  |  |      | 9,445,783   |   |      |   | 5,859,658   |  
|Cash and cash equivalents at beginning of period           |  |      | 25,645,627  |   |      |   | 18,576,048  |  
|                                                           |  |      |             |   |      |   |             |  
|Cash and cash equivalents at end of period                 |  | $    | 35,091,410  |   |      | $ | 24,435,706  |  
|                                                           |  |      |             |   |      |   |             |  

The accompanying notes are an integral part of these financial statements.



7



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##### Table of Contents

EQUUS II INCORPORATED

STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005

(Unaudited)

(Continued)



|                                                                                                                        |  |      |             |   |      |   |             |  
|----------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                                                                        |  | 2006 |             |   | 2005 |  
|Reconciliation of increase in net assets from operations to net cash provided by operating activities:                  |  |      |             |   |      |   |             |  
|Net increase in net assets resulting from operations                                                                    |  | $    | 4,680,917   |   |      | $ | 8,221,255   |  
|Adjustments to reconcile increase in net assets from operations to net cash provided by (used in) operating activities: |  |      |             |   |      |   |             |  
|Gain realized on dispositions of portfolio securities, net                                                              |  |      | (28,164,337 | ) |      |   | (2,282,765  | )
|Decrease (increase) in unrealized appreciation, net                                                                     |  |      | 22,708,597  |   |      |   | (7,722,128  | )
|Increase in accrued interest receivable due from portfolio securities                                                   |  |      | (790,595    | ) |      |   | (9,454      | )
|Decrease in accounts receivable and other                                                                               |  |      |            |   |      |   | 32,337      |  
|Accrued interest or dividends exchanged for portfolio securities                                                        |  |      | (353,036    | ) |      |   | (652,112    | )
|Non-cash compensation expense                                                                                           |  |      |            |   |      |   | 552,760     |  
|(Decrease) increase in accounts payable and accrued liabilities                                                         |  |      | (16,246     | ) |      |   | 727,936     |  
|Increase (decrease) in due to adviser                                                                                   |  |      | 669,021     |   |      |   | (319,752    | )
|Purchase of portfolio securities                                                                                        |  |      | (8,324,735  | ) |      |   | (1,097,500  | )
|Proceeds from dispositions of portfolio securities                                                                      |  |      | 31,760,193  |   |      |   | 3,409,490   |  
|Principal payments from portfolio securities                                                                            |  |      | 52,229      |   |      |   | 31,032      |  
|Sales (purchases) of restricted temporary cash investments                                                              |  |      | 20,169,819  |   |      |   | (16,160,525 | )
|                                                                                                                        |  |      |             |   |      |   |             |  
|Net cash provided by (used in) operating activities                                                                     |  | $    | 42,391,827  |   |      | $ | (15,269,426 | )
|                                                                                                                        |  |      |             |   |      |   |             |  

The accompanying notes are an integral part of these financial statements.



8



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##### Table of Contents

EQUUS II INCORPORATED

SUPPLEMENTAL INFORMATION  SELECTED PER SHARE DATA AND RATIOS

FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005

(Unaudited)



|                                                                                    |  |      |       |    |      |   |       |   
|----------------------------------------------------------------------------------- |  | ---- | ----- | -- | ---- | - | ----- | --
|                                                                                    |  | 2006 |       |    | 2005 |  
|Selected per share data:                                                            |  |      |       |    |      |   |       |   
|Investment income                                                                   |  | $    | 0.34  |    |      | $ | 0.18  |   
|Expenses                                                                            |  |      | 0.44  |    |      |   | 0.45  |   
|                                                                                    |  |      |       |    |      |   |       |   
|Net investment loss(1)                                                              |  |      | (0.10 | )  |      |   | (0.27 | ) 
|Net realized gain on portfolio securities                                           |  |      | 3.62  |    |      |   | 0.35  |   
|Net change in unrealized (depreciation) appreciation of portfolio securities        |  |      | (2.92 | )  |      |   | 1.18  |   
|                                                                                    |  |      |       |    |      |   |       |   
|Increase in net assets from operations                                              |  |      | 0.60  |    |      |   | 1.26  |   
|                                                                                    |  |      |       |    |      |   |       |   
|Capital transactions:                                                               |  |      |       |    |      |   |       |   
|Dividends declared                                                                  |  |      | (2.50 | )  |      |   |      |   
|Dilutive effect of shares issued in common stock dividend and exercise of options   |  |      | (0.25 | )  |      |   | (0.40 | ) 
|                                                                                    |  |      |       |    |      |   |       |   
|Net decrease in assets from capital transactions                                    |  |      | (2.75 | )  |      |   | (0.40 | ) 
|                                                                                    |  |      |       |    |      |   |       |   
|Net (decrease) increase in net assets                                               |  |      | (2.15 | )  |      |   | 0.86  |   
|Net asset value at beginning of period                                              |  |      | 12.55 |    |      |   | 10.54 |   
|                                                                                    |  |      |       |    |      |   |       |   
|Net asset value at end of period                                                    |  | $    | 10.40 |    |      | $ | 11.40 |   
|                                                                                    |  |      |       |    |      |   |       |   
|Weighted average number of shares outstanding during period, in thousands           |  |      | 7,780 |    |      |   | 6,511 |   
|                                                                                    |  |      |       |    |      |   |       |   
|Market value per share at end of period                                             |  | $    | 7.18  |    |      | $ | 8.25  |   
|                                                                                    |  |      |       |    |      |   |       |   
|Selected ratios:                                                                    |  |      |       |    |      |   |       |   
|Ratio of total expenses to average net assets                                       |  |      | 3.83  | %  |      |   | 3.83  | % 
|Ratio of net investment loss to average net assets                                  |  |      | (0.88 | )% |      |   | (2.34 | )%
|Ratio of net increase in net assets resulting from operations to average net assets |  |      | 5.29  | %  |      |   | 10.77 | % 
|Total Return                                                                        |  |      | 8.40  | %  |      |   | 7.00  | % 

---

|(1) | Net investment loss of $0.10 is calculated as the net investment loss of $774,823 divided by the weighted average number of shares outstanding during the period of 7,779,782.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The accompanying notes are an integral part of these financial statements.



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EQUUS II INCORPORATED

SCHEDULE OF PORTFOLIO SECURITIES

JUNE 30, 2006

(Unaudited)



|                                                                             |  |                            |  |      |           |            |   |          
|---------------------------------------------------------------------------- |  | -------------------------- |  | ---- | --------- | ---------- | - | ---------
|Portfolio Company                                                            |  | Date of Initial Investment |  | Cost |           | Fair Value
|Alenco Window Holdings, LLC                                                  |  | February 2001              |  |      |           |            |   |          
|Holds cash and escrowed receivables                                          |  |                            |  |      |           |            |   |          
|- 32.25% membership interest                                                 |  |                            |  | $    |          |            | $ | 91,815   
|The Bradshaw Group                                                           |  | May 2000                   |  |      |           |            |   |          
|Sells and services mid-range and high-speed printing equipment               |  |                            |  |      |           |            |   |          
|- Prime + 4% promissory note with a face amount of $398,383                  |  |                            |  |      |          |            |   | 250,000  
|- 15% promissory note(2)                                                     |  |                            |  |      | 459,546   |            |   |         
|- 1,335,000 shares of preferred stock                                        |  |                            |  |      | 1,335,000 |            |   |         
|- Warrant to buy 2,229,450 shares of common stock for $0.01 through May 2008 |  |                            |  |      | 1         |            |   |         
|Cedar Lodge Holdings, Inc.                                                   |  | December 2005              |  |      |           |            |   |          
|Real estate condominiums in Baton Rouge, Louisiana                           |  |                            |  |      |           |            |   |          
|- 5,000 shares of common stock                                               |  |                            |  |      | 500,000   |            |   | 553,425  
|- 18%-19.8% promissory note(1)                                               |  |                            |  |      | 7,617,956 |            |   | 7,772,466
|CMC Investments, LLC                                                         |  | December 2001              |  |      |           |            |   |          
|Awaiting liquidation                                                         |  |                            |  |      |           |            |   |          
|- 21% membership interest                                                    |  |                            |  |      | 525,000   |            |   | 50,000   
|ConGlobal Industries, Inc. (Formerly Container Acquisition, Inc.)            |  | February 1997              |  |      |           |            |   |          
|Shipping container repair & storage                                          |  |                            |  |      |           |            |   |          
|- 24,397,303 shares of common stock                                          |  |                            |  |      | 1,370,495 |            |   |         
|- Promissory note(3)                                                         |  |                            |  |      | 3,010,372 |            |   |         
|- Member interest in CCI-ANI, LLC                                            |  |                            |  |      | 1,926,942 |            |   |         
|- Member interest (66.7%) in JL Madre, LLC                                   |  |                            |  |      | 1,000,000 |            |   | 1,000,000
|- Member interest (66.7%) in JL Madre Equipment, LLC                         |  |                            |  |      | 69,210    |            |   | 69,210   

The accompanying notes are an integral part of these financial statements.



