<PAGE>

                                   FORM 10-Q

                      SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C.  20549

(Mark One)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

For the quarterly period ended September 30, 2001

                                      or

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

Commission File Number 0-19509

                             EQUUS II INCORPORATED
            (Exact name of registrant as specified in its charter)


           Delaware                                        76-0345915
(State or other jurisdiction of                         (I.R.S. Employer
incorporation or organization)                         Identification No.)

2929 Allen Parkway, Suite 2500
       Houston, Texas                                      77019-2120
  (Address of principal                                     (Zip Code)
    executive offices)

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

Securities registered pursuant to Section 12(b) of the Act:

        Title of each class                             Name of each exchange
                                                         on which registered

           Common Stock                                 New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:  None

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 [ ]

Approximate aggregate market value of common stock held by non-affiliates of the
registrant:  $42,079,895 computed on the basis of $8.45 per share, closing
price of the common stock on the New York Stock Exchange Inc. on November 13,
2001.  For the purpose of calculating this amount only, all directors and
executive officers of the registrant have been treated as affiliates.  There
were 5,666,383 shares of the registrant's common stock, $.001 par value,
outstanding, as of November 13, 2001. The net asset value of a share at
September 30, 2001 was $13.82.

Documents incorporated by reference:  None
<PAGE>

                             EQUUS II INCORPORATED
                           (A Delaware Corporation)

                                     INDEX

PART I.   FINANCIAL INFORMATION                                         PAGE
                                                                        ----
          Item 1.  Financial Statements

                   Balance Sheets

                   --September 30, 2001 and December 31, 2000             1

                   Statements of Operations

                   --For the three months ended September 30,
                     2001 and 2000                                        2

                   --For the nine months ended September 30,
                     2001 and 2000                                        3

                   Statements of Changes in Net Assets

                   --For the nine months ended September 30,
                     2001 and 2000                                        4

                   Statements of Cash Flows

                   --For the nine months ended September 30,
                     2001 and 2000                                        5

                   Selected Per Share Data and Ratios

                  --For the nine months ended September 30,
                    2001 and 2000                                         7

                   Schedule of Portfolio Securities

                   --September 30, 2001                                   8

                   Notes to Financial Statements                         14

          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

PART II.  OTHER INFORMATION

          Item 6.  Exhibits and Reports on Form 8-K                      26

SIGNATURE                                                                26
<PAGE>

PART I.   FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

                             EQUUS II INCORPORATED
                                BALANCE SHEETS
                   SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                2001           2000
                                                            ------------   ------------
<S>                                                         <C>            <C>
Assets
------

Investments in portfolio securities at fair value
     (cost $89,885,028 and $94,936,875, respectively)       $ 83,251,281   $ 94,117,912
Temporary cash investments, at cost which
     approximates fair value                                  65,152,352     77,041,332
Cash                                                              20,889          2,200
Accounts receivable                                               45,622            867
Accrued interest receivable                                    4,030,301      4,855,256
                                                            ------------   ------------
          Total assets                                       152,500,445    176,017,567
                                                            ------------   ------------
Liabilities and net assets
--------------------------

Liabilities:
     Accounts payable                                            162,055        338,178
     Due to management company                                   391,485        454,624
     Notes payable to bank                                    73,650,000     84,300,000
                                                            ------------   ------------
          Total liabilities                                   74,203,540     85,092,802
                                                            ------------   ------------
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, 5,666,383 and 6,674,577 shares
        outstanding                                                5,666          6,675
     Additional paid-in capital                               83,658,268     98,046,809
     Notes receivable from officers related to
        771,927 shares of common stock                                 -    (10,132,925)
     Undistributed net investment income                       1,521,467         36,936
     Undistributed net capital gains (losses)                   (254,749)     3,786,233
     Unrealized depreciation of portfolio securities, net     (6,633,747)      (818,963)
                                                            ------------   ------------
          Total net assets                                  $ 78,296,905   $ 90,924,765
                                                            ============   ============
          Net assets per share                                    $13.82         $15.40
                                                            ============   ============
</TABLE>

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

                                       1
<PAGE>

                             EQUUS II INCORPORATED
                           STATEMENTS OF OPERATIONS
            FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
                                  (Unaudited)


<TABLE>
<CAPTION>
                                                                      2001                     2000
                                                                   -----------             ------------
<S>                                                            <C>                      <C>
Investment income:
     Income from portfolio securities                              $   480,866             $  1,225,265
     Interest from temporary cash investments                           14,482                   44,291
     Other income                                                            -                   26,079
                                                                   -----------             ------------
          Total investment income                                      495,348                1,295,635
                                                                   -----------             ------------
Expenses:
     Management fees                                                   391,485                  452,606
     Non-cash compensation expense                                    (180,037)                       -
     Director fees and expenses                                         56,929                   58,164
     Professional fees                                                  12,093                   28,245
     Administrative fees                                                12,500                   12,500
     Mailing, printing and other expenses                               (5,336)                  41,605
     Interest expense                                                  136,991                  557,193
     Franchise taxes                                                     7,040                    7,840
                                                                   -----------             ------------
          Total expenses                                               431,665                1,158,153
                                                                   -----------             ------------
Net investment income                                                   63,683                  137,482
                                                                   -----------             ------------
Realized gain (loss) on sales of portfolio securities, net            (283,022)               3,397,734
                                                                   -----------             ------------
Unrealized depreciation of portfolio securities, net:
     End of period                                                  (6,633,747)             (14,168,303)
     Beginning of period                                            (3,610,715)              (2,873,741)
                                                                   -----------             ------------
     Increase in unrealized depreciation, net                       (3,023,032)             (11,294,562)
                                                                   -----------             ------------
     Total decrease in net assets from operations                  $(3,242,371)            $ (7,759,346)
                                                                   ===========             ============
</TABLE>
                         The accompanying notes are an
                  integral part of these financial statements.

                                       2
<PAGE>

                             EQUUS II INCORPORATED
                           STATEMENTS OF OPERATIONS
            FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
                                  (Unaudited)


<TABLE>
<CAPTION>
                                                                      2001                     2000
                                                                   -----------             ------------
<S>                                                            <C>                      <C>
Investment income:
     Income from portfolio securities                              $ 2,008,731             $  3,714,325
     Interest from temporary cash investments                           55,570                   98,888
     Other income                                                       55,000                  319,469
                                                                   -----------             ------------
          Total investment income                                    2,119,301                4,132,682
                                                                   -----------             ------------
Expenses:
     Management fees                                                 1,233,950                1,456,650
     Non-cash compensation expense                                  (1,536,856)                       -
     Director fees and expenses                                        192,976                  176,815
     Professional fees                                                 271,260                   68,405
     Administrative fees                                                37,500                   37,500
     Mailing, printing and other expenses                               56,759                   70,868
     Interest expense                                                  295,191                1,351,162
     Franchise taxes                                                    83,990                  121,465
                                                                   -----------             ------------
          Total expenses                                               634,770                3,282,865
                                                                   -----------             ------------
Net investment income                                                1,484,531                  849,817
                                                                   -----------             ------------
Realized gain (loss) on sales of portfolio securities, net          (4,040,983)               4,744,369
                                                                   -----------             ------------
Unrealized depreciation of portfolio securities, net:
     End of period                                                  (6,633,747)             (14,168,303)
     Beginning of period                                              (818,963)              (1,100,588)
                                                                   -----------             ------------
     Increase in unrealized depreciation, net                       (5,814,784)             (13,067,715)
                                                                   -----------             ------------
     Total decrease in net assets from operations                  $(8,371,236)            $ (7,473,529)
                                                                   ===========             ============
</TABLE>

