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, 1996

                                       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                      AMERICAN 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: $65,663,376 computed on the basis of $16 per share, closing price of
the common stock on the American Stock Exchange, Inc. on November 12, 1996.
There were 4,184,766 shares of the registrant's common stock, $.001 par value,
outstanding as of November 12, 1996. The net asset value of a share at September
30, 1996 was $24.63.

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, 1996 and December 31, 1995...................1

                  Statements of Operations

                  - For the three months ended September 30, 1996 and 1995.....2
                  - For the nine months ended September 30, 1996 and 1995 .....3

                  Statements of Changes in Net Assets

                  - For the nine months ended September 30, 1996 and 1995......4

                  Statements of Cash Flows

                  - For the nine months ended September 30, 1996 and 1995......5

                  Selected Per Share Data and Ratios

                  - For the nine months ended September 30, 1996 and 1995......7

                  Schedule of Portfolio Securities

                  - September 30, 1996.........................................8

                  Notes to Financial Statements...............................13

         Item 2.  Management's Discussion and Analysis of Financial
                    Condition and Results of Operations.......................19

PART II. OTHER INFORMATION

         Item 6.   Exhibits and Reports on Form 8-K...........................23

SIGNATURE.....................................................................23

                                      -ii-
<PAGE>

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                              EQUUS II INCORPORATED
                                 BALANCE SHEETS
                    SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                1996           1995
                                                            ------------   ------------
<S>                                                         <C>            <C>         
ASSETS

Investments in portfolio securities at fair value
     (cost $69,326,901 and $63,635,092, respectively) ...   $109,478,726   $ 71,610,360
Temporary cash investments, at cost which
     approximates fair value ............................     68,871,073     60,232,594
Cash ....................................................          1,183          7,267
Accounts receivable .....................................          1,326          1,326
Accrued interest receivable .............................        896,929        525,939
Commitment fees, net ....................................         35,000         37,500
Deferred reorganization costs, net ......................         17,595         35,190
                                                            ------------   ------------

         Total assets ...................................    179,301,832    132,450,176
                                                            ------------   ------------

LIABILITIES AND NET ASSETS

Liabilities:
     Accounts payable ...................................         44,554        242,286
     Dividends payable ..................................        183,123           --
     Due to management company ..........................        591,289        309,266
     Deferred management incentive fee ..................     10,221,636      4,295,335
     Notes payable to bank ..............................     65,200,000     65,750,000
                                                            ------------   ------------

         Total liabilities ..............................     76,240,602     70,596,887
                                                            ------------   ------------

Commitments and contingencies

Net assets:
     Preferred stock, $.001 par value, 5,000,000 shares
       authorized, no shares outstanding ................           --             --
     Common stock, $.001 par value, 10,000,000 shares
       authorized, 4,184,766 and 3,138,575 shares
       outstanding, respectively ........................          4,185          3,139
     Additional paid-in capital .........................     56,961,329     51,291,676
     Undistributed net investment income ................           --             --
     Undistributed net capital gains ....................      5,943,891      2,583,206
     Unrealized appreciation of portfolio securities, net     40,151,825      7,975,268
                                                            ------------   ------------

         Total net assets ...............................   $103,061,230   $ 61,853,289
                                                            ============   ============

         Net assets per share ...........................   $      24.63   $      19.71
                                                            ============   ============
</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, 1996 AND 1995
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                            1996            1995
                                                        ------------    ------------
<S>                                                     <C>             <C>         
Investment income:
   Income from portfolio securities .................   $    873,262    $    525,458
   Interest from temporary cash investments .........         17,538          82,197
                                                        ------------    ------------
      Total investment income .......................        890,800         607,655
                                                        ------------    ------------
Expenses:
   Management fee ...................................        515,307         310,074
   Management incentive fee .........................         75,983            --
   Deferred management incentive fee ................      3,147,385         423,913
   Director fees and expenses .......................         45,007          48,030
   Professional fees ................................         84,962          56,433
   Administrative fees ..............................         12,500          12,500
   Mailing, printing and other expenses .............         44,508          61,746
   Interest expense .................................         87,553          75,069
   Franchise taxes ..................................          9,760           4,520
   Amortization .....................................          5,865           5,865
                                                        ------------    ------------
      Total expenses ................................      4,028,830         998,150
                                                        ------------    ------------
Net investment loss .................................     (3,138,030)       (390,495)
                                                        ------------    ------------
Realized gain (loss) on sales of
   portfolio securities, net ........................     (2,258,526)      3,802,362
                                                        ------------    ------------
Unrealized appreciation of portfolio securities, net:
   End of period ....................................     40,151,825       9,442,784
   Beginning of period ..............................     21,776,460      11,125,581
                                                        ------------    ------------
      Increase (decrease) in unrealized
        appreciation, net ...........................     18,375,365      (1,682,797)
                                                        ------------    ------------
Total increase in net assets from
   operations .......................................   $ 12,978,809    $  1,729,070
                                                        ============    ============
</TABLE>

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

                                       -2-

<PAGE>
                              EQUUS II INCORPORATED
                            STATEMENTS OF OPERATIONS
              FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                            1996            1995
                                                        ------------    -----------
<S>                                                     <C>             <C>        
Investment income:
   Income from portfolio securities .................   $  2,175,097    $ 1,818,249
   Interest from temporary cash investments .........         57,867        173,440
                                                        ------------    -----------
      Total investment income .......................      2,232,964      1,991,689
                                                        ------------    -----------
Expenses:
   Management fee ...................................      1,332,137        928,508
   Management incentive fee .........................      1,183,146           --
   Deferred management incentive fee ................      5,926,301      1,410,873
   Director fees and expenses .......................        147,825        155,513
   Professional fees ................................        174,042        154,531
   Administrative fees ..............................         37,500         37,500
   Mailing, printing and other expenses .............        101,657        226,833
   Interest expense .................................        526,722        192,734
   Franchise taxes ..................................         55,166         35,622
   Amortization .....................................         17,595         17,595
                                                        ------------    -----------
      Total expenses ................................      9,502,091      3,159,709
                                                        ------------    -----------
Net investment loss .................................     (7,269,127)    (1,168,020)
                                                        ------------    -----------
Realized gain on sales of portfolio
   securities, net ..................................      3,370,681      6,867,395
                                                        ------------    -----------
Unrealized appreciation of portfolio securities, net:
   End of period ....................................     40,151,825      9,442,784
   Beginning of period ..............................      7,975,268      9,255,817
                                                        ------------    -----------
     Increase in unrealized
        appreciation, net ...........................     32,176,557        186,967
                                                        ------------    -----------
Total increase in net assets
     from operations ................................   $ 28,278,111    $ 5,886,342
                                                        ============    ===========
</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, 1996 AND 1995
                                   (Unaudited)