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EQUUS II INCORPORATED

SCHEDULE OF PORTFOLIO SECURITIES

JUNE 30, 2006

(Unaudited)

(Continued)



|                                                                                            |  |                            |  |      |           |            |   |          
|------------------------------------------------------------------------------------------- |  | -------------------------- |  | ---- | --------- | ---------- | - | ---------
|Portfolio Company                                                                           |  | Date of Initial Investment |  | Cost |           | Fair Value
|Creekstone Florida Holdings, LLC                                                            |  | December 2005              |  |      |           |            |   |          
|Real Estate in Panama City, Florida                                                         |  |                            |  |      |           |            |   |          
|- 17%-19.8% promissory note(1)                                                              |  |                            |  | $    | 4,259,233 |            | $ | 4,259,233
|Doane PetCare Enterprises, Inc.                                                             |  | October 1995               |  |      |           |            |   |          
|Manufacturer of private label pet food (escrow only)                                        |  |                            |  |      |           |            |   |          
|- Escrow                                                                                    |  |                            |  |      |          |            |   | 299,333  
|The Drilltec Corporation                                                                    |  | August 1998                |  |      |           |            |   |          
|Provides protection & packaging for pipe & tubing                                           |  |                            |  |      |           |            |   |          
|- Prime + 9.75% promissory note                                                             |  |                            |  |      | 1,000,000 |            |   | 2,500,000
|ENGlobal Corporation (AMEX: ENG)                                                            |  | December 2001              |  |      |           |            |   |          
|Engineering and consulting services                                                         |  |                            |  |      |           |            |   |          
|- Options to acquire 200,000 shares of common stock exercisable only upon change of control |  |                            |  |      |          |            |   |         
|Equicom, Inc.                                                                               |  | July 1997                  |  |      |           |            |   |          
|Radio stations                                                                              |  |                            |  |      |           |            |   |          
|- 452,000 shares of common stock                                                            |  |                            |  |      | 141,250   |            |   |         
|- 657,611 shares of preferred stock                                                         |  |                            |  |      | 6,576,110 |            |   |         
|- 10% subordinated promissory note                                                          |  |                            |  |      | 4,614,824 |            |   | 1,039,854
|- 10% senior subordinated promissory note(1)(3)                                             |  |                            |  |      | 1,050,505 |            |   | 1,050,505
|- 8.81% promissory note(1)                                                                  |  |                            |  |      | 909,641   |            |   | 909,641  
|Jones Industrial Holdings, Inc.                                                             |  | July 1998                  |  |      |           |            |   |          
|Field service for petrochemical & power generation industries                               |  |                            |  |      |           |            |   |          
|- 35,000 preferred stock                                                                    |  |                            |  |      | 3,500,000 |            |   | 4,200,000
|- Warrants to buy 63,337 shares of common stock at $0.01 through June 2008                  |  |                            |  |      | 100       |            |   |         
|PalletOne, Inc.                                                                             |  | October 2001               |  |      |           |            |   |          
|Wooden pallet manufacturer                                                                  |  |                            |  |      |           |            |   |          
|- 4,192,650 shares of preferred stock(1)                                                    |  |                            |  |      | 4,192,650 |            |   | 4,192,650
|- 350,000 shares of common stock                                                            |  |                            |  |      | 350,000   |            |   | 3,915,000
|Riptide Entertainment, LLC                                                                  |  | December 2005              |  |      |           |            |   |          
|Entertainment and Leisure                                                                   |  |                            |  |      |           |            |   |          
|- Member interest (64.67%)                                                                  |  |                            |  |      | 64,667    |            |   | 64,667   
|- 8% promissory note  Dick Clarks American Bandstand                                    |  |                            |  |      | 300,000   |            |   | 300,000  
|- 8% promissory note                                                                        |  |                            |  |      | 500,000   |            |   | 500,000  
|Sovereign Business Forms, Inc.                                                              |  | August 1996                |  |      |           |            |   |          
|Business forms manufacturer                                                                 |  |                            |  |      |           |            |   |          
|- 26,123 shares of preferred stock(1)(3)                                                    |  |                            |  |      | 2,612,300 |            |   | 2,612,300
|- 15% promissory notes(1)(3)                                                                |  |                            |  |      | 4,846,228 |            |   | 4,846,228
|- Warrant to buy 551,894 shares of common stock at $1 per share through August 2006         |  |                            |  |      |          |            |   | 130,179  
|- Warrant to buy 25,070 shares of common stock at $1.25 per share through October 2007      |  |                            |  |      |          |            |   | 7,084    
|- Warrant to buy 273,450 shares of common stock at $1 per share through October 2009        |  |                            |  |      |          |            |   | 262,737  

The accompanying notes are an integral part of these financial statements.



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EQUUS II INCORPORATED

SCHEDULE OF PORTFOLIO SECURITIES

JUNE 30, 2006

(Unaudited)

(Continued)



|                                                |  |                            |  |      |            |            |   |           
|----------------------------------------------- |  | -------------------------- |  | ---- | ---------- | ---------- | - | ----------
|Portfolio Company                               |  | Date of Initial Investment |  | Cost |            | Fair Value
|Spectrum Management, LLC                        |  | December 1999              |  |      |            |            |   |           
|Business & personal property protection         |  |                            |  |      |            |            |   |           
|- 285,000 units of Class A equity interest      |  |                            |  | $    | 2,850,000  |            | $ | 7,000,000 
|- 16% subordinated promissory note(1)           |  |                            |  |      | 1,303,698  |            |   | 1,303,698 
|- 12.75% subordinated promissory note(1)        |  |                            |  |      | 386,240    |            |   | 386,240   
|Turf Grass Holdings, Inc.                       |  | May 1999                   |  |      |            |            |   |           
|Grows, sells & installs warm season turfgrasses |  |                            |  |      |            |            |   |           
|- 1,000 shares of common stock                  |  |                            |  |      | 959,632    |            |   |          
|                                                |  |                            |  |      |            |            |   |           
|Total                                           |  |                            |  | $    | 58,231,600 |            | $ | 49,566,265
|                                                |  |                            |  |      |            |            |   |           

---

|(1) | Income-producing. All other securities are considered non-income producing.
|--- | ---------------------------------------------------------------------------

|(2) | As of June 30, 2006, the Fund has reduced the fair value of these notes to zero and has discontinued recognizing any additional interest income on these notes due to conditions
specific to the respective portfolio companies. However, the portfolio companies are still liable for such notes and related interest, and they may be collected in the future.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Income on these securities is paid-in-kind by the issuance of additional securities or through the accretion of original issue discount.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------

The accompanying notes are an integral part of these financial statements.



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EQUUS II INCORPORATED

SCHEDULE OF PORTFOLIO SECURITIES

JUNE 30, 2006

(Unaudited)

(Continued)

Substantially all of the Funds portfolio securities are restricted from public sale without prior registration under the Securities Act of 1933.
The Fund negotiates certain aspects of the method and timing of the disposition of the Funds investment in each portfolio company, including registration rights and related costs. In connection with the investments in The Drilltec Corporation,
Jones Industrial Holdings, Inc. and Sovereign Business Forms, Inc., rights have been obtained to demand the registration of such securities under the Securities Act of 1933, providing certain conditions are met. The Fund does not expect to incur
significant costs, including costs of any such registration, in connection with the future disposition of its portfolio securities.

As
defined in the Investment Company Act of 1940 (the 1940 Act), at June 30, 2006, the Fund was considered to have a controlling interest in Cedar Lodge Holdings, Inc., ConGlobal Industries, Inc., Creekstone Florida Holdings, LLC, The
Drilltec Corporation, Equicom, Inc., PalletOne, Inc., Riptide Entertainment, LLC, Sovereign Business Forms, Inc., and Spectrum Management, LLC.

Income was earned in the amount of $1,850,548 and $963,509 for the six months ended June 30, 2006 and 2005, respectively, on portfolio securities of companies in which the Fund has a controlling interest. No income was earned for the
six months ended June 30, 2006 and 2005, respectively, on portfolio securities of companies that are affiliates of the Fund, but are not controlled by the Fund.

As defined in the 1940 Act, all of the Funds investments are in eligible portfolio companies. The Fund provides significant managerial assistance to all of the portfolio companies in which it has invested,
except Doane PetCare Enterprises, Inc. (Doane). The Fund provides significant managerial assistance to portfolio companies that comprise 99% of the total value of the investments in portfolio companies at June 30, 2006.

The accompanying notes are an integral part of these financial statements.



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EQUUS II INCORPORATED

SCHEDULE OF PORTFOLIO SECURITIES

JUNE 30, 2006

(Unaudited)

(Continued)

The investments in portfolio
securities held by the Fund are not geographically diversified. All of the Funds portfolio companies (except for Doane and PalletOne, Inc.) are headquartered in Texas, although several have significant operations in other states.

