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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



(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, 2005



or



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



For the transition period
 to



Commission File Number 0-19509



EQUUS II INCORPORATED

(Exact name of
registrant as specified in its charter)



|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Delaware                                                      |  | 76-0345915                         
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification No.)
|                                                              | 
|2727 Allen Parkway, 13thFloorHouston,
Texas                   |  | 77019                              
|(Address of principalexecutive offices)                       |  | (Zip Code)                         



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



Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days.



Yes x No ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in 12b-2 of the Exchange Act).



Yes ̈No x



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



Yes ̈No x



There were 7,376,592 shares of the
registrants common stock, $.001 par value, outstanding, as of November 14, 2005. The net asset value of a share at September 30, 2005 was $12.27.



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EQUUS II INCORPORATED

(A Delaware Corporation)



INDEX



|                                 |  |                                                                                       |  |     
|-------------------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|                                 |  |                                                                                       |  | PAGE
|PART I.    FINANCIAL INFORMATION |  |                                                                                      
|                                 |  |                                                                                      
|Item 1.                          |  | Financial Statements                                                                  |  |     
|                                 |  |                                                                                      
|                                 |  | Balance Sheets                                                                        |  |     
|                                 |  |                                                                                      
|                                 |  | - September 30, 2005 and December 31, 2004                                            |  | 1   
|                                 |  |                                                                                      
|                                 |  | Statements of Operations                                                              |  |     
|                                 |  |                                                                                      
|                                 |  | - For the three months ended September 30, 2005 and 2004                              |  | 2   
|                                 |  |                                                                                      
|                                 |  | - For the nine months ended September 30, 2005 and 2004                               |  | 3   
|                                 |  |                                                                                      
|                                 |  | Statements of Changes in Net Assets                                                   |  |     
|                                 |  |                                                                                      
|                                 |  | - For the nine months ended September 30, 2005 and 2004                               |  | 4   
|                                 |  |                                                                                      
|                                 |  | Statements of Cash Flows                                                              |  |     
|                                 |  |                                                                                      
|                                 |  | - For the nine months ended September 30, 2005 and 2004                               |  | 5   
|                                 |  |                                                                                      
|                                 |  | Selected Per Share Data and Ratios                                                    |  |     
|                                 |  |                                                                                      
|                                 |  | - For the nine months ended September 30, 2005 and 2004                               |  | 7   
|                                 |  |                                                                                      
|                                 |  | Schedule of Portfolio Securities                                                      |  |     
|                                 |  |                                                                                      
|                                 |  | - September 30, 2005                                                                  |  | 8   
|                                 |  |                                                                                      
|                                 |  | Notes to Financial Statements                                                         |  | 13  
|                                 |  |                                                                                      
|Item 2.                          |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 21  
|                                 |  |                                                                                      
|Item 3.                          |  | Quantitative and Qualitative Disclosure about Market Risk                             |  | 28  
|                                 |  |                                                                                      
|Item 4.                          |  | Controls and Procedures                                                               |  | 29  
|                                 | 
|PART II.    OTHER INFORMATION    |  |                                                                                      
|                                 |  |                                                                                      
|Item 6.                          |  | Exhibits                                                                              |  | 30  
|                                 | 
|SIGNATURE                        |  | 31                                                                                   



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EQUUS II INCORPORATED

BALANCE SHEETS

SEPTEMBER 30, 2005 AND DECEMBER 31, 2004

(Unaudited)



|                                                                                                                      |  |      |             |   |      |   |             |  
|--------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                                                                      |  | 2005 |             |   | 2004 |  
|Assets                                                                                                                |  |      |             |   |      |   |             |  
|Investments in portfolio securities at fair value (cost $54,420,262 and $53,194,666, respectively)                    |  | $    | 64,380,139  |   |      | $ | 48,621,356  |  
|Restricted cash & temporary investments, at cost which approximates fair value                                        |  |      | 40,380,016  |   |      |   | 24,218,234  |  
|Cash                                                                                                                  |  |      | 14,155      |   |      |   | 12,523      |  
|Temporary cash investments, at cost which approximates fair value                                                     |  |      | 23,988,426  |   |      |   | 18,563,525  |  
|Accounts receivable                                                                                                   |  |      | 72,627      |   |      |   | 104,964     |  
|Accrued interest and dividends receivable                                                                             |  |      | 237,403     |   |      |   | 441,644     |  
|Escrowed receivables, at fair value                                                                                   |  |      | 2,137,334   |   |      |   | 2,660,000   |  
|                                                                                                                      |  |      |             |   |      |   |             |  
|Total assets                                                                                                          |  | $    | 131,210,100 |   |      | $ | 94,622,246  |  
|                                                                                                                      |  |      |             |   |      |   |             |  
|Liabilities and net assets                                                                                            |  |      |             |   |      |   |             |  
|Liabilities:                                                                                                          |  |      |             |   |      |   |             |  
|Accounts payable and accrued liabilities                                                                              |  | $    | 284,124     |   |      | $ | 99,614      |  
|Accrued compensation                                                                                                  |  |      |            |   |      |   | 12,367      |  
|Dividends payable                                                                                                     |  |      |            |   |      |   | 1,589,160   |  
|Due to management company                                                                                             |  |      | 452,466     |   |      |   | 342,998     |  
|Borrowing under margin account                                                                                        |  |      | 39,980,214  |   |      |   | 23,978,450  |  
|                                                                                                                      |  |      |             |   |      |   |             |  
|Total liabilities                                                                                                     |  |      | 40,716,804  |   |      |   | 26,022,589  |  
|                                                                                                                      |  |      |             |   |      |   |             |  
|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, 7,376,592 and 6,506,692 shares outstanding, respectively |  |      | 7,377       |   |      |   | 6,507       |  
|Additional paid-in capital                                                                                            |  |      | 91,456,960  |   |      |   | 84,174,979  |  
|Undistributed net investment losses                                                                                   |  |      | (2,218,643  | ) |      |   | (12,367     | )
|Undistributed net capital losses                                                                                      |  |      | (8,712,275  | ) |      |   | (10,996,152 | )
|Unrealized appreciation (depreciation) of portfolio securities, net                                                   |  |      | 9,959,877   |   |      |   | (4,573,310  | )
|                                                                                                                      |  |      |             |   |      |   |             |  
|Total net assets                                                                                                      |  | $    | 90,493,296  |   |      | $ | 68,599,657  |  
|                                                                                                                      |  |      |             |   |      |   |             |  
|Net assets per share                                                                                                  |  | $    | 12.27       |   |      | $ | 10.54       |  
|                                                                                                                      |  |      |             |   |      |   |             |  



The accompanying notes
are an

integral part of these financial statements.



1



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##### Table of Contents

EQUUS II INCORPORATED

STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

(Unaudited)