                                                     1996              1995
                                                 -------------     ------------
Operations:

   Net investment loss ......................    $  (7,269,127)    $ (1,168,020)
   Realized gain on sales of
      portfolio securities, net .............        3,370,681        6,867,395
   Increase in unrealized appreciation
      of portfolio securities, net ..........       32,176,557          186,967
                                                 -------------     ------------
      Increase in net assets
        from operations .....................       28,278,111        5,886,342
                                                 -------------     ------------
Capital transactions:

   Proceeds from rights offering ............       13,338,935             --
   Rights offering expenses .................         (225,982)            --
   Dividends ................................         (183,123)
   Redemption of fractional shares ..........             --               (115)
   Stock repurchased and retired
      under common stock repurchase plan ....             --         (1,993,642)
                                                 -------------     ------------
      Increase (decrease) in net assets
        from capital share transactions .....       12,929,830       (1,993,757)
                                                 -------------     ------------
Net increase in net assets ..................       41,207,941        3,892,585

Net assets at beginning of period ...........       61,853,289       60,880,364
                                                 -------------     ------------
Net assets at end of period .................    $ 103,061,230     $ 64,772,949
                                                 =============     ============

                          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, 1996 AND 1995
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                 1996             1995
                                                            -------------    -------------
<S>                                                         <C>              <C>          
Cash flows from operating activities:
      Interest and dividends received ...................   $   1,426,295    $   1,622,476
      Cash paid to management company, directors,
        bank and suppliers ..............................      (3,471,404)      (1,850,205)
                                                            -------------    -------------
        Net cash used by operating activities ...........      (2,045,109)        (227,729)
                                                            -------------    -------------
Cash flows from investing activities:
      Purchase of portfolio securities ..................     (18,021,986)      (8,616,480)
      Proceeds from sales of portfolio securities .......       7,736,537        8,941,229
      Principal payments from portfolio companies .......       8,400,000        3,603,328
      Maturity of temporary cash investment with original
        maturities of greater than three months .........            --            300,000
                                                            -------------    -------------
        Net cash provided (used) by investing activities       (1,885,449)       4,228,077
                                                            -------------    -------------
Cash flows from financing activities:
      Advances from bank ................................     195,950,000      208,100,000
      Repayments to bank ................................    (196,500,000)    (194,700,000)
      Proceeds from rights offering .....................      13,338,935             --
      Rights offering expenses ..........................        (225,982)            --
      Repurchase of common stock ........................            --         (1,993,642)
      Redemption of fractional shares ...................            --               (115)
                                                            -------------    -------------
        Net cash provided by financing activities .......      12,562,953       11,406,243
                                                            -------------    -------------
        Net increase in cash and cash equivalents .......       8,632,395       15,406,591

Cash and cash equivalents at beginning of period ........      60,239,861       45,175,967
                                                            -------------    -------------
Cash and cash equivalents at end of period ..............   $  68,872,256    $  60,582,558
                                                            =============    =============
</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, 1996 AND 1995
                                   (Unaudited)
                                   (Continued)

<TABLE>
<CAPTION>
                                                                                       1996            1995
                                                                                   ------------    -----------
<S>                                                                                <C>             <C>        
Reconciliation of increase in net assets from operations to net cash used by
      operating activities:

Increase in net assets from operations .........................................   $ 28,278,111    $ 5,886,342

Adjustments to reconcile increase in net assets from operations to net cash used
      by operating activities:
        Realized gain on sale of portfolio
          securities, net ......................................................     (3,370,681)    (6,867,395)
        Increase in unrealized appreciation, net ...............................    (32,176,557)      (186,967)
        Increase in accounts receivable ........................................           --          (44,886)
        Accrued interest and dividends exchanged for
          portfolio securities .................................................       (435,679)      (272,244)
        Increase (decrease) in accrued interest receivable .....................       (370,990)        52,083
        Amortization of commitment fee .........................................         72,500         46,875
        Commitment fees paid ...................................................        (70,000)       (75,000)
        Amortization of reorganization costs ...................................         17,595         17,595
        Decrease in accounts payable ...........................................       (197,732)       (94,981)
        Increase in due to management company ..................................      6,208,324      1,415,015
                                                                                   ------------    -----------
Net cash used by operating activities ..........................................   $ (2,045,109)   $  (227,729)
                                                                                   ============    ===========
</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, 1996 AND 1995
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                   1996              1995
                                               -------------     -------------
<S>                                            <C>               <C>          
Investment income ..........................   $        0.60     $        0.67
Expenses ...................................            2.57              1.06
                                               -------------     -------------
Net investment loss ........................           (1.97)            (0.39)
Realized gain on sale of
     portfolio securities, net .............            0.91              2.30
Increase in unrealized appreciation
     of portfolio securities, net ..........            8.71              0.06
                                               -------------     -------------
Increase in net assets from
     operations ............................            7.65              1.97
                                               -------------     -------------
Capital transactions:
  Effect of rights offering ................           (2.69)             --
  Dividends ................................           (0.04)             -- 
  Effect of common stock repurchases .......            --                0.37
                                               -------------     -------------
  Net increase in net assets from capital
     transactions ..........................           (2.73)             0.37
                                               -------------     -------------
Net increase in net assets .................            4.92              2.34
Net assets at beginning of period ..........           19.71             19.94
                                               -------------     -------------
Net assets at end of period ................   $       24.63     $       22.28
                                               =============     =============
Ratio of expenses to average net
     assets ................................           11.52%             5.03%
Ratio of net investment loss
      to average net assets ................           (8.82)%           (1.86)%
Ratio of increase in net
     assets from operations to average
     net assets ............................           34.29%             9.37%
Average shares outstanding during period ...       3,696,034         2,985,009
</TABLE>

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

                                       -7-

<PAGE>
                              EQUUS II INCORPORATED
                        SCHEDULE OF PORTFOLIO SECURITIES
                               SEPTEMBER 30, 1996
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                            Date Of
   Portfolio Company                                   Initial Investment               Cost             Fair Value
<S>                                                        <C>                    <C>                  <C>        
A.C. Liquidating Corporation                               February 1985
  -4,885 shares of 10% Series C
   cumulative preferred stock                                                     $    488,500         $       -
  -10% secured promissory notes                                                        188,014                 -