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

                                       3
<PAGE>

                             EQUUS II INCORPORATED
                      STATEMENTS OF CHANGES IN NET ASSETS
             FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                     2001                    2000
                                                                 ------------            ------------
<S>                                                             <C>                     <C>
 Operations:

      Net investment income                                      $  1,484,531            $    849,817
      Realized gain (loss) on sales of portfolio
         securities, net                                           (4,040,983)              4,744,369
      Increase in unrealized depreciation of
         portfolio securities, net                                 (5,814,784)            (13,067,715)
                                                                 ------------            ------------
 Decrease in net assets from operations                            (8,371,236)             (7,473,529)
                                                                 ------------            ------------
 Capital Transactions:
      Increase (decrease) related to officers' notes                 (536,780)                335,915
      Non-cash compensation expense related to officers'
         stock options                                             (1,536,856)                      -
      Repurchase shares of common stock                            (2,182,988)             (3,759,988)
                                                                 ------------            ------------
 Decrease in net assets from capital transactions                  (4,256,624)             (3,424,073)
                                                                 ------------            ------------
 Decrease in net assets                                           (12,627,860)            (10,897,602)

 Net assets at beginning of period                                 90,924,765             101,418,820
                                                                 ------------            ------------
 Net assets at end of period                                     $ 78,296,905            $ 90,521,218
                                                                 ============            ============
</TABLE>

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

                                       4
<PAGE>

                             EQUUS II INCORPORATED
                           STATEMENTS OF CASH FLOWS
             FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                       2001                      2000
                                                                  -------------             -------------
<S>                                                              <C>                       <C>
Cash flows from operating activities:
     Interest and dividends received                              $     363,515             $   2,031,259
     Cash paid to management company, directors,
        bank and suppliers                                           (2,409,447)               (3,548,790)
                                                                  -------------             -------------
        Net cash used by operating activities                        (2,045,932)               (1,517,531)
                                                                  -------------             -------------
Cash flows from investing activities:
     Purchase of portfolio securities                                (7,140,284)               (9,952,562)
     Proceeds from sales of portfolio securities                     10,071,403                 6,753,517
     Principal payments from portfolio companies                              -                 5,355,763
     (Advances) repayment from portfolio companies                      (13,579)                   50,263
                                                                  -------------             -------------
        Net cash provided by investing activities                     2,917,540                 2,206,981
                                                                  -------------             -------------
Cash flows from financing activities:
     Advances from bank                                             205,400,000               230,000,000
     Repayments to bank                                            (216,050,000)             (223,600,000)
     Repurchase of common stock                                      (2,182,988)               (3,847,094)
     Payments received on officer notes                                  92,531                   991,161
     Dividend payments                                                   (1,442)                   (6,023)
                                                                  -------------             -------------
        Net cash provided (used) by financing activities            (12,741,899)                3,538,044
                                                                  -------------             -------------
Net increase (decrease) in cash and cash equivalents                (11,870,291)                4,227,494

Cash and cash equivalents at beginning of period                     77,043,532                55,819,682
                                                                  -------------             -------------
Cash and cash equivalents at end of period                        $  65,173,241             $  60,047,176
                                                                  =============             =============
</TABLE>

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

                                       5
<PAGE>

                             EQUUS II INCORPORATED
                           STATEMENTS OF CASH FLOWS
             FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
                                  (Unaudited)
                                  (Continued)

<TABLE>
<CAPTION>
                                                                        2001                    2000
                                                                     -----------             -----------
<S>                                                                  <C>                     <C>
Reconciliation of decrease in net assets from
     operations to net cash used by operating activities:

Decrease in net assets from operations                               $(8,371,236)            $(7,473,529)

Adjustments to reconcile decrease in net assets from
     operations to net cash used by operating activities:

     Realized (gain) loss on sale of portfolio securities, net         4,040,983              (4,744,369)
     Increase in unrealized depreciation, net                          5,814,784              13,067,715
     Accrued interest and dividends exchanged for
         portfolio securities                                         (1,950,830)             (1,067,861)
     Non-cash compensation expense related to officers'
         stock options                                                (1,536,856)                      -
     Increase in accounts receivable                                        (600)                      -
     (Increase) decrease in accrued interest receivable                  195,643              (1,369,477)
     Interest income on officer notes                                          -                 335,915
     Decrease in accounts payable                                       (174,681)               (211,437)
     Decrease in due to management company                               (63,139)                (54,488)
                                                                     -----------             -----------
Net cash used by operating activities                                $(2,045,932)            $(1,517,531)
                                                                     ===========             ===========
</TABLE>

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

                                       6
<PAGE>

                             EQUUS II INCORPORATED
         SUPPLEMENTAL INFORMATION - SELECTED PER SHARE DATA AND RATIOS
             FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                               2001                2000
                                                                             --------             -------
<S>                                                                     <C>                    <C>

Investment income                                                            $   0.36             $  0.70

Expenses                                                                         0.11                0.56
                                                                             --------             -------
Net investment income                                                            0.25                0.14

Realized gain (loss) on sale of portfolio securities, net                       (0.69)               0.80

Increase in unrealized depreciation of portfolio securities, net                (1.00)              (2.20)
                                                                             --------             -------
Decrease in net assets from operations                                          (1.44)              (1.26)
                                                                             --------             -------
Capital Transactions:

Increase (decrease) related to officers' notes                                  (0.10)               0.06

Non-cash compensation expense                                                   (0.27)                  -

Effect of common stock repurchase                                                0.23                0.34
                                                                             --------             -------
Increase (decrease) in net assets from capital transactions                     (0.14)               0.40
                                                                             --------             -------
Net decrease in net assets                                                      (1.58)              (0.86)

Net assets at beginning of period                                               15.40               16.61
                                                                             --------             -------
Net assets at end of period                                                  $  13.82             $ 15.75
                                                                             ========             =======
Ratio of expenses to average net assets                                          0.75%               3.42%

Ratio of expenses to average net assets, exclusive of non-cash
     compensation expense                                                        2.57%               3.42%

Ratio of net investment income to average net assets                             1.75%               0.89%

Ratio of net investment income to average net assets, exclusive of
     non-cash compensation expense                                             (0.06)%               0.89%

Ratio of decrease in net assets from operations to average net assets          (9.89)%             (7.79)%

Ratio of decrease in net assets from operations to average net
     assets, exclusive of non-cash compensation expense                       (11.71)%             (7.79)%
</TABLE>

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

                                       7
<PAGE>

                             EQUUS II INCORPORATED
                       SCHEDULE OF PORTFOLIO SECURITIES
                              SEPTEMBER 30, 2001
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                         Date of
                                                         Initial
                Portfolio Company                      Investment           Cost           Fair Value
               -------------------                     ----------          ------          ----------
<S>                                                 <C>                 <C>             <C>
A.C. LIQUIDATING CORPORATION                         February 1985
 Asset held for liquidation
 -10% secured promissory notes *                                            $  188,014         $        -

AMERICAN TRENCHLESS TECHNOLOGY, LLC                  February 2001
 Boring, tunneling and directional drilling
 -100,000 shares of preferred stock                                           1,000,000          1,000,000
 -1,934,532 shares of common stock                                              116,550            116,550

THE BRADSHAW GROUP                                      May 2000
 Sells and services midrange and high-speed
 printing equipment
 -1,335,000 shares of preferred stock                                         1,335,000                  -
 -Prime + 2% promissory note                                                          -            398,383
 -15% promissory note                                                           222,945            222,945
 -15% promissory note                                                           222,945            222,945
 -Warrant to buy 2,229,450 shares of common
  stock for $0.01 through May 2008                                                    1                  -

CHAMPION WINDOW, INC.                                  March 1999
 Primary aluminum window manufacturer
 & distributor
 -1,400,000 shares of common stock                                            1,400,000          7,200,000
 -20,000 shares of preferred stock                                            2,000,000          2,427,500