|                                                                               |  |      |           |   |      |   |             |  
|------------------------------------------------------------------------------ |  | ---- | --------- | - | ---- | - | ----------- | -
|                                                                               |  | 2005 |           |   | 2004 |  
|Investment income:                                                             |  |      |           |   |      |   |             |  
|Interest income from portfolio securities                                      |  | $    | 333,704   |   |      | $ | 400,573     |  
|Dividend income from portfolio securities                                      |  |      | 158,516   |   |      |   | 49,200      |  
|Interest from temporary cash investments                                       |  |      | 125,070   |   |      |   | 46,696      |  
|                                                                               |  |      |           |   |      |   |             |  
|Total investment income                                                        |  |      | 617,290   |   |      |   | 496,469     |  
|                                                                               |  |      |           |   |      |   |             |  
|Expenses:                                                                      |  |      |           |   |      |   |             |  
|Management fee                                                                 |  |      | 452,467   |   |      |   | 338,451     |  
|Director fees and expenses                                                     |  |      | 75,087    |   |      |   | 63,144      |  
|Professional fees                                                              |  |      | 280,911   |   |      |   | 112,977     |  
|Administrative fees                                                            |  |      | 112,500   |   |      |   | 12,500      |  
|Mailing, printing and other expenses                                           |  |      | 63,616    |   |      |   | 4,899       |  
|Interest expense                                                               |  |      | 38,597    |   |      |   | 3,228       |  
|Compensation expense                                                           |  |      |          |   |      |   | 400,297     |  
|Franchise taxes and excise taxes                                               |  |      | 16,750    |   |      |   | (29,757     | )
|                                                                               |  |      |           |   |      |   |             |  
|Total expenses                                                                 |  |      | 1,039,928 |   |      |   | 905,739     |  
|                                                                               |  |      |           |   |      |   |             |  
|Net investment loss                                                            |  |      | (422,638  | ) |      |   | (409,270    | )
|                                                                               |  |      |           |   |      |   |             |  
|Realized gain (loss) on dispositions of portfolio securities, net              |  |      | 1,112     |   |      |   | (8,551,053  | )
|                                                                               |  |      |           |   |      |   |             |  
|Change in unrealized appreciation (depreciation) of portfolio securities, net: |  |      |           |   |      |   |             |  
|End of period                                                                  |  |      | 9,959,877 |   |      |   | (7,851,239  | )
|Beginning of period                                                            |  |      | 3,148,818 |   |      |   | (15,365,837 | )
|                                                                               |  |      |           |   |      |   |             |  
|Change in unrealized appreciation (depreciation), net                          |  |      | 6,811,059 |   |      |   | 7,514,598   |  
|                                                                               |  |      |           |   |      |   |             |  
|Total increase (decrease) in net assets from operations                        |  | $    | 6,389,533 |   |      | $ | (1,445,725  | )
|                                                                               |  |      |           |   |      |   |             |  
|Increase (decrease) in net assets from operations per share:                   |  |      |           |   |      |   |             |  
|Basic                                                                          |  | $    | 0.87      |   |      | $ | (0.23       | )
|                                                                               |  |      |           |   |      |   |             |  
|Diluted                                                                        |  | $    | 0.87      |   |      | $ | (0.23       | )
|                                                                               |  |      |           |   |      |   |             |  
|Weighted average shares outstanding, in thousands                              |  |      |           |   |      |   |             |  
|Basic                                                                          |  |      | 7,377     |   |      |   | 6,405       |  
|                                                                               |  |      |           |   |      |   |             |  
|Diluted                                                                        |  |      | 7,377     |   |      |   | 6,405       |  
|                                                                               |  |      |           |   |      |   |             |  



The accompanying notes
are an

integral part of these financial statements.



2



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##### Table of Contents

EQUUS II INCORPORATED

STATEMENTS OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

(Unaudited)



|                                                                               |  |      |            |   |      |   |            |  
|------------------------------------------------------------------------------ |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                               |  | 2005 |            |   | 2004 |  
|Investment income:                                                             |  |      |            |   |      |   |            |  
|Interest income from portfolio securities                                      |  | $    | 983,481    |   |      | $ | 1,552,468  |  
|Dividend income from portfolio securities                                      |  |      | 472,248    |   |      |   | 3,669,300  |  
|Interest from temporary cash investments                                       |  |      | 297,477    |   |      |   | 71,806     |  
|Other income                                                                   |  |      | 3,335      |   |      |   | 30,000     |  
|                                                                               |  |      |            |   |      |   |            |  
|Total investment income                                                        |  |      | 1,756,541  |   |      |   | 5,323,574  |  
|                                                                               |  |      |            |   |      |   |            |  
|Expenses:                                                                      |  |      |            |   |      |   |            |  
|Management fees                                                                |  |      | 1,250,858  |   |      |   | 1,039,682  |  
|Director fees and expenses                                                     |  |      | 322,436    |   |      |   | 218,403    |  
|Professional fees                                                              |  |      | 658,017    |   |      |   | 401,245    |  
|Administrative fees                                                            |  |      | 137,500    |   |      |   | 37,500     |  
|Mailing, printing and other expenses                                           |  |      | 222,869    |   |      |   | 72,711     |  
|Interest expense                                                               |  |      | 102,256    |   |      |   | 266,941    |  
|Non-cash compensation expense                                                  |  |      | 552,760    |   |      |   | 123,446    |  
|Franchise taxes and excise taxes                                               |  |      | 181,121    |   |      |   | 51,908     |  
|Special administrative fees                                                    |  |      | 535,000    |   |      |   |           |  
|                                                                               |  |      |            |   |      |   |            |  
|Total expenses                                                                 |  |      | 3,962,817  |   |      |   | 2,211,836  |  
|                                                                               |  |      |            |   |      |   |            |  
|Net investment income (loss)                                                   |  |      | (2,206,276 | ) |      |   | 3,111,738  |  
|                                                                               |  |      |            |   |      |   |            |  
|Realized gain (loss) on sales of portfolio securities, net                     |  |      | 2,283,878  |   |      |   | (4,415,904 | )
|                                                                               |  |      |            |   |      |   |            |  
|Change in unrealized appreciation (depreciation) of portfolio securities, net: |  |      |            |   |      |   |            |  
|End of period                                                                  |  |      | 9,959,877  |   |      |   | (7,851,239 | )
|Beginning of period                                                            |  |      | (4,573,310 | ) |      |   | (7,576,155 | )
|                                                                               |  |      |            |   |      |   |            |  
|Change in unrealized appreciation (depreciation), net                          |  |      | 14,533,187 |   |      |   | (275,084   | )
|                                                                               |  |      |            |   |      |   |            |  
|Total increase (decrease) in net assets from operations                        |  | $    | 14,610,789 |   |      | $ | (1,579,250 | )
|                                                                               |  |      |            |   |      |   |            |  
|Increase (decrease) in net assets from operations per share:                   |  |      |            |   |      |   |            |  
|Basic                                                                          |  | $    | 2.15       |   |      | $ | (0.24      | )
|                                                                               |  |      |            |   |      |   |            |  
|Diluted                                                                        |  | $    | 2.15       |   |      | $ | (0.24      | )
|                                                                               |  |      |            |   |      |   |            |  
|Weighted average shares outstanding, in thousands                              |  |      |            |   |      |   |            |  
|Basic                                                                          |  |      | 6,803      |   |      |   | 6,533      |  
|                                                                               |  |      |            |   |      |   |            |  
|Diluted                                                                        |  |      | 6,803      |   |      |   | 6,533      |  
|                                                                               |  |      |            |   |      |   |            |  



The accompanying notes
are an

integral part of these financial statements.



3



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##### Table of Contents

EQUUS II INCORPORATED

STATEMENTS OF CHANGES IN NET ASSETS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

(Unaudited)



|                                                                            |  |      |            |   |      |   |            |  
|--------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                            |  | 2005 |            |   | 2004 |  
|Operations:                                                                 |  |      |            |   |      |   |            |  
|Net investment income (loss)                                                |  | $    | (2,206,276 | ) |      | $ | 3,111,738  |  
|Realized gain (loss) on dispositions of portfolio securities, net           |  |      | 2,283,878  |   |      |   | (4,415,904 | )
|Increase (decrease) in unrealized appreciation of portfolio securities, net |  |      | 14,533,187 |   |      |   | (275,084   | )
|                                                                            |  |      |            |   |      |   |            |  
|Increase (decrease) in net assets from operations                           |  |      | 14,610,789 |   |      |   | (1,579,250 | )
|                                                                            |  |      |            |   |      |   |            |  
|Capital transactions:                                                       |  |      |            |   |      |   |            |  
|Non-cash compensation expense (benefit)                                     |  |      |           |   |      |   | (302,402   | )
|Capital Stock Repurchased                                                   |  |      |           |   |      |   | (2,555,667 | )
|Increase from officer notes settlement                                      |  |      | 23,475     |   |      |   | 602,210    |  
|Shares issued in dividend                                                   |  |      | (217       | ) |      |   |           |  
|Options exercised by directors and officers                                 |  |      | 7,259,592  |   |      |   |           |  
|                                                                            |  |      |            |   |      |   |            |  
|Increase (decrease) in net assets from capital share transactions           |  |      | 7,282,850  |   |      |   | (2,255,859 | )
|                                                                            |  |      |            |   |      |   |            |  
|Increase (decrease) in net assets                                           |  |      | 21,893,639 |   |      |   | (3,835,109 | )
|Net assets, at beginning of period                                          |  |      | 68,599,657 |   |      |   | 71,538,554 |  
|                                                                            |  |      |            |   |      |   |            |  
|Net assets, at end of period                                                |  | $    | 90,493,296 |   |      | $ | 67,703,445 |  
|                                                                            |  |      |            |   |      |   |            |  



The accompanying notes
are an

integral part of these financial statements.