Allied Waste Industries, Inc. (NASDAQ - AWIN)                 March 1989
  -1,351,449 shares of common stock                                                  5,109,808           11,893,580
  -Warrants to buy up to 125,000 and
   15,000 shares of common stock at $5.00
   and $13.50 per share, through August 1999
   and February 1997, respectively                                                       -                  126,563

American Residential Services, Inc.
 (NYSE - ARS)                                              December 1995
  -1,221,035 shares of common stock                                                  3,057,100           16,479,868
  -Warrants to buy up to 100,000 shares of
   common stock at $15 per share through
   September 2001                                                                        -                     -

BSI Holdings, Inc.                                         February 1989
  -230,965 shares of common stock                                                    1,330,647            5,269,743
  -1,200,000 shares of Series A preferred stock                                      1,200,000            1,200,000
  -3,528,500 shares of 8% Series B preferred stock                                   3,528,500            3,528,500
  -Warrants to buy up to 22,018, 31,926 and 3,991 shares of common stock at
   $0.01, $0.01 and $35 per share, through June 2006, August 2006
   and August 2006, respectively.                                                         -               1,230,257
  -1,000 shares of common stock of GCS RE, Inc.                                        132,910              132,910

Cardiovascular Ventures, Inc.                              November 1991
  -150,000 shares of Series A convertible
   preferred stock                                                                     375,000              375,000
  -214,286 shares of Series B convertible
   preferred stock                                                                     750,001              750,001
  -56,717 shares of Series C convertible
   preferred stock                                                                     248,137              248,137
</TABLE>

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

                                       -8-

<PAGE>

                              EQUUS II INCORPORATED
                        SCHEDULE OF PORTFOLIO SECURITIES
                               SEPTEMBER 30, 1996
                                   (Unaudited)
                                   (Continued)



<TABLE>
<CAPTION>
                                                            Date Of
   Portfolio Company                                   Initial Investment               Cost             Fair Value
<S>                                                        <C>                    <C>                  <C>        
Carruth-Doggett Industries, Inc.                           December 1995
  -10% senior subordinated promissory note                                        $  2,250,000        $   2,250,000
  -Warrant to buy up to 33,333 shares
   of common stock at $0.01 per share
   through December 14, 2005                                                              -                    -
  -Warrant to buy up to 333 shares of
   common stock of CDE Corp at $0.01
   per share through December 2005                                                        -                    -

Coach USA, INC. (NASDAQ - TOUR)                            December 1985
  -143,112 shares of common stock                                                    1,863,357            3,108,154

David's Supermarkets, Inc.                                 February 1990
  -735,000 shares of common stock                                                      735,000              450,000
  -333,445 shares of 3.5% junior preferred stock                                     3,334,450            3,334,450
  -Warrants to buy up to 538,462 shares of common
   stock at $1 per share through April 2000                                                -                  -

Drypers Corporation (NASDAQ - DYPR)                            July 1991
  -1,096,892 shares of common stock                                                  6,400,132            3,151,143
  -25,000 shares of 7.5% convertible preferred stock                                 2,500,000            6,500,001
  -Warrants to buy up to 6,634 shares
   of common stock at $4 per share
   through June 1998                                                                       -                   -

Garden Ridge Corporation (NASDAQ - GRDG)                       July 1992
  -474,942 shares of common stock                                                      685,030            7,841,318

Hot & Cool Holdings, Inc.                                     March 1996
  -12% subordinated promissory note                                                  1,300,000            1,300,000
  -Warrants to buy up to 14,942 shares of
   common stock at $.01 per share
   through March 2006                                                                     -                    -
</TABLE>

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

                                       -9-

<PAGE>

                              EQUUS II INCORPORATED
                        SCHEDULE OF PORTFOLIO SECURITIES
                               SEPTEMBER 30, 1996
                                   (Unaudited)
                                   (Continued)


<TABLE>
<CAPTION>
                                                            Date Of
   Portfolio Company                                   Initial Investment               Cost             Fair Value
<S>                                                        <C>                    <C>                  <C>        
Industrial Equipment Rentals, Inc.                             June 1993
  -182,230 shares of common stock                                                $       1,822      $       500,000
  -5,371 shares of junior preferred stock                                              537,100              537,100
  -67,500 shares of Series B senior convertible
   preferred stock                                                                     250,050              250,050
  -12% subordinated debenture                                                        1,077,778            1,077,778
  -9% senior subordinated debenture                                                    499,950              499,950

Midway Airlines Corporation                                  August 1993
  -452,392 shares of Class C common stock                                            1,195,616                 -
  -274,761 shares of junior preferred stock                                          2,747,610                 -
  -12% subordinated note                                                               271,000              271,000
  -Warrants to buy up to 203,250 shares of
   Class C common stock at $.01 per
   share through April 2002                                                               -                    -

NCI Building Systems, Inc. (NASDAQ - BLDG)                    April 1989
  -100,000 shares of common stock                                                      159,784            3,250,000

Paracelsus Healthcare Corporation
 (NYSE - PLS)                                              December 1990
  -1,263,058 shares of common stock                                                  5,278,748           11,100,401

Restaurant Development Group, Inc.                             June 1987
  -610,909 shares of Class A common stock                                            2,891,156              700,000
  -14% promissory note, face amount $350,000                                           275,000              350,000
  -Prime +2% promissory note                                                           639,122              639,122
  -Warrants to buy up to 150,000 and 62,500
   shares of common stock at $2.80 and $3
   per share through November 1996 and
   April 1998, respectively                                                               -                   -

</TABLE>

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

                                       -10-

<PAGE>
                              EQUUS II INCORPORATED
                        SCHEDULE OF PORTFOLIO SECURITIES
                               SEPTEMBER 30, 1996
                                   (Unaudited)
                                   (Continued)


<TABLE>
<CAPTION>
                                                            Date Of
   Portfolio Company                                   Initial Investment               Cost             Fair Value
<S>                                                        <C>                    <C>                  <C>        
Sovereign Business Forms, Inc.                               August 1996
  -6,500 shares of preferred stock                                                $    650,000       $      650,000
  -15% promissory note                                                                 550,000              550,000
  -Warrant to buy 551,894 shares of
   common stock at $1 per share through
   August 2006                                                                            -                    -