The Funds investments in portfolio securities consist of the following types of securities at June 30, 2006:



|                                      |  |      |            |            |   |                                        |  |      |  
|------------------------------------- |  | ---- | ---------- | ---------- | - | -------------------------------------- |  | ---- | -
|Type of Securities                    |  | Cost |            | Fair Value |   | Fair Value as Percentage of Net Assets | 
|Common stock                          |  | $    | 3,439,333  |            | $ | 4,767,758                              |  | 5.7  | %
|Secured and subordinated debt         |  |      | 29,881,054 |            |   | 24,858,632                             |  | 29.5 | %
|Preferred stock                       |  |      | 18,216,060 |            |   | 11,004,950                             |  | 13.0 | %
|Limited liability company investments |  |      | 6,695,052  |            |   | 8,534,925                              |  | 10.1 | %
|Options and warrants                  |  |      | 101        |            |   | 400,000                                |  | 0.5  | %
|                                      |  |      |            |            |   |                                        |  |      |  
|Total                                 |  | $    | 58,231,600 |            | $ | 49,566,265                             |  | 58.8 | %
|                                      |  |      |            |            |   |                                        |  |      |  

The following is a summary by industry of the Funds investments as of June 30, 2006:



|                                 |  |            |            |                                        |      |  
|-------------------------------- |  | ---------- | ---------- | -------------------------------------- | ---- | -
|Industry                         |  | Fair Value |            | Fair Value as Percentage of Net Assets |     
|Business Products and Services   |  | $          | 16,798,467 |                                        | 19.9 | %
|Consumer Goods and Services      |  |            | 299,334    |                                        | 0.4  | %
|Industrial Products and Services |  |            | 6,700,000  |                                        | 7.9  | %
|Leisure and Entertainment        |  |            | 864,667    |                                        | 1.0  | %
|Media                            |  |            | 3,000,000  |                                        | 3.6  | %
|Real Estate                      |  |            | 12,585,122 |                                        | 14.9 | %
|Residential Building Products    |  |            | 91,815     |                                        | 0.1  | %
|Shipping Products and Services   |  |            | 9,176,860  |                                        | 10.9 | %
|Other                            |  |            | 50,000     |                                        | 0.1  | %
|                                 |  |            |            |                                        |      |  
|Total                            |  | $          | 49,566,265 |                                        | 58.8 | %
|                                 |  |            |            |                                        |      |  



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EQUUS II INCORPORATED

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2006 AND 2005

(Unaudited)

(1) Organization and Business Purpose

Equus II Incorporated (the Fund), a Delaware corporation, was formed by Equus Investments II, L.P. (the Partnership) on
August 16, 1991. On July 1, 1992, the Partnership was reorganized and all of the assets and liabilities of the Partnership were transferred to the Fund in exchange for shares of common stock of the Fund. The shares of the Fund trade on the
New York Stock Exchange under the symbol EQS. On August 11, 2006, shareholders of the Fund approved the change of the Funds investment strategy to a total return investment objective. This new strategy will seek to provide the highest total
return, consisting of capital appreciation and current income. In connection with this strategic investment change, the shareholders also approved the change of name from Equus II Incorporated to Equus Total Return, Inc.

The Fund seeks to achieve capital appreciation by making investments in equity and equity-oriented securities issued by privately-owned companies in
transactions negotiated directly with such companies. The Fund seeks to invest primarily in companies which intend to grow either by acquiring other businesses, including leveraged buyouts, or internally. The Fund may also invest in
recapitalizations of existing businesses or special situations from time to time. The Funds investments in portfolio companies consist principally of equity securities such as common and preferred stock, but also include other equity-oriented
securities such as debt convertible into common or preferred stock or debt combined with warrants, options or other rights to acquire common or preferred stock. The Fund elected to be treated as a business development company under the Investment
Company Act of 1940 (Investment Company Act). For tax purposes, the Fund has elected to be treated as a regulated investment company (RIC). With shareholder approval on June 30, 2005, the Fund entered into an investment
advisory agreement with Moore Clayton Capital Advisors, Inc. (the Adviser). Prior to this agreement, the Funds adviser was Equus Capital Management Corporation.

The Fund elected to retain the Adviser in part to provide the Fund with enhanced investment opportunities in both the United States and internationally.
Effective August 11, 2006, Equus II Incorporated (EQS) began to employ a total return investment style. The total return style combines both growth and income investments and is intended to strike a balance between the
potential for gain and the risk of loss. In the growth category, the Fund is a growth-at-reasonable-price investor. The Fund invests primarily in privately owned companies and is open to virtually any potential growth
investment in the privately owned arena. However, the Funds primary aim is to identify and acquire only those equity securities that meet its criteria for selling at reasonable prices. The income investments made by the Fund consist
principally of purchasing debt financing with the objective of generating regular interest income back to the fund as well as long-term capital appreciation through the exercise and sale of warrants received in connection with the financing.

The Fund has decided to further the total return investment objective, with authorization from the Board of Directors (which includes all
of the Funds independent directors) and approval of a majority of the shareholders, by amending the Funds Restated Certificate of Incorporation to change the name of the Fund from Equus II Incorporated to Equus Total
Return, Inc. This proposal was approved by a majority of the shareholders on August 11, 2006.

(2) Liquidity
and Financing Arrangements

Liquidity and Revolving Line of Credit  As of June 30, 2006, the Fund had cash and
unrestricted temporary investments of $35,091,410. The Fund had $49,566,265 of its total assets of $116,371,945 invested in portfolio securities. Restricted assets totaled $30,275,186, of which $29,975,432 was invested in U.S. Treasury Bills for the
purpose of satisfying the diversification requirement to maintain the Funds pass-through tax treatment and $299,754 represented a required 1% brokerage margin deposit. These securities are held by a securities brokerage firm and are pledged
along with cash to secure the payment of the margin account balance. The U.S. Treasury bills were sold and the margin loan was repaid to the brokerage firm on July 6, 2006.

On April 25, 2006, the Fund received a $1,981,156 cash payment from the Strategic Holdings, Inc. escrow account. The amount was split with
$1,897,333 relating to the escrow receivable and $83,823 relating to interest on the escrow account.

On March 22, 2006, the Fund
funded the cash election portion of its $2.50 dividend payable for $12,975,926 to shareholders of record as of February 13, 2006.

On
February 21, 2006, the Fund acquired 4,000 shares of common stock, and an 18%-19.8% promissory note for $400,000 and, $7,643,513, respectively. The acquisition was accomplished through the formation of Cedar Lodge Holdings, Inc. and relates to
the conversion of apartments to condominiums in Baton Rouge, Louisiana.



15



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##### Table of Contents

On January 25, 2006, the Fund received cash of $28,112,141 for the sale of Champion Window Holdings,
Inc. (Champion).

Under certain circumstances, the Fund may be called on to make follow-on investments in certain portfolio
companies. If the Fund does not have sufficient funds to make follow-on investments, the portfolio company in need of the investment may be negatively impacted. Also, the Funds equity interest in the estimated fair value of the portfolio
company could be reduced.

During the six months ended June 30, 2006 and 2005, the amount of interest and loan fees paid in cash was
$52,679 and $72,941, respectively.

RIC Borrowings, Restricted Cash and Temporary Investments - Because of the nature and size of
its portfolio investments, the Fund periodically borrows money utilizing a margin account with a securities brokerage firm to make qualifying investments to maintain its tax status as a RIC under the Internal Revenue Code. As of June 30, 2006
and 2005, the Fund borrowed $29,975,432 and $39,978,970, respectively. The Fund collateralized such borrowings with restricted cash and temporary investments of $30,275,186 and $40,378,760, as of June 30, 2006 and 2005, respectively. The
temporary qualifying investments were sold, and the total amount borrowed was repaid in July 2006 and 2005, respectively. The Adviser believes the Fund will be able to use this financing arrangement to maintain its RIC status. However, there is no
assurance that such arrangement will be available to the Fund in the future. If the Fund is unable to borrow funds in the future to make qualifying investments, the Fund may no longer qualify as a RIC. Failure to continue to qualify as a RIC could
be material to the Fund and the Funds shareholders in that the Fund would be subject to corporate income tax on its net investment income and net realized gains, and any distributions to stockholders would be subject to income tax as ordinary
dividends.

(3) Significant Accounting Policies

Valuation of Investments  Portfolio investments are carried at fair value with the net change in unrealized appreciation or depreciation
included in the determination of net assets. Valuations of portfolio securities are performed in accordance with accounting principles generally accepted in the United States of America and the financial reporting policies of the SEC. The applicable
methods prescribed by such principles and policies are described below:

Publicly-traded portfolio securities - Investments in
companies whose securities are publicly traded are valued at their quoted market price at the close of business on the valuation date, less a discount to reflect the estimated effects of restrictions on the sale of such securities (Valuation
Discount), if applicable.

Privately-held portfolio securities  The fair value of investments for which no market exists
is determined on the basis of procedures established in good faith by the Board of Directors of the Fund. As a general principle, the current fair value of an investment would be the amount the Fund might reasonably expect to receive for
it upon its current sale, in an orderly manner. Appraisal valuations are necessarily subjective and the Advisers estimate of values may differ materially from amounts actually received upon the disposition of portfolio securities.