4



---

##### Table of Contents

EQUUS II INCORPORATED

STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

(Unaudited)



|                                                               |  |      |              |   |      |   |              |  
|-------------------------------------------------------------- |  | ---- | ------------ | - | ---- | - | ------------ | -
|                                                               |  | 2005 |              |   | 2004 |  
|Cash flows from operating activities:                          |  |      |              |   |      |   |              |  
|Interest and dividends received                                |  | $    | 1,212,771    |   |      | $ | 6,047,622    |  
|Cash paid to management company, directors, bank and suppliers |  |      | (3,116,078   | ) |      |   | (2,257,251   | )
|Purchase of portfolio securities                               |  |      | (1,097,500   | ) |      |   | (1,695,142   | )
|Proceeds from dispositions of portfolio securities             |  |      | 3,410,602    |   |      |   | 24,747,561   |  
|Principal payments from portfolio securities                   |  |      | 48,193       |   |      |   | 2,365,000    |  
|Sales (purchases) of restricted temporary cash investments     |  |      | (16,161,782  | ) |      |   | 28,066,810   |  
|                                                               |  |      |              |   |      |   |              |  
|Net cash provided by (used in) operating activities            |  |      | (15,703,794  | ) |      |   | 57,274,600   |  
|                                                               |  |      |              |   |      |   |              |  
|Cash flows from financing activities:                          |  |      |              |   |      |   |              |  
|Advances from bank                                             |  |      |             |   |      |   | 3,034,044    |  
|Repayments to bank                                             |  |      |             |   |      |   | (8,034,044   | )
|Borrowings under margin account                                |  |      | 142,904,179  |   |      |   | 96,992,047   |  
|Repayments under margin account                                |  |      | (126,902,415 | ) |      |   | (124,982,249 | )
|Dividends paid                                                 |  |      | (1,589,377   | ) |      |   | (2,287,194   | )
|Repurchase of common stock                                     |  |      |             |   |      |   | (2,555,667   | )
|Payment of promissory note payable                             |  |      |             |   |      |   | (1,500,000   | )
|Exercise of stock options                                      |  |      | 6,694,465    |   |      |   |             |  
|Payments received on officer notes                             |  |      | 23,475       |   |      |   |             |  
|                                                               |  |      |              |   |      |   |              |  
|Net cash provided by (used in) financing activities            |  |      | 21,130,327   |   |      |   | (39,333,063  | )
|                                                               |  |      |              |   |      |   |              |  
|Net increase in cash and cash equivalents                      |  |      | 5,426,533    |   |      |   | 17,941,537   |  
|Cash and cash equivalents at beginning of period               |  |      | 18,576,048   |   |      |   | 386,879      |  
|                                                               |  |      |              |   |      |   |              |  
|Cash and cash equivalents at end of period                     |  | $    | 24,002,581   |   |      | $ | 18,328,416   |  
|                                                               |  |      |              |   |      |   |              |  



The accompanying notes
are an

integral part of these financial statements.



5



---

##### Table of Contents

EQUUS II INCORPORATED

STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

(Unaudited)

(Continued)



|                                                                                                                                   |  |      |             |   |      |   |            |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ---------- | -
|                                                                                                                                   |  | 2005 |             |   | 2004 |  
|Reconciliation of increase (decrease) in net assets from operations to net cash provided by (used in) operating activities:        |  |      |             |   |      |   |            |  
|Increase (decrease) in net assets from operations                                                                                  |  | $    | 14,610,789  |   |      | $ | (1,579,250 | )
|Adjustments to reconcile increase (decrease) in net assets from operations to net cash provided by (used in) operating
activities: |  |      |             |   |      |   |            |  
|Realized (gain) loss on dispositions of portfolio securities, net                                                                  |  |      | (2,283,878  | ) |      |   | 4,415,904  |  
|Decrease (increase) in unrealized appreciation, net                                                                                |  |      | (14,533,187 | ) |      |   | 275,085    |  
|Decrease (increase) in accrued interest and dividends receivable                                                                   |  |      | 204,241     |   |      |   | (1,452,847 | )
|Decrease in accounts receivable                                                                                                    |  |      | 32,337      |   |      |   | 1,864      |  
|Accrued interest or dividends exchanged for portfolio securities                                                                   |  |      | (780,347    | ) |      |   | 2,175,032  |  
|Non-cash compensation expense                                                                                                      |  |      | 552,760     |   |      |   | 123,446    |  
|Increase (decrease) in accounts payable and accrued liabilities                                                                    |  |      | 184,510     |   |      |   | (149,620   | )
|Increase (decrease) in due to management company                                                                                   |  |      | 109,468     |   |      |   | (19,243    | )
|Purchase of portfolio securities                                                                                                   |  |      | (1,097,500  | ) |      |   | (1,695,142 | )
|Proceeds from dispositions of portfolio securities                                                                                 |  |      | 3,410,602   |   |      |   | 24,747,561 |  
|Principal payments from portfolio securities                                                                                       |  |      | 48,193      |   |      |   | 2,365,000  |  
|Sales (purchases) of restricted temporary cash investments                                                                         |  |      | (16,161,782 | ) |      |   | 28,066,810 |  
|                                                                                                                                   |  |      |             |   |      |   |            |  
|Net cash provided by (used in) operating activities                                                                                |  | $    | (15,703,794 | ) |      | $ | 57,274,600 |  
|                                                                                                                                   |  |      |             |   |      |   |            |  



The accompanying notes
are an

integral part of these financial statements.



6



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##### Table of Contents

EQUUS II INCORPORATED

SUPPLEMENTAL INFORMATION  SELECTED PER SHARE DATA AND RATIOS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

(Unaudited)



|                                                                                  |  |      |       |    |      |   |       |   
|--------------------------------------------------------------------------------- |  | ---- | ----- | -- | ---- | - | ----- | --
|                                                                                  |  | 2005 |       |    | 2004 |  
|Selected per share data:                                                          |  |      |       |    |      |   |       |   
|Investment income                                                                 |  | $    | 0.26  |    |      | $ | 0.82  |   
|Expenses                                                                          |  |      | 0.58  |    |      |   | 0.34  |   
|                                                                                  |  |      |       |    |      |   |       |   
|Net investment income (loss)(1)                                                   |  |      | (0.32 | )  |      |   | 0.48  |   
|Realized gain (loss) on dispositions of portfolio securities, net                 |  |      | 0.34  |    |      |   | (0.68 | ) 
|Increase (decrease) in unrealized appreciation of portfolio securities, net       |  |      | 2.13  |    |      |   | (0.04 | ) 
|                                                                                  |  |      |       |    |      |   |       |   
|Increase (decrease) in net assets from operations                                 |  |      | 2.15  |    |      |   | (0.24 | ) 
|                                                                                  |  |      |       |    |      |   |       |   
|Capital transactions:                                                             |  |      |       |    |      |   |       |   
|Non-cash compensation expense                                                     |  |      |      |    |      |   | (0.05 | ) 
|Officer Notes Settlement                                                          |  |      |      |    |      |   | 0.09  |   
|Common stock repurchases                                                          |  |      |      |    |      |   | 0.16  |   
|Dilutive effect of shares issued in common stock dividend and exercise of options |  |      | (0.42 | )  |      |   |      |   
|                                                                                  |  |      |       |    |      |   |       |   
|Net increase (decrease) in assets from capital transactions                       |  |      | (0.42 | )  |      |   | 0.20  |   
|                                                                                  |  |      |       |    |      |   |       |   
|Net increase (decrease) in net assets                                             |  |      | 1.73  |    |      |   | (0.04 | ) 
|Net asset value at beginning of period                                            |  |      | 10.54 |    |      |   | 10.81 |   
|                                                                                  |  |      |       |    |      |   |       |   
|Net asset value at end of period                                                  |  | $    | 12.27 |    |      | $ | 10.77 |   
|                                                                                  |  |      |       |    |      |   |       |   
|Weighted average number of shares outstanding during period, in thousands         |  |      | 6,803 |    |      |   | 6,533 |   
|                                                                                  |  |      |       |    |      |   |       |   
|Market value per share at end of period                                           |  | $    | 8.61  |    |      | $ | 8.19  |   
|                                                                                  |  |      |       |    |      |   |       |   
|Selected ratios:                                                                  |  |      |       |    |      |   |       |   
|Ratio of total expenses to average net assets                                     |  |      | 4.98  | %  |      |   | 3.14  | % 
|Ratio of net investment income (loss) to average net assets                       |  |      | (2.77 | )% |      |   | 4.47  | % 
|Ratio of increase (decrease) in net assets from operations to average net assets  |  |      | 18.37 | %  |      |   | (2.19 | )%
|Total shareholder return                                                          |  |      | 11.67 | %  |      |   | 1.74  | % 



|(1) | Net investment income (loss) is calculated as the net investment income (loss) divided by the weighted average number of shares outstanding during the period.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------



The accompanying notes are an

integral part of these financial statements.