Strategic Holdings, Inc.                                  September 1995
  -2,986,408 shares of common stock                                                  2,986,408            2,986,408
  -3,705,900 shares of Series B preferred stock                                      3,705,900            3,705,900
  -1,000 shares of SMIP, Inc. common stock                                             150,000              150,000
  -15% promissory note of SMIP, Inc.                                                   175,000              175,000

Summit/DPC Partners, L.P.                                   October 1995
  -36.11% limited partnership interest                                               2,600,000            2,600,000

Travis International, Inc.                                 December 1986
  -66,784 shares of common stock                                                       534,589            1,502,640
  -104,500 shares of Class A common stock                                               25,701            2,351,250

Video Rental of Pennsylvania, Inc.                          January 1988
  -125,000 shares of common stock                                                      125,000              500,000
  -125,000 shares of 9% redeemable
   preferred stock                                                                     125,000              125,000
  -10% secured promissory note                                                       2,672,349            2,672,349
  -12% secured promissory note                                                         900,000              900,000
  -10,000 shares of common stock
   of Equus Video Corporation                                                           25,000               25,000

WMW Industries, Inc.
 (formerly Williams & Mettle Co.)                           October 1989
  -530,035 shares of common stock                                                    1,024,309              463,830
  -12% subordinated promissory note                                                    763,747              763,747
  -Junior participation in prime + 1.75% note                                        1,012,576            1,012,576
  -Warrant to buy 72,672 shares of common stock
   at $0.01 per share through December 1999                                              -                     -
                                                                              ----------------    --------------

     Total                                                                         $69,326,901         $109,478,726
                                                                                   ===========         ============
</TABLE>

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

                                       -11-

<PAGE>

                              EQUUS II INCORPORATED
                        SCHEDULE OF PORTFOLIO SECURITIES
                               SEPTEMBER 30, 1996
                                   (Unaudited)
                                   (Continued)


          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 Allied Waste Industries, Inc.,
American Residential Services, Inc., BSI Holdings, Inc., Cardiovascular
Ventures, Inc., Coach USA, INC., Drypers Corporation, Hot & Cool Holdings, Inc.,
Industrial Equipment Rentals, Inc., Paracelsus Healthcare Corporation, Sovereign
Business Forms, Inc. and Strategic Holdings, Inc., rights have been obtained to
demand the registration of such securities under the Securities Act of 1933,
providing certain conditions are met. The Fund does not expect to incur
significant costs, including costs of any such registration, in connection with
the future disposition of its portfolio securities.

          As defined in the Investment Company Act of 1940, the Fund is
considered to have a controlling interest in A.C. Liquidating Corporation, BSI
Holdings, Inc., Industrial Equipment Rentals, Inc., Restaurant Development
Group, Inc., Strategic Holdings, Inc., Video Rental of Pennsylvania, Inc. and
WMW Industries, Inc. In addition, American Residential Services, Inc.,
Cardiovascular Ventures, Inc., David's Supermarkets, Inc., Drypers Corporation
and Travis International, Inc. are considered to be affiliated entities of the
Fund. The fair value of the Fund's investments in publicly traded securities
include discounts from the closing market prices to reflect the effects of
restrictions on the sale of such securities at September 30, 1996. Such
discounts, as detailed below, total $15,990,453 or $3.82 per share as of
September 30, 1996.

               Allied Waste Industries, Inc. .....   $ 1,012,011
               American Residential Services, Inc.     7,541,801
               Coach USA, Inc. ...................       720,092
               Drypers Corporation ...............     4,736,424
               Garden Ridge Corporation ..........       292,064
               Paracelsus Healthcare Corporation .     1,688,061
                                                     -----------

                     Total discount ..............   $15,990,453

          Income was earned in the amount of $1,408,950 and $1,050,156 for the
nine months ended September 30, 1996 and 1995, 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 are in eligible portfolio companies. The Fund provides significant
managerial assistance to all of the portfolio companies in which it has invested
except Cardiovascular Ventures, Inc., Coach USA, Inc., Midway Airlines
Corporation, Paracelsus Healthcare Corporation and Summit/DPC Partners, L.P. The
Fund provides significant managerial assistance to portfolio companies that
comprise 83% of the total value of the investments in portfolio companies at
September 30, 1996.

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

                                      -12-

<PAGE>

                              EQUUS II INCORPORATED
                          NOTES TO FINANCIAL STATEMENTS
                           SEPTEMBER 30, 1996 AND 1995
                                   (Unaudited)


(1)      ORGANIZATION AND BUSINESS PURPOSE

         Equus II Incorporated (the "Fund"), a Delaware corporation, was formed
by Equus Investments II, L.P. (the "Partnership") on August 16, 1991. On July 1,
1992, the Partnership was reorganized and all of the assets and liabilities of
the Partnership were transferred to the Fund in exchange for shares of common
stock of the Fund. The shares of the Fund trade on the American 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 has elected to be
treated as a business development company under the Investment Company Act of
1940, as amended.

(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 entered into a Sub-Adviser
Agreement with Equus Capital Corporation, a Delaware corporation (the
"Sub-Adviser"), pursuant to which the Sub- Adviser provides certain investment
advisory services for the Fund, including preparing the Fund's quarterly net
asset valuations. The Management Company receives a management fee at an annual
rate of 2% of the net assets of the Fund, paid quarterly in arrears. Included in
"Due to management company" in the accompanying Balance Sheet at September 30,
1996 and 1995, are $515,306 and $309,266, respectively of such management fees.
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 the nine months ended September 30, 1996 and 1995.

         The Management Company also receives or must reimburse a management
incentive fee equal to 20% of net realized capital gains less unrealized capital
depreciation, computed on a cumulative basis over the life of the Fund. The
Sub-Adviser receives a fee from the Management Company equal to 50% of the
Management Company's net management incentive fee. The management incentive fee
is paid or reimbursed quarterly in arrears. Included in "Due to management
company" in the accompanying Balance Sheet at September 30, 1996, is $75,983 of
such management incentive fees. Current management incentive fee expense of
$1,183,146 is included in the accompanying Statement of Operations for the nine
months ended September 30, 1996.