CONTAINER ACQUISITION, INC.                           February 1997
 Shipping container repair & storage
 -1,370,000 shares of common stock                                            1,370,000          2,870,000
 -70,954 shares of preferred stock                                            7,095,400          7,095,400
 -Conditional warrant to buy up to 370,588 shares
  of common stock at $0.01 through June 2003                                      1,000              1,000

DOANE PETCARE ENTERPRISES, INC.                        October 1995
 Manufacturer of private label pet food
 -1,943,598 shares of common stock                                            3,936,643          6,794,367
 -15% promissory note with a face amount
  of $1,805,556                                                               1,349,647          1,349,647

THE DRILLTEC CORPORATION                               August 1998
 Provides protection & packaging for pipe & tubing
 -Prime + 9.75% promissory note *                                             1,000,000            500,000
 -Warrant to buy 10% of the common
  equity for $100 through September 2002                                              -                  -
</TABLE>

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

                                       8
<PAGE>

                             EQUUS II INCORPORATED
                       SCHEDULE OF PORTFOLIO SECURITIES
                              SEPTEMBER 30, 2001
                                  (Unaudited)
                                  (Continued)

<TABLE>
<CAPTION>
                                                         Date of
                                                         Initial
                Portfolio Company                      Investment             Cost           Fair Value
               -------------------                     ----------            ------          ----------
<S>                                                 <C>                   <C>             <C>
EQUICOM, INC.                                           July 1997
 Radio stations
 -452,000 shares of common stock                                             $  141,250         $        -
 -657,611 shares of preferred stock                                           6,576,110          2,000,000
 -10% promissory note                                                         2,618,750          2,618,750

EQUIPMENT SUPPORT SERVICES, INC.                        December 1999
 Equipment rental
 -35,000 shares of common stock                                                 101,500                  -
 -35,000 shares of preferred stock                                            1,929,000            500,000
 -8% promissory note *                                                        1,138,000          1,138,000

FS STRATEGIES, INC.                                     June 2000
 Temporary staffing and web-based human
 resources provider
 -110,000 shares of common stock                                              7,166,667          2,866,667

GCS RE, INC.                                            February 1989
 Investment in real estate
 -1,000 shares of common stock                                                  132,910            650,000

NCI BUILDING SYSTEMS, INC. (NYSE-NCS)                   April 1989
 Design & manufacture metal buildings
 -200,000 shares of common stock                                                159,784          2,300,000

PETROCON ENGINEERING, INC.                              September 1998
 Engineering, systems & construction management
 -12% promissory note *                                                       4,663,356          4,663,356
 -887,338 shares of common stock                                                    635                635
 -8% Series B junior subordinated promissory note *                           2,659,332          2,659,332
 -Warrant to buy up to 1,552,571 shares of common
  stock at $0.01 per share through March 2009                                         -                  -

RELIANT WINDOW HOLDINGS, LLC                            February 2001
 Aluminum & vinyl window manufacturer & distributor
 -36.86% membership interest                                                    372,256            372,256
</TABLE>

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

                                       9
<PAGE>

                             EQUUS II INCORPORATED
                       SCHEDULE OF PORTFOLIO SECURITIES
                              SEPTEMBER 30, 2001
                                  (Unaudited)
                                  (Continued)

<TABLE>
<CAPTION>
                                                         Date of
                                                         Initial
                Portfolio Company                      Investment             Cost           Fair Value
               -------------------                     ----------            ------          ----------
<S>                                                 <C>                   <C>             <C>
SOVEREIGN BUSINESS FORMS, INC.                         August 1996
 Business forms manufacturer
 -17,117 shares of preferred stock                                           $1,711,700         $1,711,700
 -15% promissory notes                                                        3,151,562          3,151,562
 -Warrant to buy 551,894 shares of common stock
  at $1 per share through August 2006                                                 -            734,019
 -Warrant to buy 25,070 shares of common stock
  at $1.25 per share through October 2007                                             -             27,076
 -Warrant to buy 273,450 shares of common stock
  at $1 per share through October 2009                                                -            363,689

SPECTRUM MANAGEMENT, LLC                               December 1999
 Business & personal property protection
 -285,000 units of Class A equity interest                                    2,850,000          2,850,000

STERNHILL PARTNERS I, LP                               March 2000
 Venture capital firm
 -3% limited partnership interest                                             1,471,604          1,300,000

STRATEGIC HOLDINGS, INC.                               September 1995
 Processor of recycled glass
 -3,089,751 shares of common stock                                            3,088,389                  -
 -3,822,157 shares of Series B preferred stock                                3,820,624          3,250,000
 -15% promissory note *                                                       6,750,000          6,750,000
 -Warrant to buy 225,000 shares of common
  stock at $0.4643 per share through August 2005                                      -                  -
 -Warrant to buy 100,000 shares of common
  stock at $1.50 per share through August 2005                                        -                  -
 -Warrant to buy 2,219,237 shares of common
  stock at $0.01 per share through November 2005                                      -                  -
 -1,000 shares of SMIP, Inc. common stock                                       150,000                  -
 -15% promissory note of SMIP, Inc. *                                           175,000            175,000

TRAVIS INTERNATIONAL, INC.                             December 1986
 Specialty distribution
 -98,761 shares of common stock                                                   5,398          1,200,000

TULSA INDUSTRIES, INC.                                 December 1997
 Manufacturer of oil & gas equipment
 -209,089 shares of common stock                                              5,500,000          1,164,485
 -1,058 shares of Series B preferred stock                                    1,058,000            828,156
</TABLE>

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

                                       10
<PAGE>

                             EQUUS II INCORPORATED
                       SCHEDULE OF PORTFOLIO SECURITIES
                              SEPTEMBER 30, 2001
                                  (Unaudited)
                                  (Continued)

<TABLE>
<CAPTION>
                                                         Date of
                                                         Initial
                Portfolio Company                      Investment             Cost           Fair Value
               -------------------                     ----------            ------          ----------
<S>                                                 <C>                   <C>             <C>
TURFGRASS AMERICA, INC.                                May 1999
 Grows, sells & installs warm season turfgrasses
 -211,184 shares of common stock                                          $   600,000      $   600,000
 -1,507,226 shares of preferred stock                                         768,638          768,638
 -12% subordinated promissory note
  with a face amount of $4,000,000                                          3,685,000        3,685,000
 -12% subordinated promissory note                                            502,035          502,035
 -Warrants to buy 250,412 shares of common
  stock at $0.51 through April 2010                                                 -                -

UNITED INDUSTRIAL SERVICES, INC.                       July 1998
 Field service for petrochemical & power
 generation industries
 -35,000 shares of preferred stock                                          3,500,000        2,500,000
 -15% promissory note                                                         626,958          626,958
 -Warrant to buy 63,637 shares of common stock
  at $0.01 through June 2008                                                      100              100
 -Warrant to buy 18,887 shares of common
  stock at $0.01 through March 2011                                                 -                -

VANGUARD VII, L.P.                                     June 2000
 Venture capital fund
 -1.3% limited partnership interest                                           900,000          800,000

WEATHERFORD INTERNATIONAL (NYSE-WFT)                   July 2001
 Provides equipment & services used for the
 drilling, completion, and production of oil
 and natural gas wells
 -11,927 shares of common stock                                               672,325          295,130
                                                                          -----------      -----------
        Total                                                             $89,885,028      $83,251,281
                                                                          ===========      ===========
</TABLE>

*  The Fund is not recording any additional accrued interest receivable on these
notes, although the Portfolio Companies are still liable for such interest and
it may be collected in the future.  The accrued interest receivable on these
notes is $3,319,402.