Generally, cost is the primary factor used to determine fair value until significant developments affecting the portfolio company (such as results of
operations or changes in general market conditions) provide a basis for use of an appraisal valuation. Thereafter, portfolio investments are carried at appraised values as determined quarterly by the Adviser, subject to the approval of the Board of
Directors. Appraisal valuations are based upon such factors as a portfolio companys earnings, cash flow and net worth, the market prices for similar securities of comparable companies, an assessment of the companys current and future
financial prospects and various other factors and assumptions. In the case of unsuccessful operations, the appraisal may be based upon liquidation value.

Most of the Funds common equity investments are appraised at a multiple of free cash flow generated by the portfolio company in its most recent fiscal year, less outstanding funded indebtedness and other senior
securities such as preferred stock. Projections of current year free cash flow may be utilized and adjustments for non-recurring items are considered. Multiples utilized are estimated based on the Advisers experience in the private company
marketplace, and are necessarily subjective in nature.

Most of the portfolio companies utilize a high degree of leverage. The banking
environment currently has resulted in pressure on several of these portfolio companies to reduce the amount of leverage in order to maintain such financing. From time to time, portfolio companies are in default of certain covenants in their loan
agreements. When the Adviser has a reasonable belief that the portfolio company will be able to restructure the loan agreements to adjust for any defaults, the portfolio companys securities continue to be valued assuming that the company is a
going concern. In the event a portfolio



16



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##### Table of Contents

company cannot generate adequate cash flow to meet the principal and interest payments on such indebtedness or is not successful in refinancing the debt upon
its maturity, the Funds investment could be reduced or eliminated through foreclosure on the portfolio companys assets or the portfolio companys reorganization or bankruptcy.

The Fund may also use, when available, third-party transactions in a portfolio companys securities as the basis of valuation (the private
market method). The private market method will be used only with respect to completed transactions or firm offers made by sophisticated, independent investors.

The fair values of debt securities, which are generally held to maturity, are determined on the basis of the terms of the debt securities and the financial condition of the issuer. Certificates of deposit purchased by
the Fund generally will be valued at their face value, plus interest accrued to the date of valuation.

Certain of the promissory notes
provide that interest may be paid in-kind or that the original issue discount may be accreted over the life of the notes, by adding such amounts to the principal of the notes.

Because of the inherent uncertainty of the valuation of portfolio securities which do not have readily ascertainable market values, amounting to
$49,566,265 and $65,134,527 (neither of which includes an amount for publicly-traded securities) as of June 30, 2006 and December 31, 2005, respectively, the Funds estimate of fair value may materially differ from the value that
would have been used had a ready market existed for the securities. Appraised values do not reflect brokers fees or other normal selling costs which might become payable on disposition of such investments.

On a daily basis, the Fund adjusts its net asset value for the changes in the value of its publicly held securities and material changes in the value of
its private securities and reports those amounts to Lipper Analytical Services, Inc. Weekly and daily net asset values appear in various publications, including Barrons and The Wall Street Journal.

Investment Transactions - Investment transactions are recorded on the accrual method. Realized gains and losses on investments sold are computed
on a specific identification basis.

Escrowed Receivables, at Estimated Fair Value - In April and May of 2004, the Fund sold
investments in Strategic Holdings, Inc. and Alenco Holding Corporation, respectively. A portion of the proceeds from each sale was placed in a cash escrow account to secure the representations and warranties made to the respective purchasers. On
April 25, 2006, the Fund received all of the potential proceeds from the Strategic Holdings, Inc. escrow account leaving the Alenco Holding Corporation as the only outstanding escrow receivable. The aggregate amount of total potential proceeds
from Alenco is $122,556. As of June 30, 2006, the amount receivable from the Alenco escrow is valued at $96,684. The Fund is not aware of any claims against the escrow that have been made as of June 30, 2006 and is anticipating a final
payment from the Alenco Holding Corporation escrow account by May 2007.

Cash Flows - For purposes of the statements of cash flows,
the Fund considers all highly liquid temporary cash investments purchased with an original maturity of three months or less to be cash equivalents. The Fund includes its investing activities within cash flows from operations.

Stock-Based Compensation  The Board of Directors cancelled the Stock Incentive Plan as of June 30, 2005. The Fund accounted for
stock-based compensation using the intrinsic value method in accordance with the provisions of APB No. 25. Had the Fund accounted for the options using the fair value method under SFAS 123, the increase in net assets from operations for the six
months ended June 30, 2005, would have been:



|                                                                                             |  |      |           |  
|-------------------------------------------------------------------------------------------- |  | ---- | --------- | -
|                                                                                             |  | 2005 |          
|Increase in net assets from operations, as reported                                          |  | $    | 8,221,255 |  
|Stock-based employee compensation expense included in increase in net assets from operations |  |      | 552,760   |  
|Stock-based employee compensation expense determined using fair value method                 |  |      | (46,136   | )
|                                                                                             |  |      |           |  
|Pro forma increase in net assets from operations                                             |  | $    | 8,727,879 |  
|                                                                                             |  |      |           |  
|Net increase in net assets from operations per share                                         |  |      |           |  
|Basic, as reported                                                                           |  | $    | 1.11      |  
|                                                                                             |  |      |           |  
|Basic, pro-forma                                                                             |  | $    | 1.18      |  
|                                                                                             |  |      |           |  
|Diluted, as reported                                                                         |  | $    | 1.11      |  
|                                                                                             |  |      |           |  
|Diluted, pro-forma                                                                           |  | $    | 1.18      |  
|                                                                                             |  |      |           |  



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Federal Income Taxes  The Fund intends to comply with the requirements of the Internal
Revenue Code necessary to qualify as a regulated investment company (RIC) and, as such, will not be subject to federal income taxes on otherwise taxable income (including net realized capital gains) which is distributed to stockholders.
Therefore, no provision for federal income taxes is recorded in the financial statements. The Fund usually borrows money quarterly to maintain its tax status under the Internal Revenue Code as a RIC. See Note 2 for further discussion of the
Funds RIC borrowings.

(4) Related Party Transactions

Moore, Clayton & Co., Inc., a Delaware corporation, formed Moore Clayton Capital Advisors, Inc. (MCCA) in February 2005 for the
purpose of managing the Fund. Moore, Clayton & Co., Inc., either directly or indirectly has a significant ownership interest in the Fund and, additionally, has one common director. MCCA has no direct ownership in the Fund and has two common
directors with the Fund. MCCA acquired the outstanding stock of the two entities which owned the previous adviser, Equus Capital Management Corporation. Those two entities were individually owned by a current officer of the Fund and a previous
officer of the Fund who resigned with the change to the new adviser, Moore Clayton Capital Advisors, Inc. See Footnote 5 Management Agreements for discussion of fees paid by the Fund to the Adviser and Administrator.

(5) Management Agreements

The Fund entered into an investment advisory agreement dated June 30, 2005 (the Advisory Agreement) with the Adviser. Pursuant to the Advisory Agreement, the Adviser performs certain investment advisory services that are
necessary for the operation of the Fund. The Adviser receives a base advisory fee at an annual rate of 2% of the net assets of the Fund, paid quarterly in arrears, as well as incentive fees in the following amounts: (i) 20% of the excess, if
any, of the Funds net investment income for a quarter that exceeds a quarterly hurdle rate equal to 2% (8% annualized) of the Funds net assets, and (ii) 20% of the Funds net realized capital gain less unrealized capital
depreciation paid on an annual basis ($675,041 incentive fee in 2005 and $1,385,537 (estimated) incentive fee in 2006 due to the sales of Champion Window Holdings, Inc. and Doane PetCare Enterprises, Inc). The advisory fees that the Fund pays
represent the Advisers primary source of revenue. The Adviser is a wholly-owned subsidiary of Moore, Clayton & Co., Inc., an international private equity investment and advisory firm.

The Advisory Agreement will continue in effect for two years, and from year-to-year thereafter, provided such continuance is approved at least annually
by (i) a vote of a majority of the outstanding shares of the Fund, or (ii) a majority of the Independent Directors of the Fund. The Advisory Agreement may be terminated at any time, without the payment of any penalty, by the Board of
Directors or the holders of a majority of the Funds shares on 60 days written notice to the Adviser, and would automatically terminate in the event of its assignment (as defined in the 1940 Act).

The Fund has entered into an administration agreement dated June 30, 2005 (Administration Agreement) with Equus Capital Administration
Company (the Administrator). The Fund agreed to reimburse the Administrator certain one time costs and expenses (Special Administrative Fee) associated with the change in administrators. The Special Administrative Fee, in the
amount of $535,000, was accrued to expense at June 30, 2005, and paid to the Administrator in the third quarter of 2005. Pursuant to the Administration Agreement, the Administrator provides (or arranges for suitable third parties to provide)
all administrative services necessary for the operation of the fund. The Fund reimburses the Administrator for the costs and expenses incurred by the Administrator in performing its obligations and providing personnel and facilities under the
Administrative Agreement, provided that such reimbursements do not exceed $450,000 per year, excluding the one-time Special Administrative Fee.