         Included in "Deferred management incentive fees" in the accompanying
Balance Sheets are $10,221,636 and $4,295,335 of accrued management incentive
fees at September 30, 1996 and December 31, 1995, respectively. Such fees are
calculated on the net unrealized appreciation of investments in portfolio
securities and will not be paid until such appreciation is realized. Deferred
management incentive fee expense for the nine months ended September 30, 1996
and 1995 totaled $5,926,301 and $1,410,873, respectively. The deferred
management incentive fee is reflected as an expense of the Fund when there is an
increase in the Fund's net unrealized appreciation of portfolio securities and
is reflected

                                      -13-
<PAGE>

as a reduction in expense to the Fund when there is a decrease in the Fund's net
appreciation of portfolio securities.

         The Sub-Adviser is a wholly-owned subsidiary of the Management Company
and the Management Company is controlled by a privately-owned corporation.

         As compensation for services rendered to the Fund, each director who is
not an officer of the Fund receives an annual fee of $20,000 paid quarterly in
arrears, a fee of $2,000 for each meeting of the Board of Directors attended in
person, a fee of $1,000 for participation in each telephonic meeting of the
Board 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. Certain officers and directors of the Fund serve as directors of
Portfolio Companies, and receive and retain fees in consideration for such
service.

(3)      SIGNIFICANT ACCOUNTING POLICIES

         Interim Financial Statements - The financial statements included herein
have been prepared without audit and include all adjustments which management
considers necessary for a fair presentation.

         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 companies whose securities are
publicly traded are valued at their quoted market price as of the respective
balance sheet dates, 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 Sub- Adviser, 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 condition of the issuer. Because of the inherent
uncertainty of the valuation of portfolio securities which do not have readily
ascertainable market values, $106,228,726 (including $60,074,466 in
publicly-traded securities, net of a $15,990,453 Valuation Discount) and
$68,098,481 (including $26,862,806 in publicly-traded securities, net of a
$5,642,282 Valuation Discount) at September 30, 1996 and December 31, 1995,
respectively, the Sub-Adviser'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 or management incentive fees which might become payable on
disposition of such investments. See Note 2 above regarding the accrual of
management incentive fees.

         On a weekly basis, the Fund adjusts its net asset value for changes in
the value of its publicly held securities and material changes in the value of
its private securities and reports those amounts to Lipper Analytical Services,
Inc. Such weekly net asset values appear in various publications, including
BARRON'S and THE WALL STREET JOURNAL. Subsequent to September 30, 1996 and
through November 12, 1996, the Fund's net asset value declined approximately
5.4% due to decreases in the market value of its publicly held securities.

         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 

                                      -14-
<PAGE>

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 Fund
had undistributed net investment income and capital gains during 1995 of
$173,128 and $9,995, respectively, for tax purposes. A dividend of such
undistributed income was declared and will be distributed during 1996 (see note
5). The Fund had a net investment loss for tax purposes for the nine months
ended September 30, 1996, and therefore has no net investment income to
distribute for 1996. The Fund, for book purposes, has undistributed net capital
gains of $5,943,891 in the accompanying Balance Sheet at September 30, 1996.
However, for tax purposes, the Fund has distributed all of its net realized
capital gains except for $2,197,530. The $2,197,530 is comprised of $2,187,535
of net realized capital gains for the nine months ended September 30, 1996 and
$9,995 in net realized capital gains from 1995 which have not yet been
distributed. The following is a reconciliation of the difference in the Fund's
net realized capital gain on the sale of portfolio securities for book and tax
purposes for the nine months ended September 30, 1996 and 1995, respectively.

                                                    1996           1995
                                                 -----------    -----------
   Net realized gain on the sales of portfolio
     securities, book ........................   $ 3,370,681    $ 6,867,395
   Management incentive fee ..................    (1,183,146)          --
   Reversal of amounts previously
     written off .............................          --           48,838
   Utilization of capital loss carryforwards .          --       (1,892,377)
                                                 -----------    -----------
   Net realized gain on the sales of
     portfolio securities, tax ...............   $ 2,187,535    $ 5,023,856
                                                 ===========    ===========

(5)      DIVIDENDS

         The Fund declared dividends of $183,123 during the nine months ended
September 30, 1996, to be paid prior to year-end. The $183,123 represents
$173,128 of ordinary income and $9,995 of capital gains. The Fund adopted a
policy effective in 1995 to make dividend distributions of at least $0.50 per
share on an annual basis. In the event that taxable income, including realized
capital gains, exceeds $0.50 per share in any year, additional dividends may be
declared to distribute such excess. Distributions can be made payable by the
Fund either in the form of a cash distribution or a stock dividend. If the Fund
does not have available cash to pay the minimum dividends, it may borrow the
required funds or sell some of its portfolio investments.

(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 expenses, consist of money market accounts
earning interest at rates ranging from 3.50% to 4.84% at September 30, 1996. The
following is a list of temporary cash investments at September 30, 1996 and
December 31, 1995:

                                      -15-
<PAGE>

                                                  1996           1995
                                               -----------   -----------

       Broadcort Money Plus ................   $      --     $     1,338
       Dreyfus Cash Management Fund ........          --          58,141
       Dreyfus Treasury Cash Management Fund          --      60,026,074
       First Interstate Bank of Texas, N.A .          --          85,353
       Great Hall Money Market .............            11         8,211
       NationsBank of Texas, N.A ...........    68,871,062          --
       Pitkin County Bank ..................          --          53,477
                                               -----------   -----------
           Total money market accounts .....   $68,871,073   $60,232,594
                                               ===========   ===========


(7)      PORTFOLIO SECURITIES

         During the nine months ended September 30, 1996, the Fund invested
$9,800,000 in three new companies and made follow-on investments of $9,407,665
in nine portfolio companies, including $435,679 in dividends and accrued
interest received in the form of additional portfolio securities and $750,000 of
common stock received through the net exercise of common stock warrants. In
addition, the Fund realized net capital gains of $3,370,681 during the nine
months ended September 30, 1996.

         During the nine months ended September 30, 1995, the Fund invested
$7,017,308 in a new company and made follow-on investments of $1,871,416 in six
portfolio companies, and realized net capital gains of $6,867,395.

(8)      DEFERRED REORGANIZATION COSTS

         The Fund paid $117,300 in expenses related to the formation of the Fund
and is amortizing such amount over 5 years. Accumulated amortization of such
expenses totaled $99,705 and $82,110 at September 30, 1996 and December 31,
1995, respectively.