7



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##### Table of Contents

EQUUS II INCORPORATED

SCHEDULE OF PORTFOLIO SECURITIES

SEPTEMBER 30, 2005

(Unaudited)



|                                                                                           |  |                           |  |      |           |            |   |           
|------------------------------------------------------------------------------------------ |  | ------------------------- |  | ---- | --------- | ---------- | - | ----------
|Portfolio Company                                                                          |  | Date ofInitial Investment |  | Cost |           | Fair Value
|Alenco Window Holdings, LLC                                                                |  | February 2001             |  |      |           |            |   |           
|Holds cash and escrowed receivables                                                        |  |                           |  |      |           |            |   |           
|- 32.25% membership interest                                                               |  |                           |  | $    |          |            | $ | 450,000   
|The Bradshaw Group                                                                         |  | May 2000                  |  |      |           |            |   |           
|Sells and services mid-range and high-speed printing equipment                             |  |                           |  |      |           |            |   |           
|- Prime + 4% promissory note with a face amount of $398,383(2)                             |  |                           |  |      |          |            |   | 250,000   
|- 15% promissory note(2)                                                                   |  |                           |  |      | 459,546   |            |   |          
|- 1,335,000 shares of preferred stock                                                      |  |                           |  |      | 1,335,000 |            |   |          
|- Warrant to buy 2,229,450 shares of common stock for $0.01 through May 2008               |  |                           |  |      | 1         |            |   |          
|Champion Window Holdings, Inc.                                                             |  | March 1999                |  |      |           |            |   |           
|Manufacturer & distributor of residential windows                                          |  |                           |  |      |           |            |   |           
|- 1,410,000 shares of common stock(1)                                                      |  |                           |  |      | 1,471,800 |            |   | 26,338,000
|- Warrant to purchase 10,000 shares of common stock for $12.50 per share through June 2009 |  |                           |  |      |          |            |   | 62,000    
|ConGlobal Industries, Inc. (Formerly Container Acquisition, Inc.)                          |  | February 1997             |  |      |           |            |   |           
|Shipping container repair & storage                                                        |  |                           |  |      |           |            |   |           
|- 24,397,303 shares of common stock                                                        |  |                           |  |      | 1,370,495 |            |   |          
|- Member interest in CCI-ANI, LLC                                                          |  |                           |  |      | 1,926,942 |            |   |          
|- Member interest (66.7%) in JL Madre, LLC                                                 |  |                           |  |      | 1,000,000 |            |   | 1,000,000 
|- Promissory note(3)                                                                       |  |                           |  |      | 2,856,840 |            |   |          
|CMC Investments, LLC                                                                       |  | December 2001             |  |      |           |            |   |           
|Awaiting liquidation                                                                       |  |                           |  |      |           |            |   |           
|- 21% membership interest                                                                  |  |                           |  |      | 525,000   |            |   | 65,000    



The accompanying notes
are an

integral part of these financial statements.



8



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##### Table of Contents

EQUUS II INCORPORATED

SCHEDULE OF PORTFOLIO SECURITIES

SEPTEMBER 30, 2005

(Unaudited)

(Continued)



|                                                                                            |  |                           |  |      |           |            |   |          
|------------------------------------------------------------------------------------------- |  | ------------------------- |  | ---- | --------- | ---------- | - | ---------
|Portfolio Company                                                                           |  | Date ofInitial Investment |  | Cost |           | Fair Value
|Doane PetCare Enterprises, Inc.                                                             |  | October 1995              |  |      |           |            |   |          
|Manufacturer of private label pet food                                                      |  |                           |  |      |           |            |   |          
|- 1,943,598 shares of common stock                                                          |  |                           |  | $    | 3,936,643 |            | $ | 6,462,463
|The Drilltec Corporation                                                                    |  | August 1998               |  |      |           |            |   |          
|Provides protection & packaging for pipe & tubing                                           |  |                           |  |      |           |            |   |          
|- Prime + 9.75% promissory note(2)                                                          |  |                           |  |      | 1,000,000 |            |   |         
|ENGlobal Corporation (AMEX: ENG)                                                            |  | December 2001             |  |      |           |            |   |          
|Engineering and consulting services                                                         |  |                           |  |      |           |            |   |          
|- Options to acquire 200,000 shares of common stock exercisable only upon change of control |  |                           |  |      |          |            |   |         
|Equicom, Inc.                                                                               |  | July 1997                 |  |      |           |            |   |          
|Radio stations                                                                              |  |                           |  |      |           |            |   |          
|- 452,000 shares of common stock                                                            |  |                           |  |      | 141,250   |            |   |         
|- 657,611 shares of preferred stock                                                         |  |                           |  |      | 6,576,110 |            |   |         
|- 10% subordinated promissory note                                                          |  |                           |  |      | 4,614,824 |            |   | 1,040,792
|- 10% senior subordinated promissory note(1)(3)                                             |  |                           |  |      | 975,102   |            |   | 975,102  
|- 8.81% promissory note(1)                                                                  |  |                           |  |      | 984,106   |            |   | 984,106  
|PalletOne, Inc.                                                                             |  | October 2001              |  |      |           |            |   |          
|Wooden pallet manufacturer                                                                  |  |                           |  |      |           |            |   |          
|- 4,192,650 shares of preferred stock(1)                                                    |  |                           |  |      | 4,192,650 |            |   | 4,192,650
|- 350,000 shares of common stock                                                            |  |                           |  |      | 350,000   |            |   | 615,000  
|Sovereign Business Forms, Inc.                                                              |  | August 1996               |  |      |           |            |   |          
|Business forms manufacturer                                                                 |  |                           |  |      |           |            |   |          
|- 24,436 shares of preferred stock(1)(3)                                                    |  |                           |  |      | 2,443,600 |            |   | 2,403,772
|- 15% promissory notes(1)(3)                                                                |  |                           |  |      | 4,846,228 |            |   | 4,846,228
|- Warrant to buy 551,894 shares of common stock at $1 per share through August 2006         |  |                           |  |      |          |            |   |         
|- Warrant to buy 25,070 shares of common stock at $1.25 per share through October 2007      |  |                           |  |      |          |            |   |         
|- Warrant to buy 273,450 shares of common stock at $1 per share through October 2009        |  |                           |  |      |          |            |   |         



The accompanying notes
are an

integral part of these financial statements.