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 Champion Window, Inc., Container
Acquisition, Inc., The Drilltec Corporation, Sovereign Business Forms, Inc.,
Strategic Holdings, Inc., Turfgrass America, Inc. and United Industrial
Services, 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

                                       11
<PAGE>

                             EQUUS II INCORPORATED
                       SCHEDULE OF PORTFOLIO SECURITIES
                              SEPTEMBER 30, 2001
                                  (Unaudited)
                                  (Continued)

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, at September 30, 2001,
the Fund was considered to have a controlling interest in Champion Window, Inc.,
Container Acquisition, Inc., The Drilltec Corporation, Equicom, Inc., Reliant
Window Holdings, LLC, Sovereign Business Forms, Inc., Spectrum Management LLC,
Strategic Holdings, Inc., Tulsa Industries, Inc. and United Industrial Services,
Inc.   The fair value of the Fund's investment in Weatherford International
includes a discount of $9,128 from the closing market price to reflect the
estimated effect of restrictions on the sale of such securities at September 30,
2001.

     Income was earned in the amount of $1,177,552 and $2,444,997 for the nine
months ended September 30, 2001 and 2000, respectively, on portfolio securities
of companies in which the Fund has a controlling interest.

     As defined in the Investment Company Act of 1940, all of the Fund's
investments, except Sternhill Partners I, L.P. and Vanguard VII, L.P., are in
eligible portfolio companies.  The Fund provides significant managerial
assistance to all of the eligible portfolio companies in which it has invested,
except Doane PetCare Enterprises, Inc. ("Doane"), Equipment Support Services,
Inc. and Weatherford International.  The Fund provides significant managerial
assistance to portfolio companies that comprise 85% of the total value of the
investments in portfolio companies at September 30, 2001.

     The investments in portfolio securities held by the Fund are not
geographically diversified.  All of the Fund's portfolio companies (except for
Doane and certain investments in the venture capital funds) 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 September 30, 2001:

<TABLE>
<CAPTION>
                                                                                                      Percentage
          Type of Securities                          Cost                   Fair Value             of Fair Value
         --------------------                        ------                  ----------             --------------
<S>                                                <C>                       <C>                       <C>
Secured and Subordinated Debt                        $28,953,545               $28,663,913               34.4%
Common Stock                                          24,542,050                26,057,834               31.3%
Preferred Stock                                       30,794,472                22,081,394               26.5%
Limited Liability Company Investments                  3,222,256                 3,222,256                3.9%
Limited Partnership Investments                        2,371,604                 2,100,000                2.5%
Options and Warrants                                       1,101                 1,125,884                1.4%
                                                     -----------               -----------              -----
        Total                                        $89,885,028               $83,251,281              100.0%
                                                     ===========               ===========              =====
</TABLE>

     Currently, the Fund is not accruing any additional interest income on
secured and subordinated debt with an estimated aggregate fair value of
$15,885,688.

                                       12
<PAGE>

                             EQUUS II INCORPORATED
                       SCHEDULE OF PORTFOLIO SECURITIES
                              SEPTEMBER 30, 2001
                                  (Unaudited)
                                  (Continued)

     The following is a summary by industry of the Fund's investments as of
September 30, 2001:

<TABLE>
<CAPTION>
               Industry                        Fair Value            Percentage
              ----------                      ------------           ----------
<S>                                         <C>                    <C>
Business Products and Services                  $22,515,386              27.1%
Building Products                                17,855,429              21.5%
Industrial                                       16,056,608              19.3%
Energy                                           10,111,094              12.1%
Consumer Goods and Services                       8,144,014               9.8%
Media                                             4,618,750               5.5%
Venture Funds and Other                           2,750,000               3.3%
Retailing/Distribution                            1,200,000               1.4%
                                                -----------             -----
        Total                                   $83,251,281             100.0%
                                                ===========             =====
</TABLE>

                                       13
<PAGE>

                             EQUUS II INCORPORATED
                         NOTES TO FINANCIAL STATEMENTS
                          SEPTEMBER 30, 2001 AND 2000
                                  (Unaudited)

(1)  Organization and Business Purpose

     Equus II Incorporated (the "Fund"), incorporated in Delaware on August 16,
1991, is a non-diversified, closed-end management investment company that has
elected to be a business development company under the Investment Company Act of
1940. The Fund is the successor to Equus Investments II, L.P., which transferred
all of its assets and liabilities to the Fund on July 1, 1992, and Equus
Investments Incorporated, which merged into the Fund on June 30, 1993. The
Fund's shares trade on the New York Stock Exchange under the symbol "EQS".

     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 acquire other businesses, including
leveraged buyouts.  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.  Current income is
not a significant factor in the selection of investments.

(2)  Management

     The Fund has entered into a management agreement with Equus Capital
Management Corporation, a Delaware corporation (the "Management Company").
Pursuant to such agreement, the Management Company performs certain services,
including certain management and administrative services necessary for the
operation of the Fund.  The Management Company receives a management fee at an
annual rate of 2% of the net assets of the Fund, paid quarterly in arrears.  The
Management Company also receives compensation for providing certain investor
communication services, of which $37,500 is included in the accompanying
Statements of Operations for each of the nine months ended September 30, 2001
and 2000.

     The Management Company is controlled by a privately-owned corporation.

     As compensation for services, each director who is not an officer of the
Fund receives an annual fee of $25,000 paid quarterly in arrears, a fee of
$3,000 for each meeting of the Board of Directors attended in person, a fee of
$1,500 for participation in each telephonic meeting of the Board of Directors
and for each committee meeting attended ($500 for each committee meeting if
attended on the same day as a Board Meeting), and reimbursement of all out-of-
pocket expenses relating to attendance at such meetings.  In addition, each
director who is not an officer of the Fund is granted incentive stock options to
purchase shares of the Fund's stock from time to time.  (See Note 9).  Certain
officers and directors of the Fund serve as directors of Portfolio Companies,
and may receive and retain fees, including non-employee director stock options,
from such Portfolio Companies in consideration for such service.

(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.  Investments in

                                       14
<PAGE>

companies whose securities are publicly traded are valued at their quoted market
price, less a discount to reflect the estimated effects of restrictions on the
sale of such securities ("Valuation Discount"), if applicable. Cost is used to
approximate fair value of other investments until significant developments
affecting an investment provide a basis for use of an appraisal valuation.
Thereafter, portfolio investments are carried at appraised values as determined
quarterly by the Management Company, subject to the approval of the Board of
Directors. The fair market 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. Because of the inherent uncertainty of
the valuation of portfolio securities which do not have readily ascertainable
market values, amounting to $80,951,281 (including $295,130 in publicly-traded
securities, net of a $9,128 Valuation Discount) at September 30, 2001, and
$90,328,540 (including $22,459 in publicly-traded securities, net of a $1,518
Valuation Discount) at December 31, 2000, the Fund's estimate of fair value may
significantly differ from the fair 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 and on the Fund's website,
www.equuscap.com.

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

     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.

     Income Taxes - No provision for federal income taxes has been made in the
accompanying financial statements as the Fund has qualified for pass-through
treatment as a "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986. As such, all net income is allocable to the stockholders
for inclusion in their respective tax returns.  Net capital losses are not
allocable to the shareholders but can be carried over to offset future earnings
of the Fund.

(4)  Book to Tax Reconciliation

     The Fund accounts for dividends in accordance with Statement of Position
93-2 which relates to the amounts distributed by the Fund as net investment
income or net capital gains, which are often not equal to the corresponding
income or gains shown in the Fund's financial statements.  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, which allows current year
dividends to be paid prior to the end of the calendar year.  The Fund realized
net capital gains (losses) of $(3,884,515) and $148,953 for the nine months
ended September 30, 2001 and 2000, respectively.  For the tax year ended
December 31, 2000, the Fund had a net capital loss carryover of $1,936,520 that
will be applied to future years.  The Fund had net investment income for tax
purposes of $332,063 and $557,298 for the nine months ended September 30, 2001
and 2000, respectively.