(9)      NOTES PAYABLE TO BANK

         The Fund had a $60,000,000 line of credit promissory note with a bank,
with interest payable at the prime rate, at December 31, 1995. The prime rate
was 8.5% at December 31, 1995. The Fund had $60,000,000 outstanding on such note
at December 31, 1995, that was secured by $60,000,000 of the Fund's temporary
cash investments. The Fund paid a $75,000 commitment fee on such note in 1995,
which was deferred and amortized over the commitment period. Amortization
expense related to such fees is included in "Interest expense" in the
accompanying Statements of Operations for the nine months ended September 30,
1995.

         In March 1996, the Fund entered into a new $65,000,000 line of credit
promissory note with a bank, with interest payable at 1% over the rate earned in
its money market account. The Fund had $65,000,000 outstanding on such note at
September 30, 1996, that was secured by $65,000,000 of the Fund's temporary cash
investments. The Fund paid a $50,000 commitment fee in 1996, which was deferred
and is being amortized over the commitment period. The note matures on April 4,
1997.

         The Fund also had a $13,000,000 revolving line of credit from a bank,
with interest payable at prime, of which $5,750,000 was outstanding at December
31, 1995. The Fund paid a facility fee of $3,125 to the bank for such revolving
line of credit during 1995, which is included in interest expense for the year
ended December 31, 1995. The line of credit was secured by a portion of the
Fund's investment in Allied Waste Industries, Inc., Champion Healthcare
Corporation, Drypers Corporation, Garden Ridge Corporation and NCI Building
Systems, Inc.

                                      -16-

<PAGE>

         On March 18, 1996, the Fund entered into a new $20,000,000 revolving
line of credit with another bank which replaced its $13,000,000 line of credit.
The Fund had $200,000 outstanding under such line of credit at September 30,
1996. The line is secured by the Fund's investments in portfolio securities. The
Fund paid a $20,000 commitment fee in connection with such loan which was
deferred and will be amortized over the commitment period which ends April 4,
1997. The outstanding balance on the loan bears interest at prime + 1/4% to
3/4%. The fund also pays 1/4% interest on the unused portion of the line of
credit.

         The average daily balances outstanding on the Fund's notes payable
during the nine months ended September 30, 1996 and 1995, were $7,215,345 and
$2,450,915, respectively.

(10)     STOCK REPURCHASE PLAN

         During 1995, the Board of Directors of the Fund authorized the
repurchase of additional shares of the Fund's common stock, and during the nine
months ended September 30, 1995, the Fund repurchased and cancelled 145,500
shares of its stock for $1,993,642. The stock repurchased in 1995 was
repurchased at an average discount of 33.61% from its net asset value.

(11)     RIGHTS OFFERING

         On March 5, 1996, the Fund filed a registration statement with the
Securities and Exchange Commission for a rights offering. Under the rights
offering, the Fund issued each shareholder of record as of April 10, 1996, one
right for each share owned. One share of common stock could be acquired for
every three rights. The exercise price for shares in the rights offering was
$12.75 per share, a 19.7% discount from the market price on April 10, 1996. On
May 8, 1996, the Fund completed its rights offering, which was over-subscribed.
The Fund issued a total of 1,046,191 shares at $12.75 per share and raised
$13,112,953, net of $225,982 in expenses. The proceeds from the rights offering
were used to repay debt and to fund the commitments the Fund had made for new
and follow-on investments.

(12)     COMMITMENTS AND CONTINGENCIES

         The Fund has made commitments to invest, under certain circumstances,
up to an additional $2,000,000 in BSI Holdings, Inc., $565,500 in GCS RE, Inc.,
$450,000 in Sovereign Business Forms, Inc., $300,000 in Video Rental of
Pennsylvania, Inc. and $500,000 in a new company. In connection with its
commitment to GCS RE, Inc., the Fund has committed to a bank to maintain at
least $380,000 in temporary cash investments to fund such commitment.

         On April 1, 1996, an action was filed in federal district court in
Houston, Texas by two stockholders of the Fund against the directors of the
Fund, the Management Company, and the Fund, as nominal defendant, asserting that
by approving the rights offering the Management Company and the directors of the
Fund violated their fiduciary duties to the Fund's stockholders under the
Investment Company Act of 1940 and Delaware common law, that the Fund and the
Management Company aided and abetted the breaches of fiduciary duties. The
plaintiffs seek to have the action certified as a class action on behalf of all
of the stockholders of the Fund but do not specify the amount of any damages
that have been suffered. The Fund, its directors and the Management Company
intend to vigorously defend against this action, and management of the Fund
believes that ultimate resolution of such complaint will not have a material
adverse effect on the Fund's financial position or results of operations.

         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.

                                      -17-

<PAGE>

(13)     SUBSEQUENT EVENTS

         In October 1996, in connection with its commitment discussed above, the
Fund advanced an additional $100,000 to Sovereign Business Forms, Inc. under a
15% promissory note. In addition, during October 1996, the Fund advanced
$216,705 to Strategic Materials, Inc. in exchange for 216,705 shares of common
stock. In connection with such purchase, the Fund received warrants to buy up to
100,000 and 225,000 shares of Strategic Materials Inc. common stock for $1.50
and $.004643 per share, respectively.

         Subsequent to September 30, 1996, the Fund repaid $65,200,000 of notes
payable to the bank.

                                      -18-
<PAGE>

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

LIQUIDITY AND CAPITAL RESOURCES

         Equus II Incorporated (the "Fund"), a Delaware corporation and business
development company, was formed as a successor to Equus Investments II, L.P.
(the "Partnership" or "Predecessor Entity") pursuant to a reorganization in
which all of the assets and liabilities of the Partnership were transferred to
the Fund on July 1, 1992, in exchange for 1,866,132 shares of common stock of
the Fund (the "Exchange"). Such shares were then distributed on a pro rata basis
to the partners of the Partnership, effectively liquidating the Partnership.
Each Limited Partner received one share of common stock of the Fund for each
unit of partnership interest owned. The Fund has qualified for pass-through tax
treatment as a "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986 each year since its organization. On September 11, 1992,
the Fund's shares of common stock were listed for trading on the American Stock
Exchange, under the symbol "EQS".

         At September 30, 1996, the Fund had $109,478,726 of its assets invested
in portfolio securities of 22 companies, and has committed to invest up to an
additional $3,315,500 in three of such companies and $500,000 in a new company
under certain conditions. 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, 1996, the Fund had $200,000 outstanding on its
$20,000,000 revolving line of credit loan from a bank.