The Administration Agreement will continue in effect for two years (through June 30, 2007), and from year-to-year thereafter, provided such continuance is approved at least annually by the Funds Board of Directors, including a
majority of the Independent Directors. The Administration Agreement may be terminated at any time, without the payment of any penalty, by the Board of Directors, or by the Administrator, upon 60 days written notice to the other party, and
would automatically terminate in the event of its assignment (as defined in the 1940 Act).



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##### Table of Contents

Prior to entering into the Advisory and Administration Agreements, the Fund was a party to a
management agreement with Equus Capital Management Corporation (ECMC) that was initially approved by the Funds stockholders at a special meeting held on April 9, 1997. Under that agreement, ECMC provided both
advisory and administration services. ECMC received a management fee at an annual rate of 2% of the net assets of the Fund, paid quarterly in arrears. Additionally, ECMC received compensation for providing certain investor
communication services. The accompanying Statements of Operations include Administrative fees of $225,000 related to such services for the six months ended June 30, 2006 and $25,000 for the six months ended June 30, 2005.

As compensation for services to the Fund, each Independent Director receives an annual fee of $20,000 paid quarterly in arrears, a fee of $2,000 for
each meeting of the Board of Directors attended in person, a fee of $1,000 for participation in each telephonic meeting of the Board and a fee of $1,000 for each committee meeting attended, and reimbursement of all out-of-pocket expenses relating to
attendance at such meetings. Certain officers of the Fund serve as directors of the Funds portfolio companies, and may receive and retain fees, including non-employee director stock options, from such portfolio companies in consideration for
such service.

(6) Federal Income Tax Matters

The Fund is required to make distributions of any net taxable investment income on an annual basis, and may elect to distribute or retain net taxable
realized capital gains. The Internal Revenue Service approved the Funds request, effective October 31, 1998, to change its year-end for determining capital gains for purposes of Section 4982 of the Internal Revenue Code from
December 31 to October 31.

The Fund was not required to make a distribution of ordinary income for 2005 under income tax
regulations. During 2005, the Fund had a net capital gain for book purposes of $1.2 million and a net capital gain for tax purposes of $1.5 million. As of December 31, 2005, the Fund has a capital loss carry-forward of $14.3 million, which may
be used to offset future taxable capital gains. If not utilized, some of the loss will expire beginning in 2009.

(7)
Dividends

On February 2, 2006, the Fund declared dividends of $18,441,480 ($2.50 per share). The Fund paid $12,975,926 in cash
and issued 729,773 additional shares of common stock at $7.489 per share on March 23, 2006, in payment of such dividend. The classification of the dividend will not be known as to whether it is an ordinary income, capital gain, or return of
capital dividend until December 31, 2006. The Fund declared no dividends during the six months ended June 30, 2005. On January 16, 2005, the Fund paid $1,589,160 in cash and issued 260,719 additional shares of stock at $7.56 per share
for a dividend that had been declared in 2004.

(8) Portfolio Securities

During the six months ended June 30, 2006, the Fund invested $8,677,771 in eight follow-on investments in eight companies, including $353,036 in the
form of interest and dividends paid in kind or original issue discount/premium amortization. In addition, the Fund realized a net capital gain of $28,164,337 (the sale of Champion generated a net capital gain of $26,846,269) during the six months
ended June 30, 2006.

During the six months ended June 30, 2005, the Fund made follow-on investments of $1,749,612 in four
companies and one venture fund, including $652,112 in the form of interest and dividends paid in kind or original issue discount amortization. In addition, the Fund realized a net capital gain of $2,282,765 during the six months ended June 30,
2005.

(9) Former Stock Option Plan

Prior to June 30, 2005, an Equus II Incorporated 1997 Stock Incentive Plan had authorized the Fund to issue options to the directors and officers of the Fund in an aggregate amount of up to 20% of the outstanding
shares of common stock of the Fund. The Board of Directors cancelled the Stock Incentive Plan as of June 30, 2005.

(10) Subsequent Events

On July 6, 2006, the Fund sold U.S. Treasury bills for $30,000,000 and repaid the margin loan.

On July 11, 2006, the Fund received a cash dividend payment from PalletOne, Inc. for $104,816. This amount was included in dividends
receivable at June 30, 2006.



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On July 12, 2006 the Fund agreed to engage A.G. Edwards for $150,000 to provide the Fund with
certain financial advisory services regarding the strategic and tactical alternatives available. The agreement has a one year life.

On
August 4, 2006, EQS subscribed to acquire an interest in RP&C International Investments LLC (RP&C). RP&C is a fund that invests in nursing and residential care homes in Europe and the subscription commitment obligates
EQS to invest up to $11.1 million in RP&C.

The Fund has decided to further the total return investment objective, with authorization
from the Board of Directors (which includes all of the Funds independent directors) and approval of a majority of the shareholders, by amending the Funds Restated Certificate of Incorporation to change the name of the Fund from
Equus II Incorporated to Equus Total Return, Inc. This proposal was approved by a majority of the shareholders on August 11, 2006.

In early August, the Fund has received approximately $2.7 million in principal and interest on our promissory note with Cedar Lodge Holdings, Inc., based on condominium sales activity.

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

Overview

Equus II Incorporated is a business development company which invests in equity and
equity-oriented securities issued by privately-owned companies in transactions negotiated directly with such companies. The Fund did not make any new investments other than follow-on investments during the six months ended June 30, 2006 or
2005.

The valuation of the Funds investments is the most significant area of judgment impacting the financial statements. The
Funds portfolio investments are valued at estimates of fair value, with the net change in unrealized appreciation or depreciation included in the determination of net assets. Almost all of the long-term investments are in privately-held or
restricted securities, the valuation of which is necessarily subjective. Actual values may differ materially from the Funds estimated fair value. Portfolio valuations are determined quarterly by the Adviser, subject to the approval of the
Board of Directors, and are based on a number of relevant factors.

Most of the Funds portfolio companies utilize leverage, and the
leverage magnifies the return on its investments. For example, if a portfolio company has a total enterprise value of $10 million and $7.5 million in funded indebtedness, its equity is valued at $2.5 million. If the enterprise value increases or
decreases by 20%, to $12 million or $8 million, respectively, the value of the equity increases or decreases by 80%, to $4.5 million or $0.5 million, respectively. This disproportionate increase or decrease adds a level of volatility to the
Funds equity-oriented portfolio securities.

The Fund derives its cash flow from interest and dividends received and sales of
securities from its investment portfolio. The Fund pays certain advisory fees to the Adviser, administrative fees to the Administrator and interest expense on its existing debt. The Fund also spends its cash on new investments, or follow-on
investments which may be required by certain portfolio companies. Because the investments are illiquid, the Fund utilized leverage to provide the required funds, and the leverage was then repaid from the sale of portfolio securities. The Fund has
maintained substantial amounts of cash and cash equivalents since May 2004.

The Fund has distributed to its stockholders any net taxable
investment income or realized capital gains on an annual basis. On February 2, 2006, a dividend was announced of $2.50 per share to shareholders of record on February 13, 2006. The classification of the dividend will not be known as to
whether it is an ordinary income, capital gain, or return of capital dividend until December 31, 2006, since any purchase or sale of a portfolio company during the remainder of the year would affect the classification. The Fund did not declare
a dividend for the six months ended June 30, 2005.

Since the Fund is a closed-end business development company, stockholders have no
right to present their shares to the Fund for redemption. Because the shares continue to trade at a discount, the Board of Directors has determined that it would be in the best interest of the Funds stockholders for the Fund to be authorized
to attempt to reduce or eliminate the market value discount from net asset value. Accordingly, from time to time the Fund may, but is not required to, repurchase its shares (including by means of tender offers) to attempt to reduce or eliminate the
discount or to increase the net asset value of those shares.

Significant Accounting Policies

Valuation of Investments - The valuation of portfolio companies is the most significant area of judgment impacting the financial statements.
Portfolio investments are carried at fair value with the net change in unrealized appreciation or depreciation included in the determination of net assets. Valuations of portfolio securities are performed in accordance with



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##### Table of Contents

accounting principles generally accepted in the United States of America and the financial reporting policies of the SEC. The applicable methods prescribed
by such principles and policies are described below:

Publicly-traded portfolio securities - Investments in companies whose
securities are publicly traded are valued at their quoted market price at the close of business on the valuation date, less a discount to reflect the estimated effects of restrictions on the sale of such securities (Valuation Discount),
if applicable.

Privately-held portfolio securities  The fair value of investments for which no market exists is determined on
the basis of procedures established in good faith by the Board of Directors. As a general principle, the current fair value of an investment is the amount that the Fund might reasonably expect to receive for it upon its current sale, in
an orderly manner. Appraisal valuations are necessarily subjective and the Advisers estimate of values may differ materially from amounts actually received upon the disposition of portfolio securities.

Generally, cost is the primary factor used to determine fair value until significant developments affecting the portfolio company (such as results of
operations or changes in general market conditions) provide a basis for use of an appraisal valuation. Thereafter, portfolio investments are carried at appraised values as determined quarterly by the Adviser, subject to the approval of the Board of
Directors. Appraisal valuations are based upon such factors as a portfolio companys earnings, cash flow and net worth, the market prices for similar securities of comparable companies, an assessment of the companys current and future
financial prospects and various other factors and assumptions. In the case of unsuccessful operations, the appraisal may be based upon liquidation value.