                                       15
<PAGE>

     The following is a reconciliation of the difference in the Fund's net
realized gain or loss on the sale of portfolio securities for book and tax
purposes.

                                             2001              2000
                                         -----------       -----------
Net realized gain (loss) on the sale
  of portfolio securities, book          $(4,040,983)      $ 4,744,369
Book to tax basis difference                 156,468                 -
Post October 31, 1999 losses                       -        (4,595,416)
                                         -----------       -----------
Net realized gain (loss) on the sale
  of portfolio securities, tax           $(3,884,515)      $   148,953
                                         ===========       ===========

(5)  Dividends

     The Fund declared no dividends during the nine months ended September 30,
2001.  The Fund declared undistributed capital gains of $21,751 from 1999 and
undistributed net investment income of $108,174 from 1999 as a dividend in
August 2000 which was distributed in December 2000.

     Prior to November 6, 2001, the Fund's policy was to make cash or
stock dividend distributions of at least $0.60 per share on an annual basis. In
the event that taxable income, including realized capital gains, exceeded $0.60
per share in any year, additional dividends were declared to distribute such
excess. On November 6, 2001, the board of directors of the Fund declared a 10%
stock dividend for 2001, in lieu of the $0.60 cash or stock dividend. See Note
11.

(6)  Temporary Cash Investments

     Temporary cash investments, which represent the short-term utilization of
cash prior to investment in securities of portfolio companies, distributions to
the shareholders or payment of loans and expenses, consist of $65,152,352 in
money market accounts with Bank of America, N.A. earning interest at rates
ranging from 1.46% to 1.75% per annum at September 30, 2001.

(7)  Portfolio Securities

     During the nine months ended September 30, 2001, the Fund invested
$1,120,236 in two new companies and made follow-on investments of $7,970,878 in
eleven companies, including $1,950,830 in accrued interest and dividends
received in the form of additional portfolio securities and accretion of
original issue discount on a promissory note.  In addition, the Fund realized a
net capital loss of $4,040,983 during the nine months ended September 30, 2001.

     During the nine months ended September 30, 2000, the Fund invested
$7,435,001 in four new companies and made follow-on investments of $3,585,422 in
eight companies, including $1,067,861 in accrued interest and dividends received
in the form of additional portfolio securities and accretion of original issue
discount on a promissory note. In addition, the Fund realized a net capital gain
of $4,744,369 during the nine months ended September 30, 2000.

(8)  Notes Payable to Bank

     The Fund has a $100,000,000 line of credit promissory note with Bank of
America N.A., with interest payable at 1/2% over the rate earned in its money
market account. The Fund had $65,000,000

                                       16
<PAGE>

and $77,000,000 outstanding on such notes at September 30, 2001 and December 31,
2000, respectively, that was secured by $65,000,000 and $77,000,000 of the
Fund's temporary cash investments. The line of credit promissory note expires
July 1, 2002.

     The Fund has a $22,500,000 revolving line of credit with Bank of America,
N.A. that expires on July 1, 2002. The Fund had $8,650,000 and $7,300,000
outstanding under such line of credit at September 30, 2001 and December 31,
2000, respectively, which is secured by the Fund's investments in portfolio
securities. The interest rate ranges from prime - 1/4% to prime + 1/2 % or LIBOR
+ 1.75% to LIBOR + 2.50%. The Fund also pays interest at the rate of 1/4% per
annum on the unused portion of the revolving line of credit.

     The average daily balances outstanding on the Fund's notes payable during
the nine months ended September 30, 2001 and 2000, were $7,076,374 and
$20,399,903, respectively.

(9)  Stock Option Plan

     Shareholders have approved the Equus II Incorporated 1997 Stock Incentive
Plan ("Stock Incentive Plan"), which authorizes 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 Stock Incentive Plan also
provides that each director who is not an officer of the Fund is, on the first
business day following each annual meeting, granted an incentive stock option to
purchase 2,000 shares of the Fund's common stock.

     Under the Stock Incentive Plan, options to purchase 76,000 and 306,773
shares of the Fund's common stock with a weighted average exercise price of
$18.89 and $18.71 per share were outstanding at September 30, 2001 and 2000,
respectively. Outstanding options at September 30, 2001 have exercise prices
ranging from $9.29 to $27.44 and expire in May 2007 through May 2010. No options
were exercised during the nine months ended September 30, 2001 and 2000. On
April 1, 2001, officers of the Fund surrendered options to acquire 224,616
shares of common stock pursuant to the Stock Incentive Plan back to the Fund,
and such options were cancelled. On September 30, 1999, options to purchase
654,358 shares of common stock of the Fund were exercised by the officers of the
Fund for $17 per share. The exercise price of $11,124,086 was paid in the form
of promissory notes from the officers to the Fund. The notes provided for
interest at 5.42% per annum, had limited recourse and were due on or before
September 30, 2008. The notes were secured by the 654,358 shares, including any
proceeds or dividends paid thereon. As a result of dividends paid since the
issuance of the notes, 178,331 additional shares were issued to the officers and
pledged to the Fund. In 2000, principal payments of $991,161 were made on the
notes. In 2001, interest payments of $92,531 were made on the notes. On April 1,
2001, a former officer of the Fund surrendered 37,701 shares in payment of his
note receivable and accrued interest aggregating $548,542. The Fund released
5,877 shares to the officer relating to this payment. During the month of
September 2001, the officers of the Fund surrendered 729,693 shares in payment
of their notes receivable and accrued interest aggregating $10,505,551. This
payment was recorded as a decrease in common stock and additional paid in
capital. The Fund released 59,418 shares to the officers relating to this
payment. As a result of this payment, the outstanding note balance is zero at
September 30, 2001. There was no effect on net assets as a result of the note
repayment and surrendering of shares.

     The notes receivable and related accrued interest, as well as 771,927
shares of pledged common stock, were not included in the Fund's net asset value
per share at December 31, 2000. Generally accepted accounting principles require
that the options issued to the officers be accounted for using variable plan
accounting due to the limited recourse provision of such notes and that the
notes receivable be presented as a reduction of net assets. As a result,
compensation expense is adjusted to reflect the change in benefit based on the
net asset value of the Fund that the officers would have received assuming that
their notes were settled with their pledged common stock at

                                       17
<PAGE>

the end of the reporting period. Non-cash compensation expense under this
arrangement was $(1,536,856) for the nine months ended September 30, 2001 and
was recorded as a decrease to additional paid in capital. Interest earned on the
notes receivable of $384,388 and $335,915 was recorded as an increase to
additional paid in capital for the nine months ended September 30, 2001 and
2000, respectively.

     As of September 30, 2001 and 2000, all outstanding options were "out of the
money" and would not have had a dilutive effect on net assets per share if
exercised.  See Note 11.

(10) Commitments and Contingencies

     The Fund has made commitments to invest, under certain circumstances, up to
an additional $2,000,000 in Container Care International, Inc., $37,000 in
Equicom, Inc., $833,333 in FS Strategies, Inc., $4,877,729 in Reliant Building
Products, Inc., $1,500,000 in Sternhill Partners I L.P. and $2,100,000 in
Vanguard VII, L.P.  In addition, the Fund has committed to invest up to
$3,500,000 in PalletOne, Inc. ("PalletOne").