9



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##### Table of Contents

EQUUS II INCORPORATED

SCHEDULE OF PORTFOLIO SECURITIES

SEPTEMBER 30, 2005

(Unaudited)

(Continued)



|                                                                           |  |                           |  |      |            |            |   |           
|-------------------------------------------------------------------------- |  | ------------------------- |  | ---- | ---------- | ---------- | - | ----------
|Portfolio Company                                                          |  | Date ofInitial Investment |  | Cost |            | Fair Value
|Spectrum Management, LLC                                                   |  | December 1999             |  |      |            |            |   |           
|Business & personal property protection                                    |  |                           |  |      |            |            |   |           
|- 285,000 units of Class A equity interest                                 |  |                           |  | $    | 2,850,000  |            | $ | 8,000,000 
|- 16% subordinated promissory note(1)                                      |  |                           |  |      | 1,303,698  |            |   | 1,303,698 
|- 12.75% subordinated promissory note(1)                                   |  |                           |  |      | 223,657    |            |   | 223,657   
|Sternhill Partners I, L.P.                                                 |  | March 2000                |  |      |            |            |   |           
|Venture capital fund                                                       |  |                           |  |      |            |            |   |           
|- 3% limited partnership interest                                          |  |                           |  |      | 2,529,104  |            |   | 592,094   
|Turf Grass Holdings, Inc.                                                  |  | May 1999                  |  |      |            |            |   |           
|Grows, sells & installs warm season turfgrasses                            |  |                           |  |      |            |            |   |           
|- 1,000 shares of common stock                                             |  |                           |  |      | 959,632    |            |   |          
|Jones Industrial Holdings, Inc.                                            |  | July 1998                 |  |      |            |            |   |           
|Field service for petrochemical & power generation industries              |  |                           |  |      |            |            |   |           
|- 35,000 preferred stock                                                   |  |                           |  |      | 3,500,000  |            |   | 3,700,000 
|- Warrants to buy 63,637 shares of common stock at $0.01 through June 2008 |  |                           |  |      | 100        |            |   |          
|Vanguard Ventures VII, L.P.                                                |  | June 2000                 |  |      |            |            |   |           
|Venture capital fund                                                       |  |                           |  |      |            |            |   |           
|- 1.3% limited partnership interest                                        |  |                           |  |      | 2,047,934  |            |   | 875,577   
|                                                                           |  |                           |  |      |            |            |   |           
|Total                                                                      |  |                           |  | $    | 54,420,262 |            | $ | 64,380,139
|                                                                           |  |                           |  |      |            |            |   |           



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



|(2) | As of September 30, 2005, the Fund has reduced the fair value of these notes to zero and has discontinued recognizing any additional interest income on these notes due to
conditions specific to the respective Portfolio Companies. However, the Portfolio Companies are still liable for such notes and related interest, and they may be collected in the future.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



The accompanying notes are an

integral part of these financial statements.



10



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##### Table of Contents

EQUUS II INCORPORATED

SCHEDULE OF PORTFOLIO SECURITIES

SEPTEMBER 30, 2005

(Unaudited)

(Continued)



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



As defined in the Investment Company Act of 1940 (the 1940 Act),
at September 30, 2005, the Fund was considered to have a controlling interest in Champion Window Holdings, Inc., ConGlobal Industries, Inc., The Drilltec Corporation, Equicom, Inc. (Equicom), PalletOne, Inc., Sovereign Business
Forms, Inc., and Spectrum Management LLC.



Income was earned in
the amount of $1,455,729 and $5,100,249 for the nine months ended September 30, 2005 and 2004, respectively, on portfolio securities of companies in which the Fund has a controlling interest. Income was earned in the amount of $121,519 for the
nine months ended September 30, 2004, on portfolio securities of companies that are affiliates of the Fund but are not controlled by the Fund. No such income was earned in the nine months ended September 30, 2005.



As defined in the 1940 Act, all of the Funds investments are in
eligible portfolio companies except Sternhill Partners I, L.P. and Vanguard VII, L.P. The Fund provides significant managerial assistance to all of the portfolio companies in which it has invested, except Doane PetCare Enterprises, Inc.
(Doane), Sternhill Partners I, L.P., and Vanguard VII, L.P. The Fund provides significant managerial assistance to portfolio companies that comprise 88% of the total value of the investments in portfolio companies at September 30,
2005.



The accompanying notes are an

integral part of these financial statements.



11



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##### Table of Contents

EQUUS II INCORPORATED

SCHEDULE OF PORTFOLIO SECURITIES

SEPTEMBER 30, 2005

(Unaudited)

(Continued)



The investments in portfolio securities held by the Fund are not geographically diversified. All of
the Funds portfolio companies (except for Doane, PalletOne, Inc. 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, 2005:



|                                      |  |      |            |            |   |                                      |  |      |  
|------------------------------------- |  | ---- | ---------- | ---------- | - | ------------------------------------ |  | ---- | -
|Type of Securities                    |  | Cost |            | Fair Value |   | Fair Value asPercentageof Net Assets | 
|Common stock                          |  | $    | 8,229,820  |            | $ | 33,415,463                           |  | 36.9 | %
|Secured and subordinated debt         |  |      | 17,264,001 |            |   | 9,623,583                            |  | 10.6 | %
|Preferred stock                       |  |      | 18,047,360 |            |   | 10,296,422                           |  | 11.4 | %
|Limited liability company investments |  |      | 6,301,942  |            |   | 9,515,000                            |  | 10.5 | %
|Limited partnership investments       |  |      | 4,577,038  |            |   | 1,467,671                            |  | 1.6  | %
|Options and warrants                  |  |      | 101        |            |   | 62,000                               |  | 0.1  | %
|                                      |  |      |            |            |   |                                      |  |      |  
|Total                                 |  | $    | 54,420,262 |            | $ | 64,380,139                           |  | 71.1 | %
|                                      |  |      |            |            |   |                                      |  |      |  



The following is a
summary by industry of the Funds investments as of September 30, 2004:



|                                 |  |            |            |                                      |      |  
|-------------------------------- |  | ---------- | ---------- | ------------------------------------ | ---- | -
|Industry                         |  | Fair Value |            | Fair Value asPercentageof Net Assets |     
|Business Products and Services   |  | $          | 17,027,355 |                                      | 18.8 | %
|Consumer Goods and Services      |  |            | 6,462,463  |                                      | 7.1  | %
|Industrial Products and Services |  |            | 3,700,000  |                                      | 4.1  | %
|Media                            |  |            | 3,000,000  |                                      | 3.3  | %
|Residential Building Products    |  |            | 26,850,000 |                                      | 29.7 | %
|Shipping Products and Services   |  |            | 5,807,650  |                                      | 6.4  | %
|Venture Funds and Other          |  |            | 1,532,671  |                                      | 1.7  | %
|                                 |  |            |            |                                      |      |  
|Total                            |  | $          | 64,380,139 |                                      | 71.1 | %
|                                 |  |            |            |                                      |      |  



12



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##### Table of Contents

EQUUS II INCORPORATED

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2005 AND 2004

(Unaudited)



|(1) | Organization and Business Purpose
|--- | ---------------------------------



Equus II Incorporated (the Fund), a Delaware corporation, was formed by Equus Investments II, L.P. (the Partnership) on
August 16, 1991. On July 1, 1992, the Partnership was reorganized and all of the assets and liabilities of the Partnership were transferred to the Fund in exchange for shares of common stock of the Fund. The shares of the Fund trade on the
New York Stock Exchange under the symbol EQS.



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



Pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC), certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted.
The unaudited financial statements have been prepared consistent with the accounting policies reflected in the Funds annual financial statements included in the Companys Form 10-K for the year ended December 31, 2004 filed with the
SEC and should be read in conjunction therewith. In managements opinion, the unaudited financial statements include all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of such financial
statements. Interim results are not necessarily indicative of results for a full year.



|(2) | Liquidity and Financing Arrangements
|--- | ------------------------------------



Liquidity and Revolving Line of Credit  As of September 30, 2005, we had cash and unrestricted temporary investments of approximately
$24.0 million. We had $64,380,139 of our total assets of $131,210,100 invested in portfolio securities. $40,380,016 of our remaining assets were restricted, where $39,980,214 were invested in U.S. Treasury Bills for the purpose of satisfying the
diversification requirement to maintain our pass-through tax treatment and $399,802 for the required 1% brokerage margin deposit . These securities were held by a securities brokerage firm and were pledged along with cash to secure the payment of
the margin account balance. The U.S. Treasury bills were sold and the margin loan was repaid to the brokerage firm on October 3, 2005.



On June 30, 2005, the Fund received cash of $6,694,465 for the exercise of all 869,900 stock options which were in the money and being held by
officers and directors of the Fund.



In May 2004, the Fund and
Alenco Window Holdings, LLC (AWHLLC) sold their respective interests in Alenco Holding Corporation. The proceeds of the sale and distributions from AWHLLC of approximately $9.75 million were invested in short-term investments.



13



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##### Table of Contents

In May 2004, the Fund announced and began a program to utilize up to $3,000,000 of its cash to repurchase
shares of its common stock in the open market on the New York Stock Exchange, subject to the restrictions of the 1940 Act and the Securities Exchange Act of 1934. As of September 30, 2004, the Fund had repurchased 326,155 shares of common stock
(of which 225,000 shares were sold by a significant shareholder) for a total of $2,555,667. Since the shares were purchased at a discount to net asset value, these purchases added $0.16 to the net asset value per share as of September 30, 2004.