         On March 5, 1996, the Fund filed a registration statement with the
Securities and Exchange Commission for a rights offering. Under the rights
offering, the Fund issued each shareholder of record as of April 10, 1996, one
right for each share owned. One share of common stock could be acquired for
every three rights. The exercise price for shares in the rights offering was
$12.75 per share, a 19.7% discount from the market price on April 10, 1996. On
May 8, 1996, the Fund completed its rights offering, which was over-subscribed.
The Fund issued a total of 1,046,191 shares at $12.75 per share and raised
$13,112,953, net of $225,982 in expenses. The proceeds from the rights offering
were used to repay debt and to fund the commitments the Fund had made for new
and follow-on investments.

         Net cash used by operating activities was $2,045,109 and $227,729 for
the nine months ended September 30, 1996 and 1995. A decrease in cash interest
and dividends received from portfolio companies in 1996 and increased interest
expenses and management incentive fees paid during 1996 accounted for the
majority of the increase in cash used by operating activities.

         At September 30, 1996, the Fund had $68,871,073 of its total assets of
$179,301,832 invested in temporary cash investments consisting of money market
securities. This amount includes proceeds from a $65,000,000 revolving line of
credit 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 2, 1996.

         The Fund has the ability to borrow funds and issue forms of
indebtedness, 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.

         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 shareholders 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.

                                      -19-

<PAGE>

RESULTS OF OPERATIONS

INVESTMENT INCOME AND EXPENSE

         Net investment loss after all expenses amounted to $7,269,127 and
$1,168,020 for the nine months ended September 30, 1996 and 1995, respectively.
The net investment loss in 1996 was primarily attributable to the accrual of
$1,183,146 in management incentive fees and $5,926,301 in deferred management
incentive fees related to the realized gains from the sales of portfolio
securities of $3,370,681 and the increase in the net unrealized appreciation of
portfolio securities of $32,176,557, respectively. Income from portfolio
securities increased to $2,175,097 in 1996 as compared to $1,818,249 in 1995,
due to the increase in amounts invested in dividend-bearing portfolio securities
during 1996 as compared to 1995.

         Interest expense increased to $526,722 in 1996 as compared to $192,734
in 1995, due to the increase of the average daily balances outstanding on the
lines of credit to $7,215,345 during the nine months ended September 30, 1996,
from $2,450,915 in 1995.

         The Management Company receives management fee compensation at an
annual rate of 2% of the net assets of the Fund. Such fees amounted to
$1,332,137 and $928,508 for nine months ended September 30, 1996 and 1995,
respectively. The increase in 1996 is due to the $28,278,111 increase in net
assets from operations during the nine months ended September 30, 1996 and the
$13,112,953 in net equity raised in the Fund's rights offering.

         The Management Company also receives or must reimburse a management
incentive fee equal to 20% of net realized capital gains less unrealized capital
depreciation, computed on a cumulative basis over the life of the Fund.
Management incentive fees of $1,183,146 were accrued during the nine months
ended September 30, 1996. Deferred management incentive fee expense (income) for
the nine months ended September 30, 1996 and 1995 totaled $5,926,301 and
$1,410,873, respectively. The deferred management incentive fee is reflected as
an expense of the Fund when there is an increase in the Fund's net unrealized
appreciation of portfolio securities and is reflected as a reduction in expense
to the Fund when there is a decrease in the Fund's net appreciation of the
portfolio securities. The deferred management incentive fees are not paid until
such appreciation is realized.

REALIZED GAINS AND LOSSES ON SALES OF PORTFOLIO SECURITIES

         During the nine months ended September 30, 1996, the Fund realized net
capital gains of $3,370,681 from the sale or disposition of securities of six
portfolio companies. The Fund sold 233,044 shares of Allied Waste Industries,
Inc. ("AWIN") common stock for $1,563,678, realizing a capital gain of $461,919,
exchanged 25,571 shares of Enterprises Holding Company preferred stock for
$1,173,598 in cash and 238,933 shares of American Residential Services, Inc.
common stock, realizing a capital gain of $1,173,598, sold 96,000 shares of
Garden Ridge Corporation common stock for $4,719,360 realizing a capital gain of
$4,343,372, sold 32,789 shares of Tech-Sym Corporation for $1,029,901, realizing
a capital gain of $911,656 and exchanged $5,083,083 of notes receivable from
Yellow Cab Service Corporation and $63,601 in cash for 71,440 shares of Coach
USA, Inc common stock, valued at $1,714,560, realizing a capital loss of
$3,432,124. In addition, the Fund realized a capital loss of $87,740 on its
investment in Sports & Leisure, Inc., which filed for Chapter 11 bankruptcy
during February 1996.

         During the nine months ended September 30, 1995, the Fund realized
capital gains of $6,867,395 from the sale of securities in five portfolio
companies.

                                      -20-
<PAGE>

UNREALIZED APPRECIATION AND DEPRECIATION OF PORTFOLIO SECURITIES

         Net unrealized appreciation on investments increased $32,176,557 during
the nine months ended September 30, 1996, from $7,975,268 to $40,151,825. Such
net increase resulted from increases in the estimated fair value of securities
of ten of the Fund's Portfolio Companies aggregating $35,323,661, the decrease
in the estimated fair value of the securities of three of the Fund's portfolio
companies aggregating $3,433,992, and the transfer of $286,888 in net unrealized
depreciation to net realized gains from the sale of investments in three
companies.

         Net unrealized appreciation on investments increased $186,967 during
the nine months ended September 30, 1995, from $9,255,817 to $9,442,784. Such
net increase resulted from increases in the estimated fair value of securities
of six of the Fund's portfolio companies aggregating $13,403,478, a decrease in
the estimated fair value of securities of five portfolio company of $9,675,231
and the transfer of $3,541,280 in net unrealized appreciation to net realized
gains.

DIVIDENDS

         The Fund declared dividends of $183,123 during the nine months ended
September 30, 1996 and no dividends during the nine months ended September 30,
1995.

PORTFOLIO INVESTMENTS

         During the nine months ended September 30, 1996, the Fund invested
$9,800,000 in three new Portfolio Companies and made follow-on investments in
nine Portfolio Companies of $9,407,665, including $435,679 in accrued interest
and dividends received in the form of additional portfolio securities and
$750,000 of common stock received through the net exercise of common stock
warrants.

         On January 2, 1996, the Fund exercised its warrants to acquire 163,044
shares of AWIN on a net exercise basis. This resulted in the Fund receiving
56,054 shares of AWIN valued at $750,000, which were paid for by tendering the
remaining 106,990 shares to AWIN. In May 1995, the Fund received 23,751 shares
of common stock of AWIN valued at $144,733, as payment for dividends and
inducement for the conversion of preferred stock to common stock.