     The Fund and certain of the portfolio companies are involved in asserted
claims and have the possibility for unasserted claims which may ultimately
affect the fair value of the Fund's portfolio investments.  In the opinion of
Management, the financial position or operating results of the Fund will not be
materially affected by these claims.

(11)  Subsequent and Other Events

     Subsequent to September 30, 2001, the Fund repaid a net $61,350,000 of
notes payable to the bank.

     On October 18, 2001, the Fund invested $3,500,000 in PalletOne, Inc.
("PalletOne") in exchange for 3,150,000 shares of Series A preferred stock and
350,000 shares (approximately 21% of outstanding shares on a fully-diluted
basis) of common stock.  PalletOne was formed to acquire and operate twelve
wooden pallet manufacturing facilities in eight states.

     The Fund does not expect to have any net taxable ordinary income or capital
gains for the calendar year 2001.  Accordingly, rather than declaring a return
of capital dividend which might be paid in cash, the board of directors of the
Fund has declared a 10% stock dividend, payable to the shareholders of record as
of December 3, 2001.  The board determined it would be in the best interest of
the Fund to maintain its available liquidity in light of the uncertainty of the
current economic environment and for potentially attractive investment
opportunities which might occur as a result of such uncertainty.

     Also in November 2001, the board of directors of the Fund authorized the
issuance by the compensation committee of up to 900,000 stock options with
dividend equivalent rights to its officers, pursuant to the Stock Incentive
Plan.

     On July 31, 2001, the Fund entered into a Settlement Agreement and Plan of
Reorganization with Petrocon Engineering, Inc. ("Petrocon") whereby the Fund
will restructure its existing investment in Petrocon in order to facilitate
Petrocon's merger into Industrial Data Systems Corporation ("IDS") (AMEX: IDS).
IDS provides consulting services to the pipeline and process industries for the
development, management and turnkey execution of engineering projects.  Upon
completion of the transaction, the Fund will receive, in exchange for its
subordinated notes, warrant to purchase common stock and common stock of
Petrocon, the following IDS securities:  (i) $2.0 million in cash, (ii) a $3.0

                                       18
<PAGE>

million 9% promissory note, (iii) 2.5 million shares of 8% Series A Convertible
Redeemable Preferred Stock, (iv) 958,000 shares of common stock and (v) a
warrant to purchase an additional 200,000 shares of common stock at various
prices and under certain conditions.  The estimated fair market value of the
securities to be received by the Fund does not differ materially from the
recorded value at September 30, 2001.

     During the quarter ended September 30, 2001, Tulsa Industries, Inc.
("Tulsa") completed the sale of substantially all of its assets to Weatherford
International, Inc. ("Weatherford") (NYSE: WFT) in a stock for asset
transaction.  Accordingly, Tulsa has begun the process of an orderly
liquidation.  In connection with the liquidation, the Fund will receive its pro-
rata share of the Weatherford stock along with cash and other securities.  As of
September 30, 2001, the Fund had received 11,927 shares of Weatherford in
exchange for a junior participation promissory note and accrued interest related
to the note and expects to receive approximately 57,500 additional Weatherford
shares from the liquidation.  The estimated liquidation value of the Fund's
investment in Tulsa as a result of this transaction has been reflected in the
investment's fair market value at September 30, 2001.

                                       19
<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.

LIQUIDITY AND CAPITAL RESOURCES

     At September 30, 2001, the Fund had $83,251,281 of its assets invested in
portfolio securities of 24 companies or partnerships, and has committed to
invest up to an additional $11,348,062 in six of such entities and up to
$3,500,000 in one new company.  Current temporary cash investments, anticipated
future investment income, proceeds from borrowings, and proceeds from the sale
of existing portfolio securities are believed to be sufficient to finance these
commitments.  At September 30, 2001, the Fund had $8,650,000 outstanding on a
$22,500,000 revolving line of credit loan from a bank.

     Net cash used by operating activities was $2,045,932 and $1,517,531 for the
nine months ended September 30, 2001 and 2000, respectively.

     At September 30, 2001, the Fund had $65,152,352 of its total assets of
$152,500,445 invested in temporary cash investments consisting of money market
securities.  This amount includes proceeds of $65,000,000 from a $100,000,000
note payable to a bank that is utilized to enable the Fund to achieve adequate
diversification to maintain its pass-through tax status as a regulated
investment company.  Such amount was repaid to the bank on October 1, 2001.

     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 investment income and net 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 contingencies or to
make follow-on or new investments.  Management believes that the availability
under its line of credit, as well as the ability to sell its investments in
publicly traded securities, are adequate to provide payment for any expenses and
contingencies of the Fund.

     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 by the Fund 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.

     The Fund may repurchase its shares, subject to the restrictions of the
Investment Company Act. On February 6, 2001, the Board of Directors approved a
program to purchase up to 5% of the outstanding shares of the Fund's common
stock, pursuant to which the Fund repurchased 240,800 shares for $2,182,988
through September 30, 2001.  Such stock was repurchased at an average discount
of 38.3% from its net asset value.

RESULTS OF OPERATIONS

INVESTMENT INCOME AND EXPENSE

     Net investment income after all expenses amounted to $1,484,531 and
$849,817 for the nine months ended September 30, 2001 and 2000, respectively.
The increase in net investment income in 2001 is primarily due to a credit of
$1,536,856 charged to non-cash compensation expense in accordance with variable
plan accounting required for the stock options issued to the officers.  Income
from portfolio securities decreased to $2,008,731 for the nine months ended
September 30, 2001 from $3,714,325 for the

                                       20
<PAGE>

comparable period in 2000. This decrease is attributable to the interest
received upon the repayment of the notes from Video Rental of Pennsylvania, Inc.
in 2000 and from interest no longer being accrued on notes receivable from
certain portfolio companies in 2001. Other income is $55,000 for the nine months
ended September 30, 2001 and $319,469 for the comparable period in 2000. The
decrease in 2001 is primarily related to a fee received in conjunction with the
Fund's investment in FS Strategies, Inc. in the nine months ended September 30,
2000. Professional fees increased to $271,260 in 2001 from $68,405 in 2000 due
to an increase in the 2001 annual fee paid to the New York Stock Exchange and
legal fees incurred in 2001 related to the sale of the Fund's investment in
Stephen L. LaFrance Holdings, Inc. and a potential purchase of a portfolio
company that did not occur. Director fees and expenses increased to $192,976 in
2001 from $176,815 in 2000 due to additional meetings held in the first quarter
of 2001. Interest expense decreased to $295,191 in 2001 from $1,351,162 in 2000
due to a decrease in the average daily balances outstanding on the lines of
credit to $7,076,374 during the nine months ended September 30, 2001 from
$20,399,903 during the comparable period in 2000.

     The Management Company 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 $1,233,950 and $1,456,650 during the nine months ended September 30,
2001 and 2000, respectively.  The decrease in management fees during the nine
months ended September 30, 2001 was due to the decrease in net assets.

     Shareholders have approved the Equus II Incorporated 1997 Stock Incentive
Plan ("Stock Incentive Plan") which authorizes 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 Stock Incentive Plan also
provides that each director who is not an officer of the Fund is, on the first
business day following each annual meeting, granted an incentive stock option to
purchase 2,000 shares of the Fund's common stock.