In April 2004, the Fund sold its interest in Strategic
Holdings, Inc. and SMIP, Inc. Proceeds of such sale included cash of $13.8 million, which was used to repay the outstanding balance under the Funds line of credit and promissory note payable.



We had a $10,000,000 revolving line of credit with Bank of America, N.A. that
expired on January 31, 2004. The line of credit was extended through March 15, 2004 at the reduced maximum borrowing amount of $6,600,000. We used our revolving line of credit to pay operating expenses and for new and follow-on investments
in portfolio securities.



Effective March 15, 2004, we
entered into a new $6,500,000 revolving line of credit loan with The Frost National Bank, which extended through March 31, 2005. The proceeds of the new loan were utilized to pay off the previous line of credit. In March 2005, we extended our
revolving line of credit with The Frost National Bank through April 2006 and reduced the amount that may be borrowed to $5,000,000.



On July 28, 2005, the Fund formally terminated its revolving line of credit with The Frost National Bank due to its present cash position and
projected ongoing cash requirements, which made it unlikely that the existing line would be utilized in the foreseeable future.



Under certain circumstances, we may be called on to make follow-on investments in certain portfolio companies. If we do not have sufficient funds to make
follow-on investments, the portfolio company in need of the investment may be negatively impacted. Also, our equity interest in and our estimated fair value of the portfolio company could be reduced. As of September 2005, we have committed to invest
up to an additional $1,342,500 in the two venture capital funds in our portfolio.



As of September 30, 2004, the Fund was being charged interest at a rate of 4.5% on its line of credit. The average daily balances outstanding on the Funds line of credit during the nine months ended
September 30, 2005 and 2004 was $0 and $1,810,619, respectively. During the nine months ended September 30, 2005 and 2004, the amount of interest and loan fees paid in cash was $80,904 and $295,081, respectively.



RIC Borrowings, Restricted Cash and Temporary Investments - Because of
the nature and size of its portfolio investments, the Fund periodically borrows money utilizing a margin account with a securities brokerage firm to make qualifying investments to maintain its tax status as a RIC under the Internal Revenue Code. As
of September 30, 2005 and 2004, the Fund borrowed $39,980,214 and $23,993,887, respectively. The Fund collateralized such borrowings with restricted cash and temporary investments of $40,380,016 and $24,628,392, as of September 30, 2005
and 2004, respectively. The temporary qualifying investments were sold, and the total amount borrowed was repaid in October 2005 and 2004, respectively. The Management Company believes the Fund will be able to use this financing arrangement to
maintain its RIC status. However, there is no assurance that such arrangement will be available to the Fund in the future. If the Fund is unable to borrow funds in the future to make qualifying investments, the Fund may no longer qualify as a RIC.
Failure to continue to qualify as a RIC could be material to the Fund and the Funds shareholders in that the



14



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##### Table of Contents

Fund would be subject to corporate income tax on its net investment income and net realized gains, and any distributions to stockholders would be subject to
income tax as ordinary dividends.



|(3) | Significant Accounting Policies
|--- | -------------------------------



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



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



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



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



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



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



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



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



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



Because of the inherent uncertainty of the valuation of portfolio securities which do not have readily ascertainable market values, amounting to
$64,380,139 and $48,621,356 (including $2,778,878 in publicly-traded securities, net of a $424,836 valuation discount) as of September 30, 2005 and December 31, 2004, respectively, the Funds estimate of fair value may materially
differ from the value that would have been used had a ready market existed for the securities. Appraised values do not reflect brokers fees or other normal selling costs which might become payable on disposition of such investments.



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



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



Escrowed Receivables, at Estimated Fair Value - In April and May of
2004, we sold our investments in Strategic Holdings, Inc. and Alenco Holding Corporation, respectively. A portion of the proceeds from each sale was placed in a cash escrow account to secure the representations and warranties we made to the
respective purchasers. We could receive up to an aggregate of $3,371,000 in 2005, 2006 and 2007 from such escrow accounts if no claims are made. On April 12, 2005, the Fund received proceeds of $898,667 from the Strategic Holdings, Inc. escrow
account. This payout, which was not adjusted for any claims, reduces the aggregate amount of total potential proceeds to $2,472,333. As of September 30, 2005, we have valued the amounts receivable from the escrows at $2,137,333, because of the
uncertainty of collection. We are not aware of any claims against the escrow that have been made as of September 30, 2005.



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



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Stock-Based Compensation  The Fund accounts for stock-based compensation using the intrinsic value method in
accordance with the provisions of APB No. 25. Had the Fund accounted for the options using the fair value method under SFAS 123, the increase (decrease) in net assets from operations for the nine months ended September 30, 2004 and 2003,
respectively, would have been:



|                                                                                                                  |  |      |            |   |      |   |            |  
|----------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                  |  | 2005 |            |   | 2004 |  
|Increase (decrease) in net assets from operations, as reported                                                    |  | $    | 14,610,789 |   |      | $ | (1,579,250 | )
|Stock-based employee compensation expense (benefit) included in increase (decrease) in net assets from operations |  |      | 552,760    |   |      |   | 123,446    |  
|Stock-based employee compensation expense determined using fair value method                                      |  |      | (46,136    | ) |      |   | (37,256    | )
|                                                                                                                  |  |      |            |   |      |   |            |  
|Pro forma increase (decrease) in net assets from operations                                                       |  | $    | 15,117,413 |   |      | $ | (1,493,060 | )
|                                                                                                                  |  |      |            |   |      |   |            |  
|Net increase (decrease) in net assets from operations per share                                                   |  |      |            |   |      |   |            |  
|Basic, as reported                                                                                                |  | $    | 2.15       |   |      | $ | (0.24      | )
|                                                                                                                  |  |      |            |   |      |   |            |  
|Basic, pro-forma                                                                                                  |  | $    | 2.22       |   |      | $ | (0.23      | )
|                                                                                                                  |  |      |            |   |      |   |            |  
|Diluted, as reported                                                                                              |  | $    | 2.15       |   |      | $ | (0.24      | )
|                                                                                                                  |  |      |            |   |      |   |            |  
|Diluted, pro-forma                                                                                                |  | $    | 2.22       |   |      | $ | (0.23      | )
|                                                                                                                  |  |      |            |   |      |   |            |  



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



|(4) | Management
|--- | ----------



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



The Advisory Agreement will continue in effect for two years, and from year-to-year thereafter, provided such continuance is approved at least annually by
(i) a vote of a majority of the outstanding



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##### Table of Contents

shares of the Fund, or (ii) a majority of the Independent Directors of the Fund. The Advisory Agreement may be terminated at any time, without the
payment of any penalty, by the Board of Directors or the holders of a majority of the Funds shares on 60 days written notice to the Adviser, and would automatically terminate in the event of its assignment (as defined in the
1940 Act).



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



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



Prior to entering into the Advisory and Administration
Agreements, the Fund was a party to a management agreement with Equus Capital Management Corporation (ECMC) that was initially approved by the Funds stockholders at a special meeting held on April 9, 1997. Under that
agreement, ECMC provided both advisory and administration services. ECMC received a management fee at an annual rate of 2% of the net assets of the Fund, paid quarterly in arrears. Additionally, ECMC received compensation for
providing certain investor communication services. The accompanying Statements of Operations include Administrative fees of $137,500 related to such services for the nine months ended September 30, 2005 and $37,500 for the nine months
ended September 30, 2004.



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



|(5) | Federal Income Tax Matters
|--- | --------------------------



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



The Fund was required to
make a distribution of ordinary income for 2004 under income tax regulations. For the year ended December 31, 2004, the Fund had net investment income for book



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##### Table of Contents

purposes of $3.7 million and $3.5 million for tax purposes. During 2004, the Fund had a net capital loss for book purposes of $5.5 million and a net capital
loss for tax purposes of $7.8 million. As of December 31, 2004, the Fund has a capital loss carry forward of $16.0 million, which may be used to offset future taxable capital gains. If not utilized, some of the loss will expire beginning in
2009.



|(6) | Dividends
|--- | ---------



The Fund declared no dividends during the nine months ended September 30, 2005 and 2004. On January 16, 2005, the Fund paid $1,589,377 in cash
for a dividend that had been declared in 2004 and on January 16, 2004, the Fund paid $2,287,194 in cash for a dividend that had been declared in 2003.



|(7) | Portfolio Securities
|--- | --------------------



During the nine months ended September 30, 2005, the Fund made follow-on investments of $1,877,847 in four companies and one venture fund, including
$780,347 in the form of interest and dividends paid in kind or original issue discount amortization. In addition, the Fund realized a net capital gain of $2,283,878 during the nine months ended September 30, 2005.