         In February 1996, the Fund acquired 25,000 shares of 7.5% convertible
preferred stock of Drypers Corporation for $2,500,000. The preferred stock is
convertible into 2,500,000 shares of common stock of Drypers Corporation.

         In March 1996, the Fund acquired 24,810 shares of Series A preferred
stock and 190 shares of Series B preferred stock of Enterprises Holding Company
("EHC"), for $2,481,000 and $19,000, respectively. On June 30, 1996, the Fund
received an additional 571 shares of Series A preferred stock of EHC as payment
for $57,100 in dividends. In addition, the Fund invested $4,800,000 in a 12%
promissory note of EHC. EHC was formed to acquire Crown Services, Inc., a
company which provides plumbing, heating and air conditioning and electrical
services in Houston, Texas.

         During 1996 the Fund advanced an additional $2,550,000 on a $2,600,000
prime + 1/4% convertible promissory note to American Residential Services, Inc.
("ARS"), a company formed to acquire existing businesses which provide plumbing,
heating and air conditioning and electrical services to the residential
community. On September 25, 1996, ARS completed an initial public offering of
its common stock. In connection with such offering, ARS acquired EHC and the
Fund received $1,173,598 in cash and 238,933 shares of ARS common stock in
exchange for 5,000 shares of its EHC preferred stock. In addition, the Fund
received 137,140 shares of ARS common stock in exchange for its remaining 20,571
shares of EHC preferred stock. The $4,8000,000 promissory note due from EHC was
also repaid in full. The Fund was repaid $2,100,000 of the $2,600,000 promissory
note. The remaining

                                      -21-

<PAGE>

$500,000 was converted into 844,962 shares of ARS common stock.

         During March 1996, the Fund invested $1,300,000 in Hot & Cool Holdings,
Inc. ("Hot & Cool"), in exchange for a 12% subordinated promissory note. In
addition, the Fund received warrants to buy 14,942 shares of common stock of Hot
& Cool for $.01 per share through March 8, 2006. Hot & Cool manufactures
automotive radiators and other heat transfer products in South Texas and Mexico.

         In March 1996, the Fund committed to invest up to an additional
$1,200,000 in Video Rental of Pennsylvania ("VRP") in exchange for a 12%
promissory note. The Fund had advanced $900,000 on such note through September
30, 1996. In April 1996, the Fund rolled $147,349 of accrued interest into a new
$2,672,349, 10% promissory note due from VRP.

         In January 1996, in connection with the guaranty of $5,000,000 of BSI
Holdings, Inc. ("BSI") debt, the Fund received warrants to acquire up to 22,018
shares of BSI Holdings, Inc. common stock for $0.01 per share. In May 1996, the
Fund exercised warrants to buy 64,715 shares of common stock of BSI Holdings,
Inc. for $647. On August 9, 1996, the Fund acquired 1,200,000 shares of Series A
preferred stock of BSI for $1,200,000. In connection with such investment, the
Fund received warrants to buy up to 31,926 and 3,991 shares of BSI common stock
for $0.01 and $35 per share, respectively, through August 2006. In addition, on
August 9, 1996 , the Fund converted its $3,350,000 senior subordinated debenture
and $178,500 subordinated promissory note into 3,528,500 shares of 8%, Series B
preferred stock of BSI.

         In May 1996, the Fund converted $342,541 of its note receivable from
Champion Healthcare Corporation ("CHC") and exercised warrants to buy 45,000 and
5,246 shares of common stock of (CHC") for $315,000 and $27,541, respectively.
In August 1996, CHC was merged into Paracelsus Healthcare Corporation ("PLS")
and received one share of Paracelsus common stock for each share of common stock
of CHC and two shares of PLS common stock for each share of CHC preferred stock.

         In January 1996, the Fund rolled $86,497 of accrued interest along with
$677,250 from an existing note receivable from WMW Industries, Inc. ("WMW") into
a new $763,747, 12% subordinated promissory note. In addition, in May 1996, the
Fund purchased 40,617 shares of Series B convertible preferred stock of WMW for
$67,830. In June 1996, the Fund converted its Series A and Series B convertible
preferred stock of WMW into 4,642,452 shares of WMW common stock. WMW then
effected a 10 for 1 reverse stock split leaving the Fund with 530,035 shares of
WMW common stock.

         On August 22, 1996, the Fund acquired 6,500 shares of common stock for
$650,000, invested $550,000 in a 15% promissory note and obtained warrants to
buy up to 551,894 shares of common stock of Sovereign Business Forms, Inc. for
$1 per share through August 2006. Sovereign Business Forms, Inc, located in
Houston, Texas, is a business forms manufacturer.

         On August 29, 1996, Coach USA, Inc. acquired Yellow Cab Services
Corporation. The Fund received 143,112 shares of Coach USA, Inc. common stock
for its investment in Yellow Cab Service Corporation.

         During the nine months ended September 30, 1995, the Fund made
follow-on investments of $749,172 in three portfolio companies.

         Of the companies in which the Fund has investments at September 30,
1996, Allied Waste Industries, Inc., American Residential Services, Inc., Coach
USA, Inc., Drypers Corporation, Garden Ridge Corporation, NCI Building Systems,
Inc. and Paracelsus Healthcare Corporation are publicly held. The others each
have a small number of shareholders and do not generally make financial
information available to the public. However, each company's operations and
financial information are reviewed by Management to determine the proper
valuation of the Fund's investment.

                                      -22-

<PAGE>

SUBSEQUENT EVENTS

         In October 1996, in connection with its commitment, the Fund advanced
an additional $100,000 to Sovereign Business Forms, Inc. under a 15% promissory
note. In addition, during October 1996, the Fund advanced $216,705 to Strategic
Materials, Inc. in exchange for 216,705 shares of common stock. In connection
with such purchase, the Fund received warrants to buy up to 100,000 and 225,000
shares of Strategic Materials Inc. common stock for $1.50 and $.004643 per
share, respectively.

         Subsequent to September 30, 1996, the Fund repaid $65,200,000 of notes
payable to the bank.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8K

         (a)      Exhibits

                  None

         (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.

                                              EQUUS II INCORPORATED

                                              By:/s/NOLAN LEHMANN
                                                    Nolan Lehmann, President,
                                                    Principal Financial and
                                                    Accounting Officer

Date:  November 13, 1996

                                      -23-