     Under the Stock Incentive Plan, options to purchase 76,000 and 306,773
shares of the Fund's common stock with a weighted average exercise price of
$18.89 and $18.71 per share were outstanding at September 30, 2001 and 2000,
respectively.  Outstanding options at September 30, 2001 have exercise prices
ranging from $9.29 to $27.44 and expire in May 2007 through May 2010.  On April
1, 2001, officers of the Fund surrendered options to acquire 224,616 shares of
common stock pursuant to the Stock Incentive Plan back to the Fund, and such
options were cancelled.  On September 30, 1999, options to purchase 654,358
shares of common stock of the Fund were exercised by the officers of the Fund
for $17 per share.  The exercise price of $11,124,086 was paid in the form of
promissory notes from the officers to the Fund.  The notes provided for interest
at 5.42% per annum, had limited recourse and were due on or before September 30,
2008.  The notes were secured by the 654,358 shares, including any proceeds or
dividends paid thereon.  As a result of the dividends paid since issuance of the
notes, 178,331 additional shares were issued to the officers and pledged to the
Fund.  In 2000, principal payments of $991,161 were made on the notes.  In 2001,
interest payments of $92,531 were made on the notes.  On April 1, 2001, a former
officer of the Fund surrendered 37,701 shares in payment of his note receivable
and accrued interest. The Fund released 5,877 shares to the officer relating to
this payment.  During the month of September 2001, the officers of the Fund
surrendered 729,693 shares in payment of their notes receivable and accrued
interest aggregating $10,505,551.  This payment was recorded as a decrease in
common stock and additional paid in capital. The Fund released 59,418 shares to
the officers relating to this payment. As a result of this payment, the
outstanding note balance is zero at September 30, 2001. There was no effect on
net assets as a result of the note repayment and surrendering of the shares.

     The notes receivable and related accrued interest, as well as 771,927
shares of common stock, were not included in the Fund's net asset value per
share at December 31, 2000.  Generally accepted accounting principles require
that the options issued to the officers be accounted for using variable plan
accounting due to the limited recourse provision of such notes and that the
notes receivable be presented as a reduction of net assets. As a result,
compensation expense is

                                       21
<PAGE>

adjusted to reflect the change in benefit based on the net asset value of the
Fund that the officers would have received assuming that their notes were
settled with their pledged common stock at the end of the reporting period. Non-
cash compensation expense for the nine months ended September 30, 2001 and 2000
was $(1,536,856) and $0, respectively, and was recorded as a decrease to
additional paid in capital. Interest earned on the notes receivable of $384,388
and $335,915 was recorded as an increase to additional paid in capital for the
nine months ended September 30, 2001 and 2000, respectively.

     As of September 30, 2001 and 2000, all outstanding options were "out of the
money" and would not have had a dilutive effect on net assets per share if
exercised.  On November 6, 2001, the board of directors of the Fund authorized
the issuance of up to 900,000 incentive stock options to its officers, pursuant
to the Stock Incentive Plan.

REALIZED GAINS AND LOSSES ON SALES OF PORTFOLIO SECURITIES

     During the nine months ended September 30, 2001, the Fund realized net
capital losses of $4,040,983 from the sale of securities of two Portfolio
Companies and realized losses on four Portfolio Company investments.  The Fund
sold its investment in Stephen L. LaFrance Holdings, Inc. for $10,000,000,
realizing a capital gain of $7,501,548.  In addition, the Fund wrote off the
cost of its remaining shares of Paracelsus Healthcare Corporation, realizing a
capital loss of $4,299,450.  The Fund also wrote off its remaining investment in
Hot & Cool Holdings, Inc., realizing a capital loss of $5,775,000.  Also, the
Fund wrote off its remaining investment in CRC Holdings, Corp., realizing a
capital loss of $1,192,114.  Also, the Fund received proceeds from the sale of
an investment in Sternhill Partners, L.P., realizing a capital gain of $7,056.
In addition, the Fund sold its investment in Raytel Medical Corporation for
$66,527, realizing a capital loss of $264,203.  The Fund also received
Weatherford International common stock in payment of a note receivable and
accrued interest related to the note from Tulsa Industries, Inc. for $672,325,
realizing a capital loss of $18,820.

     During the nine months ended September 30, 2000, the Fund realized net
capital gains of $4,744,369 as a result of additional compensation related to
the previous sale of three Portfolio Companies.  The Fund realized a capital
gain of $680,636 as a result of additional compensation from the escrow account
related to the 1998 sale of WMW Industries.  The Fund realized a capital gain of
$653,697 as a result of additional compensation from the escrow account related
to the 1999 sale of HTD Corporation.  The Fund also wrote off a receivable from
Restaurant Development Group realizing a capital loss of $8,315.  In addition,
the Fund received proceeds from Video Rental of Pennsylvania, Inc. in the amount
of $3,722,349 for repayment of the outstanding notes payable and $250,000 for
redemption of the common and preferred stock and did not realize a capital gain.
The Fund also received proceeds from Equus Video Corporation and realized a
capital loss of  $5,919.  In addition, the Fund sold 237,364 shares of LG&E
Energy Corp ("LGE") common stock for $5,759,059 realizing a capital gain of
$2,399,812.  Also, as a result of the earn out related to the sale of CRC
Holdings, the Fund received cash of $994,458 and 17,739 shares of LGE and
realized the $994,458 as a capital gain.

DEPRECIATION OF PORTFOLIO SECURITIES

     Net unrealized depreciation on investments increased $5,814,784 during the
nine months ended September 30, 2001, from $818,963 to $6,633,747. Such increase
resulted from increases in the estimated fair value of securities of three of
the Fund's Portfolio Companies aggregating $3,069,641, decreases in the
estimated fair value of securities of nine of the Fund's Portfolio Companies
aggregating $13,435,783 and the transfer of $4,551,358 in net unrealized
depreciation to net realized losses from the sale or disposition of investments
in six of the Fund's Portfolio Companies.

                                       22
<PAGE>

     Net unrealized depreciation on investments increased $13,067,715 during the
nine months ended September 30, 2000, from $1,100,588 to $14,168,303. Such net
increase resulted from increases in the estimated fair value of securities of
seven of the Fund's Portfolio Companies aggregating $10,530,498, decreases in
the estimated fair value of securities of ten of the Fund's Portfolio Companies
aggregating $20,476,333 and the transfer of $3,121,880 in net unrealized
depreciation to net realized loss from the sale of securities of two Portfolio
Companies.

DIVIDENDS

     The Fund declared no dividends for the nine months ended September 30,
2001. (See subsequent events).

     The Fund declared undistributed capital gains of $21,751 from 1999 and
undistributed net investment income of $108,174 from 1999 as a dividend in
August 2000 which was distributed in December 2000.

PORTFOLIO INVESTMENTS

     During the nine months ended September 30, 2001, the Fund invested
$1,120,236 in two new companies and made follow-on investments of $7,935,503 in
eleven portfolio companies, including $1,950,830 in accrued interest and
dividends received in the form of additional portfolio securities and accretion
of original issue discount on a promissory note.

     During the nine months ended September 30, 2001, the Fund received an
additional 6,671 and 1,106 shares of preferred stock of Container Acquisition,
Inc. and Sovereign Business Forms, Inc. ("Sovereign") in payment of $667,100 and
$110,600 in dividends, respectively. In addition, Sovereign elected to convert
$357,819 of accrued interest into the balance of the 15% promissory notes due to
the Fund.

     During the nine months ended September 30, 2001, the Fund invested an
additional $600,000 in Sternhill Partners I, L.P. pursuant to a $3,000,000
commitment made in March 2000. $1,500,000 of such commitment has been funded
through September 30, 2001.

     On February 9, 2001, the Fund invested $1,116,550 in American Trenchless
Technology, LLC, a company formed to acquire the stock of H&I Boring and
Tunneling, a Houston-based regional provider of infrastructure services
utilizing boring, tunneling and directional drilling technologies.  The company
services the water, sewer, electrical and telecommunications industries.  The
Fund's investment consists of 1,934,532 shares of common stock and 100,000
shares of preferred stock.