During the nine months ended September 30, 2004, the Fund made follow-on investments of
$5,917,549 in five companies and two venture funds, including $351,729 in accrued interest and dividends received in the form of additional portfolio securities and $3,870,679 recorded as the cost of securities received in exchange for securities
previously held in acquired or merged companies. In addition, the Fund realized a net capital loss of $4,415,904 during the nine months ended September 30, 2004.



|(8) | Former Stock Option Plan
|--- | ------------------------



Prior to June 30, 2005, an Equus II Incorporated 1997 Stock Incentive Plan (Stock Incentive Plan) authorized the Fund to issue options to
the directors and officers of the Fund in an aggregate amount of up to 20% of the outstanding shares of common stock of the Fund. The Stock Incentive Plan 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 2,200 shares of the Funds common stock. Options were issued to the officers of the Fund at the discretion of the compensation committee. The options had a ten year
life and vested 50% six months after the grant date and 16 2/3% on the first, second and third
anniversaries of the date of the grant. The Board of Directors cancelled the Stock Incentive Plan as of June 30, 2005.



Under the Stock Incentive Plan, options to purchase 1,049,200 shares of the Funds common stock with a weighted average exercise price of $8.46 per
share were outstanding at June 30, 2004. Of these options, 855,950 shares, with a weighted average exercise price per share of $8.62 were exercisable at June 30, 2004. There were no outstanding options at June 30, 2005. On
June 30, 2005, all 869,900 stock options in the money were exercised, and the remaining 89,100 shares that were not in the money were cancelled.



On May 7, 2004, options to acquire a total of 15,400 shares at $7.72 per share were issued to the non-officer directors. On January 4, 2005,
options to purchase 150,000 shares at $7.69 per share were issued to two of the Funds officers. On December 24, 2003, options to purchase 40,000 shares at $7.85 per share were issued to a new officer of the Fund. On November 14,
2001, options to acquire a total of 990,000 shares at $7.69 per share were issued to officers of the Fund. These options included dividend equivalent rights which require that the options be accounted for using variable plan accounting. Variable
plan accounting resulted in non-cash compensation expense of $552,760 during the nine months ended September 30, 2005 and $123,446 during the nine months ended September 30, 2004. All options were exercised or cancelled on June 30,
2005, so no future non-cash compensation expense is expected in the foreseeable future.



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On September 30, 1999, options to purchase 719,794 shares of common stock of the Fund were exercised
by six officers of the Fund for $15.45 per share. Pursuant to the terms of the options, the Stock Incentive Plan, and the Investment Company Act, the Fund loaned the officers the exercise price of $11,124,086 and the officers issued promissory
notes, which were secured by the 719,794 shares, to the Fund. In 2001, the Fund agreed to cancel the remaining principal balance and accrued interest on the promissory notes aggregating $11,040,849 in consideration of the officers surrendering to
the Fund 844,133 shares of common stock (the shares originally issued and certain shares received as dividends). Pursuant to the terms of the notes, the cancellation of the principal and accrued interest on the notes was based on the net asset value
of the shares at date of surrender. The officers retained 71,235 shares of common stock following the cancellation of the notes. These transactions were recorded as decreases in common stock and additional paid in capital. There was no change in
total net assets as a result of the note repayment and surrendering of the shares.



In January 2002, the Fund filed an application with the SEC seeking an amendment to an exemptive order previously issued by the SEC to permit the Fund to grant dividend equivalent rights to the Funds independent
directors as part of their stock option awards. Dividend equivalent rights represent the right of the officers of the Fund to receive a credit against the option exercise price for the amount of any dividends paid by the Fund during the option
period. During its review of such application, the SEC staff advised the Fund that it does not believe that dividend equivalent rights are permitted under the Investment Company Act. Based on the ongoing discussion with the SEC, the Fund has not
credited any dividends to the outstanding options or recorded any associated compensation expense for the 2004 or 2003 dividends applicable to dividend equivalent rights. If the dividend equivalent rights had been in effect, additional non-cash
compensation expense of approximately $387,000 and $650,000 with a credit to accrued compensation, would have been recognized under variable plan accounting in 2004 and 2003, respectively.



During its review of the exemptive application filed by the Fund in
connection with the granting of the dividend equivalent rights as part of the Stock Incentive Plan, the SEC staff raised certain issues with respect to the valuation of the shares held as collateral and the manner in which the notes were settled in
2001. In November 2003, the Funds board of directors appointed a special committee of independent directors to address the SEC staffs issues and retained independent legal counsel with respect to the issues raised by the SEC. The Fund
responded to the staffs questions and supplied additional information, and the special committee and counsel met personally with the SEC staff.



In September 2004, the independent directors of the Fund unanimously approved a proposal to resolve the issues surrounding the loan transactions by
unwinding the loan transactions and attempting to place the Fund in the position it would have been in had the loan transactions never taken place. In exchange for repayment of the balance of benefits received as a result of the loan transactions,
the Fund agreed to formally release each of the Funds officers and former officers from any and all claims that the Fund might have with respect to the loan transactions. In connection with the resolution of this matter, the Fund issued a
release to one additional former officer in consideration of his payment to the Fund of $23,475 in March 2005.



Options to purchase 869,900 shares were exercised by all officers and directors on June 30, 2005 and the Fund received $6,694,465 in cash from the
exercise of such options. Options to purchase 12,500 shares were exercised by one officer of the Fund during 2004 and the Fund received $96,125 in cash from the exercise of such options.



If all outstanding options for which the market price exceeds the exercise price at December 31, 2004, had been
exercised, the funds net asset value would have been reduced by $0.02 per share,



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assuming the Fund had used the proceeds from the exercise of such options to repurchase shares at the market price pursuant to the treasury stock method.



|(9) | Subsequent Events
|--- | -----------------



On October 3, 2005, the Fund sold U.S. Treasury bills for $40,000,000 and repaid the margin loan.



On October 11, 2005, the Fund received a cash dividend payment from
PalletOne, Inc. for $104,816. This amount was included in dividends receivable at September 30, 2005.



On November 3, 2005, the Fund received a cash payment from Doane PetCare Enterprises, Inc. (Doane) for $5,916,759, representing the
Funds entire interest in Doane excluding estimated escrow of $546,000.



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



Overview



Equus II Incorporated is a business development company which invests in equity and equity-oriented securities issued by
privately-owned companies in transactions negotiated directly with such companies. We did not make any new investments during the nine months ended September 30, 2005 or 2004.



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



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



We derive our cash flow from interest and dividends received and sales of securities from our investment portfolio. We pay certain advisory fees to the Adviser, administrative fees to the Administrator and interest
expense on our existing debt. We also spend our cash on new investments, or follow-on investments which may be required by certain portfolio companies. Because our investments are illiquid, we utilized leverage to provide the required funds, and the
leverage was then repaid from the sale of portfolio securities. In April and May of 2004, we sold securities of two portfolio companies and paid off our loans. We have maintained substantial amounts of cash and cash equivalents since May 2004.



We have distributed to our stockholders any net taxable
investment income or realized capital gains on an annual basis. We declared a net investment income dividend of $0.57 per share in 2004, all of which was qualifying dividend income. We did not declare a dividend for the nine months ended
September 30, 2005.



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



In May and June of 2004, the Fund
repurchased 74,105 shares (of which 50,000 shares were sold by a significant shareholder) of its common stock for $574,204, pursuant to a plan to spend up to $3,000,000 to repurchase our common stock in the open market. The 74,105 shares were
repurchased at an average discount rate of approximately 27% from net asset value, and the effect of these transactions added approximately $0.03 per share to the net asset value of our outstanding shares. The plan was completed by the end of 2004.