Most of the Funds common equity investments are appraised at a multiple of free cash flow generated by the portfolio company in its most recent fiscal year, less outstanding funded indebtedness and other senior
securities such as preferred stock. Projections of current year free cash flow may be utilized and adjustments for non-recurring items are considered. Multiples utilized are estimated based on the Advisers experience in the private company
marketplace, and are necessarily subjective in nature.

Most of the portfolio companies utilize a high degree of leverage. From time to
time, portfolio companies are in default of certain covenants in their loan agreements. When the Adviser has a reasonable belief that a portfolio company will be able to restructure its loan agreements to adjust for any defaults, the portfolio
companys securities continue to be valued assuming that the company is a going concern. In the event a portfolio company cannot generate adequate cash flow to meet the principal and interest payments on its indebtedness or is not successful in
refinancing the debt upon its maturity, the value of the investment could be reduced or eliminated through foreclosure on the portfolio companys assets or the portfolio companys reorganization or bankruptcy.

The Fund may also use, when available, third-party transactions in a portfolio companys securities as the basis of valuation (the private
market method). The private market method will be used only with respect to completed transactions or firm offers made by sophisticated, independent investors.

The fair values of debt securities, which are generally held to maturity, are determined on the basis of the terms of the debt securities and the financial conditions of the issuer. Certificates of deposit generally
will be valued at their face value, plus interest accrued to the date of valuation.

On a daily basis, the Fund adjusts its net asset value
for changes in the value of its publicly held securities and material changes in the value of its private securities, and report those amounts to Lipper Analytical Services, Inc. Weekly and daily net asset values appear in various publications,
including Barrons and The Wall Street Journal.

Federal Income Taxes  The Fund intends to comply with the
requirements of the Internal Revenue Code necessary to qualify as a regulated investment company and, as such, will not be subject to federal income taxes on otherwise taxable income (including net realized capital gains) which is distributed to
stockholders. Therefore, no provision for federal income taxes is recorded in the financial statements. As of December 31, 2005, the Fund had a capital loss carry forward of approximately $14.3 million, which may be used to offset future
taxable capital gains. The Fund may borrow money from time to time to maintain its tax status under the Internal Revenue Code as a regulated investment company (RIC).

Liquidity and Capital Resources

As of June 30, 2006, the Fund had cash and unrestricted
temporary investments of $35,091,410. The Fund had $49,566,265 of its total assets of $116,371,945 invested in portfolio securities. Restricted assets totaled $30,275,186, of which $29,975,432 was invested in U.S. Treasury Bills for the purpose of
satisfying the diversification requirement to maintain the Funds pass-through tax treatment and $299,754 represented a required 1% brokerage margin deposit. These securities are held by a securities brokerage firm and are pledged along with
cash to secure the payment of the margin account balance. The U.S. Treasury bills were sold and the margin loan was repaid to the brokerage firm on July 6, 2006.



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On April 25, 2006, the Fund received a $1,981,156 cash payment from the Strategic Holdings, Inc.
escrow account. The amount was split with $1,897,333 relating to the escrow receivable and $83,823 relating to interest on the escrow account.

On February 21, 2006, the Fund acquired 4,000 shares of common stock, and an 18%-19.8% promissory note for $400,000 and, $7,643,513, respectively. The acquisition was accomplished through the formation of Cedar Lodge Holdings, Inc. and
relates to the conversion of apartments in Baton Rouge, Louisiana, to condominiums.

On February 2, 2006, the Fund declared dividends
of $18,441,480 ($2.50 per share). The Fund paid $12,975,926 in cash and issued 729,773 additional shares of common stock at $7.489 per share on March 23, 2006 in payment of such dividend. The classification of the dividend will not be known as
to whether it is an ordinary income, capital gain, or return of capital dividend until December 31, 2006. A net investment income dividend of $0.57 per share was declared for 2004, or $3,560,205. The Fund paid $1,589,160 in cash and issued
260,719 additional shares of common stock at $7.56 per share on January 16, 2005.

On January 25, 2006, the Fund received cash of
$28,112,141 for the sale of Champion Window Holdings, Inc. (Champion).

On July 28, 2005, the Fund formally terminated its
revolving line of credit with The Frost National Bank due to its present cash position and projected ongoing cash requirements.

On
June 30, 2005, the Fund received cash of $6,694,466 for the exercise of all $869,900 stock options which were in the money and being held by officers and directors of the Fund.

Under certain circumstances, the Fund may be called on to make follow-on investments in certain portfolio companies. If the Fund does not have sufficient
funds to make follow-on investments, the portfolio company in need of the investment may be negatively impacted. Also, the Funds equity interest in and the estimated fair value of the portfolio company could be reduced. As of June 30,
2006, the Fund has no commitment requirements to make additional new or follow-on investments.

Net cash provided by (used in) operating
activities was $42,391,827 and ($15,269,426) for the six months ended June 30, 2006 and 2005, respectively. Approximately $24.9 million in estimated value of the Funds investments are in the form of notes receivable from portfolio
companies. However, only three of the portfolio companies are currently paying cash interest to us in accordance with their respective notes receivable, which aggregate $7,059,567 in fair value. Certain of the promissory notes provide that interest
may be paid in kind or that the original issue discount may be accreted over the life of the notes, by adding such amounts to the principal of the notes.

Because of the nature and size of the portfolio investments, the Fund may periodically borrow funds to make qualifying investments to maintain its tax status as a RIC. During the six months ended June 30, 2006
and 2005, the Fund borrowed such funds by utilizing a margin account with a securities brokerage firm. There is no assurance that such arrangement will be available in the future. If the Fund is unable to borrow funds to make qualifying investments,
it may no longer qualify as a RIC. The Fund would then be subject to corporate income tax on its net investment income and realized capital gains, and distributions to stockholders would be subject to income tax as ordinary dividends.

The Fund has the ability to borrow funds and issue forms of senior securities representing indebtedness or stock, such as preferred stock, subject to
certain restrictions. Net taxable investment income and net taxable realized gains from the sales of portfolio investments are intended to be distributed at least annually, to the extent such amounts are not reserved for payment of expenses and
contingencies or to make follow-on or new investments. Pursuant to the restrictions in the existing line of credit, the Fund is not allowed to incur additional indebtedness unless approved by the lender.

The Fund reserves the right to retain net long-term capital gains in excess of net short-term capital losses for reinvestment or to pay contingencies and
expenses. Such retained amounts, if any, will be taxable to the Fund as long-term capital gains and stockholders will be able to claim their proportionate share of the federal income taxes paid on such gains as a credit against their own federal
income tax liabilities. Stockholders will also be entitled to increase the adjusted tax basis of their Fund shares by the difference between their undistributed capital gains and their tax credit.



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##### Table of Contents

Results of Operations

Investment Income and Expense

Net investment loss after all expenses was (774,823) and ($1,783,638) for the six months
ended June 30, 2006 and 2005, respectively and ($71,124) and ($1,358,070) for the three months ended June 30, 2006 and 2005, respectively. Total income from portfolio securities was $1,850,548 and $963,509 for the six months ended
June 30, 2006 and 2005, respectively and $978,950 and $491,369 for the three months ended June 30, 2006 and 2005, respectively. The decrease in net investment losses from June 30, 2005 to 2006, is due primarily to the income generated
from the Funds two real estate portfolio companies, Creekstone Florida Holdings, LLC and Cedar Lodge Holdings, Inc., amounting to $343,404 and $503,347, respectively, while the two real estate companies did not exist in 2005.

Interest from temporary cash investments increased from $172,407 to $760,936 and from $82,760 to $351,631 for the six and three months ended
June 30, 2005 and 2006, respectively. This increase is primarily due to the increase in cash generated from the sale of Champion. The cash in temporary investments (excluding the margin account) increased from $14.8 million to $31.9 million for
the six months ended June 30, 2006. The remaining difference is due to higher interest rate returns on investments in June 2006 compared to June 2005, which was approximately 4% and 2%, respectively.

The Adviser receives management fee compensation at an annual rate of 2% of the net assets of the Fund paid quarterly in arrears. Such fees amounted to
$821,541 and $798,392 during the six months ended June 30, 2006 and 2005, respectively and $421,537 and $420,519 for the three months ended June 30, 2006 and 2005, respectively. The increase in management fees during the six months and three
months ended June 30, 2006, was due to an increase in net assets between the two periods which was primarily due to valuation increases at Champion Window Holdings, Inc., Doane PetCare Enterprises, Inc., and The Drilltec Corporation.

With the change in adviser and discontinuation of the stock option plan, a new incentive fee was initiated on June 30, 2005. The
incentive fees is calculated as follows: (i) 20% of the excess, if any, of the Funds net investment income for a quarter that exceeds a quarterly hurdle rate equal to 2% (8% annualized) of the Funds net assets, and (ii) 20% of
the Funds net realized capital gain less unrealized capital depreciation paid on an annual basis. The estimated expenses for incentive fees for the six months ended June 30, 2006, are $1,385,537. The estimated incentive fee expenses for
the three months ended June 30, 2006 are $169,509. The calculation for both periods is based on the capital gains generated by the sale of Champion and Doane. No incentive fee plan existed at June 30, 2005.