     On February 9, 2001, the Fund invested $3,686 in Reliant Window Holdings,
LLC, ("RWH") a company formed to acquire 87.5% of Alenco Window Holdings, LLC
("AWH"). AWH acquired 73% of the fully-diluted stock of Alenco Holding
Corporation ("Alenco"), a company formed to purchase certain assets of Reliant
Building Products, Inc. ("RBPI") pursuant to a plan of reorganization confirmed
in bankruptcy court. The Fund's investment consisted of a 36.86% interest in
RWH. On August 14, 2001, the Fund invested an additional $368,571 in RWH. In
addition, the Fund committed to invest up to an additional $4.9 million in RWH
under certain circumstances.

     On March 26, 2001, the Fund invested an additional $1,805,556 in Summit/DPC
Partners to allow the partnership to provide a working capital loan to Doane Pet
Care Enterprises ("Doane"). Summit/DPC Partners received a promissory note and
warrants to acquire common stock of Doane in

                                       23
<PAGE>

exchange for the loan. In April 2001, Summit/DPC Partners was liquidated and the
fund received 1,120,951 shares of Doane common stock, a 15% promissory note
valued at $1,203,704, with a face value at maturity of $1,805,556, and a warrant
to acquire 822,647 shares of common stock for $0.01 through March 2006. During
the first nine months of 2001, the original issue discount accretion and
interest on the promissory note amounted to $145,943. In addition, on August 31,
2001, the Fund exercised its warrants and purchased 822,467 shares of common
stock for $8,226.

     On April 5, 2001, the Fund advanced $56,500 to Equicom, Inc. pursuant to a
10% promissory note.

     On April 24, 2001, the Fund advanced $222,945 to The Bradshaw Group in
exchange for a 15% promissory note. In addition, on September 20, 2001 the Fund
advanced another $222,945 in exchange for a 15% promissory note and also
received a prime +2% secured promissory note valued at $398,383.

     On June 5, 2001, the Fund invested an additional $300,000 in Vanguard VII,
L.P. pursuant to a $3,000,000 commitment made in June 2000. $900,000 of such
commitment has been funded through September 30, 2001.

     During the nine months ended September 30, 2001, the Fund invested
$1,666,667 in FS Strategies, Inc.

     During the nine months ended September 30, 2001, United Industrial
Services, Inc. paid accrued interest on its 15% promissory note by the issuance
of an additional note.

     During the nine months ended September 30, 2001, the Fund purchased
1,507,226 shares of preferred stock in Turfgrass America, Inc. ("Turfgrass") for
$768,638. In addition, the Fund received a warrant to purchase 250,412 shares of
Turfgrass common stock at $0.51 per share through April 2010. Also, a 12%
promissory note in the amount of $502,035 was issued in payment of the accrued
interest receivable on the 1999 note through March 31, 2001. For the nine months
ended September 30, 2001, the original issue discount accretion on the
discounted 12% subordinated promissory note due from Turfgrass amounted to
$90,000, bringing the balance of the note to $3,685,000 at September 30, 2001.
The original issue discount is being accreted over the life of the note.

     During the quarter ended September 30, 2001, the Fund received 11,927
shares of Weatherford International common stock in exchange for Tulsa
Industries Inc.'s junior participation note and $35,375 of accrued interest
related to the note.

SUBSEQUENT AND OTHER EVENTS

     Subsequent to September 30, 2001, the Fund repaid a net $61,350,000 of
notes payable to the bank.

     On October 18, 2001, the Fund invested $3,500,000 in PalletOne, Inc.
("PalletOne") in exchange for 3,150,000 shares of Series A preferred stock and
350,000 shares (approximately 21% of outstanding shares on a fully-diluted
basis) of common stock.  PalletOne was formed to acquire and operate twelve
wooden pallet manufacturing facilities in eight states.

     The Fund does not expect to have any net taxable ordinary income or capital
gains for the calendar year 2001.  Accordingly, rather than declaring a return
of capital dividend which might be paid in cash, the board of directors of the
Fund has declared a 10% stock dividend, payable to the shareholders of record as
of December 3, 2001.  The board determined it would be in the best interest of
the Fund to

                                       24
<PAGE>

maintain its available liquidity in light of the uncertainty of the current
economic environment and for potentially attractive investment opportunities
which might occur as a result of such uncertainty.

     Also in November 2001, the board of directors of the Fund authorized the
issuance by the compensation committee of up to 900,000 stock options with
dividend equivalent rights to its officers, pursuant to the Stock Incentive
Plan.

     On July 31, 2001, the Fund entered into a Settlement Agreement and Plan of
Reorganization with Petrocon Engineering, Inc. ("Petrocon") whereby the Fund
will restructure its existing investment in Petrocon in order to facilitate
Petrocon's merger into Industrial Data Systems Corporation ("IDS") (AMEX: IDS).
IDS provides consulting services to the pipeline and process industries for the
development, management and turnkey execution of engineering projects.  Upon
completion of the transaction, the Fund will receive, in exchange for its
subordinated notes, warrant to purchase common stock and common stock of
Petrocon, the following IDS securities:  (i) $2.0 million in cash, (ii) a $3.0
million 9% promissory note, (iii) 2.5 million shares of 8% Series A Convertible
Redeemable Preferred Stock, (iv) 958,000 shares of common stock and (v) a
warrant to purchase an additional 200,000 shares of common stock at various
prices and under certain conditions.  The estimated fair market value of the
securities to be received by the Fund does not differ materially from the
recorded value at September 30, 2001.

     During the quarter ended September 30, 2001, Tulsa Industries, Inc.
("Tulsa") completed the sale of substantially all of its assets to Weatherford
International, Inc. ("Weatherford") (NYSE: WFT) in a stock for asset
transaction.  Accordingly, Tulsa has begun the process of an orderly
liquidation.  In connection with the liquidation, the Fund will receive its pro-
rata share of the Weatherford stock along with cash and other securities.  As of
September 30, 2001, the Fund had received 11,927 shares of Weatherford in
exchange for a junior participation promissory note and accrued interest related
to the note and expects to receive approximately 57,500 additional Weatherford
shares from the liquidation.  The estimated liquidation value of the Fund's
investment in Tulsa as a result of this transaction has been reflected in the
investment's fair market value at September 30, 2001.

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 its investments in debt securities and its
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 the Fund's investments is generally not affected
by foreign currency fluctuations.

     The Fund's investment in portfolio securities consists 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
Fund's determination of fair value of these debt securities. The Fund's debt
securities are generally held to maturity and their fair values are determined
on the basis of the terms of the debt security and the financial condition of
the issuer.

     The Fund's liabilities consist of debt payable to a financial institution.
The revolving credit facilities are priced at floating rates of interest, with a
basis of LIBOR or prime rate at the Fund's option. As a result of the floating
rate, a change in interest rates could result in either an increase or decrease
in the Fund's interest expense.

     A portion of the Fund's investment portfolio consists of debt and equity
investments in private companies. The Fund would anticipate no impact on these
investments from modest changes in public

                                       25
<PAGE>

market equity prices. However, should significant changes in market equity
prices occur, there could be a longer-term effect on valuations of private
companies, which could affect the carrying value and the amount and timing of
gains realized on these investments. A portion of the Fund's 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.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

     (a)  Exhibits

      10. Material Contracts

          Fourth Amendment to Second Amended and Restated Loan Agreement by
          and between Equus II Incorporated and Bank of America, N.A. dated
          July 27, 2001....................................................   27

     (b)  Reports on Form 8-K

          No reports on Form 8-K were filed by the Fund during the period for
          which this report is filed.


                                   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.

Date:  November 14, 2001                EQUUS II INCORPORATED

                                        /S/ Nolan Lehmann
                                        -----------------------------------
                                        Nolan Lehmann
                                        President and Principal Financial
                                        and Accounting Officer

                                       26