Director fees and expenses decreased by $24,058 and $11,879 for the six months and three months ended June 30, 2006 and 2005, respectively, due
primarily to ten Special Committee meetings and eight full board meetings in 2005 compared to three full board meetings, three independent directors meetings and three telephonic meeting in 2006. The additional board meetings, Strategic Alternative
Meetings and Special Committee Meetings in 2005 were related to entering into the new management agreement with Moore, Clayton & Co., Inc. The reduction in director fees and expenses in 2006, were despite the fact that there is one
additional independent board member at June 30, 2006 compared to June 30, 2005.

Administrative fees increased by $200,000 and
$100,000 for the six months and three months ended June 30, 2006 and 2005, respectively, due primarily to the change in Administrator on June 30, 2005 from ECMC to ECAC. The former administrator, ECMC, received compensation for providing
certain investor communication services. The fee paid was $12,500 per quarter for such services. Under the new plan, the Fund reimburses the Administrator for the costs and expenses incurred by the Administrator, ECAC, in performing its obligations
and providing personnel and facilities under the Administrative Agreement, provided that such reimbursements do not exceed $450,000 per year. The new administrator receives $112,500 per quarter; therefore, the administrator expense through June
2006, is $225,000.

Interest expense was $51,349 and $63,659 for the six months ended June 30, 2006 and 2005, respectively. The
decrease for the six months of 2006 was due primarily to fewer days for the treasury bills to be outstanding in 2006 compared to 2005. Interest expense was $31,035 and $25,167 for the three months ended June 30, 2006 and 2005, respectively. The
increase for the three months of 2006 was due to the treasury bills being outstanding for more days in 2006.

Prior to June 30, 2005,
certain options issued by the Fund were accounted for using variable plan accounting. Such accounting resulted in non-cash compensation expense (benefit) of $0 and $552,760 during the six months ended June 30, 2006 and 2005, respectively and $0
and $283,259 during the three months ended June 30, 2006 and 2005, respectively. The change is due to the fluctuation in the Funds closing stock market price from the beginning of the year to the price at the end of June in relation to the
exercise price of the stock options. In 2005, the market price increased from a January 1, 2005 market price of $7.71 to an ending market price at June 30, 2005 (option plan was cancelled on June 30, 2005) of $8.09. At March 31,
2005 the market price was $8.09 compared to an ending June 30, 2005 market price of $8.09; therefore, the $283,259 is related to the difference between the option exercise price and market price.

The Fund agreed to reimburse the Administrator certain one-time costs and expenses (Special Administrative Fee) associated with the change in
administrators upon receiving approval from the Funds shareholders. The Special Administrative Fee, in the amount of $535,000 was expensed as of June 30, 2005. There has been no Special Administrative Fee in 2006 and none is anticipated;
therefore, the $535,000 is a variance for both the three months and six months ended June 30, 2006.

Realized Gains and Losses on Sales of
Portfolio Securities

During the six months ended June 30, 2006, the Fund realized net capital gains of $28,164,337. The Fund sold
its 1,410,000 shares of common stock and 10,000 warrants of Champion Window Holdings, Inc. for $28,331,141, realizing a capital gain of $26,846,269. The Fund sold a portion of its escrow ownership in Alenco Window Holdings, LLC, for $428,185,
realizing a capital gain of $428,185. The Fund sold a portion of its escrow ownership in Doane PetCare Enterprises, Inc. for $628,208, realizing a capital gain of $628,208. The Fund increased the value of the escrow account of Strategic Holdings,
Inc. for a capital gain of $190,000. In addition, the Fund had other capital gains of $44,955 and realized a short-term capital gain of $26,720 on U.S. Treasury Bills.



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##### Table of Contents

During the six months ended June 30, 2005, we realized net capital gains of $2,282,765 from the
disposition of securities in one portfolio company and a reduction in the discounts on the escrow receivable related to the sales of two former portfolio companies. We sold 1,033,457 shares of ENGlobal Corporation (ENG) common stock,
realizing a capital gain of $1,890,142. We increased the value of the escrow account of Strategic Holdings, Inc. for a capital gain of $331,000 and increased the value of the escrow account of Alenco Holding Corp. for a capital gain of $45,000. In
addition, we realized a short-term capital gain of $16,623 on our U.S. Treasury Bills.

Changes in Unrealized Appreciation/Depreciation of Portfolio
Securities

Net unrealized depreciation on investments increased by $22,708,597 during the six months ended June 30, 2006, from a
net unrealized appreciation of $14,043,262 to a net unrealized depreciation of ($8,665,335). Such increase in depreciation resulted primarily from the transfer of $26,640,341 in net unrealized appreciation to net realized appreciation for Champion
Window Holdings, Inc. The increase in depreciation was also increased by the transfer of $428,185 and $628,208 in net unrealized appreciation to net realized appreciation for Alenco Window Holdings, LLC and Doane PetCare Enterprises, Inc., escrow
accounts, respectively. The Fund had additional decreases in unrealized depreciation which resulted from increases in the estimated fair value of six of its portfolio companies aggregating $6,591,382 which is primarily comprised of PalletOne, Inc.
and The Drilltec Corporation due to improved operating performances at both companies. The Fund had additional increases in unrealized depreciation which resulted from decreases in the estimated fair value of two of the portfolio companies amounting
to $1,603,245.

Net unrealized appreciation on investments increased by $7,722,128 during the six months ended June 30, 2005, from a
net unrealized depreciation of $4,573,310 to a net unrealized appreciation of $3,148,818. The increase in appreciation resulted from increases in the estimated fair values of six of our portfolio companies aggregating $13,203,000, of which Champion
Window Holdings, Inc. accounted for $10,603,000. The Fund had decreases in the estimated fair values of six of our portfolio companies aggregating $3,590,730, with ConGlobal Industries, Inc. accounting for $1,346,284, Sovereign Business Forms, Inc.
786,128 and Equicom $646,140. The Fund also transferred $1,890,142 in unrealized appreciation to realized capital gains from the sale of all its common stock of ENG.

Dividends

On February 2, 2006, the Fund declared dividends of $18,441,480 ($2.50 per share).
The Fund paid $12,975,926 in cash and issued 729,773 additional shares of common stock at $7.489 per share on March 23, 2006, in payment of such dividend. The classification of the dividend will not be known as to whether it is an ordinary
income, capital gain, or return of capital dividend until December 31, 2006, since any purchase or sale of a portfolio company during the remainder of the year would affect the classification. The Fund declared no dividends during the six
months ended June 30, 2005. On January 16, 2005, the Fund paid $1,589,160 in cash and issued 260,719 additional shares of stock at $7.56 per share for a dividend that had been declared in 2004.

Portfolio Investments

During the six months ended
June 30, 2006, the Fund invested $8,677,771 in eight follow-on investments in eight companies, including $353,036 in the form of accrued interest and dividends received in the form of additional portfolio securities, accretion of original issue
discount on promissory notes and amortization of original issue premiums on promissory notes.

For the six months ended June 30, 2006,
the Fund received an additional 1,137 shares amounting to $113,700 of preferred stock of Sovereign Business Forms, Inc. (Sovereign) in dividends.

On April 18, 2006, the Fund made a follow-on investment into Riptide Entertainment LLC of $300,000 for an 8% promissory note with a maturity date of April 18, 2011. The investment is to be used for the
exclusive, worldwide license to use the trade name Dick Clarks American Bandstand in the production of live musical celebrity tribute shows.

In February 2006, Spectrum Management, LLC elected to convert $162,584 of accrued interest into a new 16.0% promissory note and extend the total promissory note valued at $386,241, with interest and principal due at
maturity on May 28, 2011.



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During the six months ended June 30, 2006, Equicom, Inc., elected to convert $50,619 of accrued
interest into the balance of the 10% promissory note due to the Fund.

For the six months ended June 30, 2006, the Fund recorded
$103,245 as amortization of original issue discount on the Funds non-interest bearing note receivable from ConGlobal Industries, Inc.

For the six months ended June 30, 2006, the Fund recorded ($51,555) and ($25,557) as amortization of premium on the organization costs related to the purchase of interest bearing promissory notes at Cedar Lodge Holdings, Inc. and
Creekstone Florida Holdings, LLC.s, Inc., respectively.

On February 21, 2006, the Fund made a $8,011,328 follow-on investment to
Cedar Lodge Holdings, Inc. The investment included $400,000 for 4,000 shares of $100/share common stock and $7,611,328 for an 18% promissory note and organization costs related to the investment.

In January, 2006, the Fund invested an additional $13,407 in Champion Window Holdings, Inc., for legal fees relating to the sale of Champion.

Subsequent Events

On July 6, 2006, the Fund
sold U.S. Treasury bills for $30,000,000 and repaid the margin loan.

On July 11, 2006, the Fund received a cash dividend payment from
PalletOne, Inc. for $104,816. This amount was included in dividends receivable at June 30, 2006.

On July 12, 2006, the Fund
agreed to engage A.G. Edwards for $150,000 to provide the Fund with certain financial advisory services regarding the strategic and tactical alternatives available. The agreement has a one year life.

On August 4, 2006, EQS subscribed to acquire an interest in RP&C International Investments LLC (RP&C). RP&C is a fund that
invests in nursing and residential care homes in Europe and the subscription commitment obligates EQS to invest up to $11.1 million in RP&C.

The Fund has decided to further the total return investment objective, with authorization from the Board of Directors (which includes all of the Funds independent directors) and approval of a majority of the shareholders, by amending
the Funds Restated Certificate of Incorporation to change the name of the Fund from Equus II Incorporated to Equus Total Return, Inc. This proposal was approved by a majority of the shareholders on August 11, 2006.

In early August, the Fund has received approximately $2.7 million in principal and interest on our promissory note with Cedar Lodge
Holdings, Inc., based on condominium sales activity.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

The Fund is subject to
financial market risks, including changes in interest rates with respect to investments in debt securities and outstanding debt payable, as well as changes in marketable equity security prices. The Fund does not use derivative financial instruments
to mitigate any of these risks. The return on investments is generally not affected by foreign currency fluctuations.

The Funds
investments in portfolio securities consist of some fixed rate debt securities. Since the debt securities are generally priced at a fixed rate, changes in interest rates do not directly impact interest income. In addition, changes in market interest
rates are not typically a significant factor in the determination of fair value of these debt securities, since the securities are generally held to maturity. Their fair values are determined on the basis of the terms of the debt security and the
financial condition of the issuer.

Borrowings under the lines of credit expose the Fund to certain market risks. Based on the average
outstanding borrowings under the Funds lines of credit for the six months ended June 30, 2006 and 2005, respectively, of approximately $0 and $0 a change of one percent in the interest rate would have caused a change in interest expense
of approximately $0. This change would have resulted in no change in the net asset value per share at June 30, 2006 and 2005, respectively. On July 28, 2005 the Fund formally terminated its revolving line of credit loan with The Frost
National Bank due to its present cash position and projected ongoing cash requirements, which made it unlikely that the existing line would be utilized in the foreseeable future. There were no borrowings outstanding during the six months ended
June 30, 2006. See Managements Discussion and Analysis of Financial Condition and Results of Operations regarding the Funds liquidity and capital resources.



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A major portion of the Funds investment portfolio consists of debt and equity investments in
private companies. Modest changes in public market equity prices generally do not significantly impact the estimated fair value of these investments. However, significant changes in market equity prices can have a longer-term effect on valuations of
private companies, which could affect the carrying value and the amount and timing of gains or losses realized on these investments. A small portion of the investment portfolio also consists of common stocks in publicly traded companies. These
investments are directly exposed to equity price risk, in that a hypothetical ten percent change in these equity prices would result in a similar percentage change in the fair value of these securities.

The Fund is classified as a non-diversified investment company under the Investment Company Act, which means the Fund is not limited in the
proportion of its assets that may be invested in the securities of a single user. The value of one segment called Business Products and Services includes three portfolio companies and was 19.9% of the net asset value and 34.1% of the Funds
investments in portfolio company securities (at fair value) at June 30, 2006. Changes in business or industry trends or in the financial condition, results of operations, or the markets assessment of any single portfolio company will
affect the net asset value and the market price of the Funds common stock to a greater extent than would be the case if the Fund were a diversified company holding numerous investments.

Item 4. Controls and Procedures

The Fund maintains disclosure controls and other
procedures that are designed to ensure that information required to be disclosed by the Fund in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the
SECs rules and forms, and that such information is accumulated and communicated to the Funds management, including its Chairman and Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.

The Funds management, with the participation of the Funds Chairman and Chief Executive Officer and Chief
Financial Officer, have evaluated the effectiveness of the design and operations of the Funds disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of June 30, 2006.
Based on their evaluation, the Funds Chairman and Chief Executive Officer and Chief Financial Officer concluded that the Funds disclosure controls and procedures are effective in timely making known to them material information relating
to the Fund required to be disclosed in the Funds reports file or submitted under the Exchange Act. There has been no change in the Funds internal control over financial reporting during the quarter ended June 30, 2006, that has
materially affected, or is reasonably likely to materially affect, the Funds internal control over financial reporting.

Part II. Other Information

Item 4. Submission of Matters to a Vote of Security Holders

The Fund held its annual meeting of shareholders on June 15, 2006. At the meeting, shareholders voted on (i) the election of
the persons named in the Proxy Statement as Directors of the Fund for the terms described therein and (ii) the ratification of the selection of UHY LLP as the Funds independent auditors for the fiscal year ending December 31, 2006.

The table set forth below shows, with respect to each nominee, the number of shares voted for such nominee and shares for which authority
was withheld:



|                    |  |           |  |         
|------------------- |  | --------- |  | --------
|Name of Nominee     |  | For       |  | Withheld
|Richard F. Bergner  |  | 6,384,507 |  | 187,511 
|Charles M. Boyd     |  | 6,391,414 |  | 180,614 
|Sam P. Douglass     |  | 6,348,546 |  | 223,472 
|Alan D. Feinsilver  |  | 5,970,732 |  | 601,286 
|Gregory J. Flanagan |  | 6,383,267 |  | 188,751 
|Henry W. Hankinson  |  | 6,386,130 |  | 185,888 
|Robert L. Knauss    |  | 6,201,554 |  | 370,464 
|Anthony R. Moore    |  | 6,401,008 |  | 171,010 
|Francis D. Tuggle   |  | 6,419,240 |  | 152,778 
|James M. Walsh      |  | 5,970,276 |  | 601,742 



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The table below sets forth, as to the other matters voted upon, the number of shares voted for the
proposals, against the proposals and shares that abstained.



|                         |  |           |  |         |  |        
|------------------------ |  | --------- |  | ------- |  | -------
|Proposal                 |  | For       |  | Against |  | Abstain
|Ratification of Auditors |  | 6,395,423 |  | 97,912  |  | 78,682 

All nominees to the Registrants Board of Directors were elected. The Funds selection
of independent auditors was ratified.

Item 6. Exhibits



|3. | Articles of Incorporation and by-laws
|-- | -------------------------------------



| | (a) | Restated Certificate of Incorporation of the Fund dated March 4, 1992. [Incorporated by reference to Exhibit 3(a) to Registrants Annual Report on Form 10-K for the year
ended December 31, 1991.]
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | Certificate of Merger dated June 30, 1993, between the Fund and Equus Investments Incorporated [Incorporated by reference to Exhibit 3(c) to Registrants Annual Report on
Form 10-K for the year ended December 31, 1993]
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | Amended and Restated Bylaws of the Fund. [Incorporated by reference to Exhibit 3(c) to Registrants Annual Report on Form 10-K for the year ended December 31, 1995.]
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10. | Material Contracts
|--- | ------------------



| | (a) | Investment Advisory Agreement dated June 30, 2005, between the Fund and Moore, Clayton Capital Advisors, Inc. [Incorporated by reference to Exhibit 10(a) to Registrants
Quarterly Report on Form 10-Q for the quarter ended June 30, 2005.]
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | Administration Agreement dated June 30, 2005, between the Fund and Equus Capital Administration Company. [Incorporated by reference to Exhibit 10(b) to Registrants
Quarterly Report on Form 10-Q for the quarter ended June 30, 2005.]
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | Safekeeping Agreement between Equus II Incorporated and The Frost National Bank dated March 15, 2004. [Incorporated by reference to Exhibit 10(f) to Registrants Annual
Report on Form 10-K for the year ended December 31, 2004.]
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) | Form of Indemnification Agreement between Equus II Incorporated and its directors and certain officers. [Incorporated by reference to Exhibit 10(g) to Registrants Annual
Report on Form 10-K for the year ended December 31, 2004.]
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (e) | Form of Release Agreement between Equus II Incorporated and certain of its officers and former officers. [Incorporated by reference to Exhibit 10(h) to Registrants Annual
Report on Form 10-K for the year ended December 31, 2004.]
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|31. | Rule 13a-14(a)/15d-14(a) Certifications
|--- | ---------------------------------------



| | 1. | Certification by Chairman and Chief Executive Officer
| | -- | -----------------------------------------------------



| | 2. | Certification by Chief Financial Officer
| | -- | ----------------------------------------



|32. | Section 1350 Certifications
|--- | ---------------------------



| | 1. | Certification by Chairman and Chief Executive Officer
| | -- | -----------------------------------------------------



| | 2. | Certification by Chief Financial Officer
| | -- | ----------------------------------------



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SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed by the undersigned, thereunto duly authorized.



|                      |  |                          
|--------------------- |  | -------------------------
|                      |  | EQUUS II INCORPORATED    
|                      | 
|Date: August 14, 2006 |  | /s/ HARRY O. NICODEMUS IV
|                      |  | Harry O. Nicodemus IV    
|                      |  | Chief Financial Officer  



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