Significant Accounting Policies



Valuation of Investments - The valuation of our portfolio companies
is the most significant area of judgment impacting the financial statements. Portfolio investments are carried at fair value with the net change in unrealized appreciation or depreciation included in the determination of net assets. Valuations of
portfolio securities are performed in accordance with accounting principles generally accepted in the United States and the financial reporting policies of the SEC. The applicable methods prescribed by such principles and policies are described
below:



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



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



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



Most of our common equity investments are appraised at a multiple of free cash flow generated by the portfolio company in its most recent fiscal year,
less outstanding funded indebtedness and other senior securities such as preferred stock. Projections of current year free cash flow may be utilized and adjustments



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for non-recurring items are considered. Multiples utilized are estimated based on the Advisers experience in the private company marketplace, and are
necessarily subjective in nature.



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



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



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



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



Federal Income Taxes  We intend to comply with the requirements of the Internal Revenue Code necessary to qualify as a regulated investment company and, as such, will not be subject to federal income
taxes on otherwise taxable income (including net realized capital gains) which is distributed to stockholders. Therefore, no provision for federal income taxes is recorded in our financial statements. As of December 31, 2004, the Fund had a
capital loss carry forward of approximately $16.0 million, which may be used to offset future taxable capital gains. We borrow money from time to time to maintain our tax status under the Internal Revenue Code as a regulated investment company
(RIC).



Liquidity and Capital Resources



At September 30, 2005, we had cash and unrestricted temporary
investments of approximately $24.0 million. We had $64,380,139 of our total assets of $131,210,100 invested in portfolio securities. $40,380,016 of our remaining assets were restricted, where $39,980,214 were invested in U.S. Treasury Bills for the
purpose of satisfying the diversification requirement to maintain our pass-through tax treatment and $399,802 for the required 1% brokerage margin deposit. These securities were held by a securities brokerage firm and were pledged along with cash
and other securities to secure the payment of the margin account balance. The U.S. Treasury bills were sold and the margin loan was repaid to the brokerage firm on October 3, 2005.



Effective March 15, 2004, we entered into a new $6,500,000 revolving line of credit loan with The Frost National Bank,
which extended through March 31, 2005. The proceeds of the new loan were utilized to pay off the previous line of credit. The proceeds of the new loan were utilized to pay off the previous line of credit. In March 2005, the Fund extended our
revolving line of credit with The Frost National Bank through April 2006 and reduced the amount that may be borrowed to $5,000,000. There is no outstanding balance as of September 30, 2005, under the new line of credit.



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The new line of credit is collateralized by our investments in portfolio securities. The provisions of
the new line of credit include a borrowing base that cannot exceed the lesser of 10% of the total value of eligible portfolio securities or $5,000,000. Interest on the new line of credit is payable quarterly at a rate of 0.50% above the floating
prime rate, adjusted daily. A facility fee of 0.25% per annum on the unused portion of the line of credit is payable quarterly in arrears. We paid a commitment fee of $65,000 at the closing of the loan in March 2004 and a $25,000 fee in March
2005 to extend the loan through April 2006.



On July 28,
2005, the Fund formally terminated its revolving line of credit loan with The Frost National Bank due to its present cash position and projected ongoing cash requirements, which made it unlikely that the existing line would be utilized in the
foreseeable future.



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



On April 8, 2004, we sold our interest in Strategic Holdings, Inc and SMIP, Inc. Proceeds from such sale were used to pay off our existing borrowings
under our line of credit and the promissory note referenced above. The remaining proceeds may be used for new or follow-on investments or other corporate purposes.



We declared a net investment income dividend of $0.57 per share for 2004, or $3,560,205. We paid $1,589,376 in cash and
issued 260,719 additional shares of common stock at $7.56 per share on January 16, 2005.



Under certain circumstances, we may be called on to make follow-on investments in certain portfolio companies. If we do not have sufficient funds to make follow-on investments, the portfolio company in need of the
investment may be negatively impacted. Also, our equity interest in and our estimated fair value of the portfolio company could be reduced. As of September 30, 2005, we have committed to invest up to an additional $1,342,500 in the two venture
capital funds in our portfolio.



Net cash provided by (used in)
operating activities was ($15,703,794) and $57,274,600 for the nine months ended September 30, 2005 and 2004, respectively. Approximately $9.6 million in estimated value of our investments are in the form of notes receivable from portfolio
companies. However, only three of the portfolio companies are currently paying cash interest to us in accordance with their respective notes receivable, which aggregate $7,134,032 in fair value. Certain of the promissory notes provide that interest
may be paid in kind or that the original issue discount may be accreted over the life of the notes, by adding such amounts to the principal of the notes.



Because of the nature and size of our portfolio investments, we periodically borrow funds to make qualifying investments to maintain our tax status as a
RIC. During the nine months ended September 30, 2005 and 2004, we borrowed such funds by utilizing a margin account with a securities brokerage firm. There is no assurance that such arrangement will be available in the future. If we are unable
to borrow funds to make qualifying investments, we may no longer qualify as a RIC. We would then be subject to corporate income tax on our net investment income and realized capital gains, and distributions to stockholders would be subject to income
tax as ordinary dividends.



We have the ability to borrow funds
and issue forms of senior securities representing indebtedness or stock, such as preferred stock, subject to certain restrictions. Net taxable investment income and net taxable realized gains from the sales of portfolio investments are intended to
be distributed at least annually, to the extent such amounts are not reserved for payment of expenses and



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contingencies or to make follow-on or new investments. Pursuant to the restrictions in our existing line of credit, we are not allowed to incur additional
indebtedness unless approved by the lender.



We reserve 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 us as long-term capital gains and stockholders will be
able to claim their proportionate share of the federal income taxes paid by us 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.



Results of Operations



Investment Income and Expense



Net investment loss after all expenses was ($422,638) and
($409,270) for the three months ended September 30, 2005 and 2004, respectively. Net investment (loss) income after all expenses amounted to ($2,206,276) and $3,111,738 for the nine months ended September 30, 2005 and 2004, respectively.
Total income from portfolio securities was $492,220 and $449,773 for the three months ended September 30, 2005 and 2004, respectively. Total income from portfolio securities was $1,455,729 for the nine months ended September 30, 2005 and
$5,221,768 for the comparable period in 2004. The decrease from 2004 to 2005 is due primarily to a cash dividend of $3,525,000 received in 2004 from Champion Window Holdings, Inc., which did not occur in 2005.



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 $1,250,858 and $1,039,682 during the nine months ended September 30, 2005 and 2004, respectively. The increase in management fees during the nine months ended
September 30, 2005 , was due to an increase in net assets between the two periods which was primarily due to the $11.2 million and $6.0 million valuation increases at Champion Window Holdings, Inc. and Doane PetCare Enterprises, Inc.,
respectively.



Director fees and expenses increased by $11,943
and $104,033 for the three and nine months ended September 30, 2005 and 2004, respectively, due primarily to nine full board meetings in 2005 compared to four full board meetings in 2004 and additional committee meetings in 2005. The additional
board meetings, Strategic Alternative Meetings and Special Committee Meetings were related to entering into the new management agreement with Moore, Clayton & Co., Inc. The additional director fees and expenses are also related to one
additional board member being added as of June 30, 2005.



Professional fees increased by $167,934 and $256,772 for the three and nine months ended September 30, 2005 and 2004, respectively. These increases are primarily due to legal fees incurred in connection with the SEC matter described in
Note 8, proxy preparation, consideration of strategic alternatives and deciding on a strategic alternative for the benefit of the Funds shareholders. In the third quarter of 2005 there were additional legal fees related to the start-up of the
new Adviser, as well as additional accounting and tax fees. There were also consulting fees of $75,000 paid to a former officer.



Administrative fees increased by $100,000 for the three and nine months ended September 30, 2005 and 2004, respectively, due primarily to the change
in Administrator on June 30, 2005 from ECMC to ECAC. The former administrator, ECMC, received compensation for providing certain investor communication services. The fee paid was $12,500 per quarter for such services. Under the new plan, the
Fund reimburses the Administrator for the costs and expenses incurred by the Administrator, ECAC, in performing its obligations and providing personnel and facilities under the Administrative Agreement,



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provided that such reimbursements do not exceed $450,000 per year. The new administrator receives $112,500 per quarter.



Mailing, printing and other expenses increased by $58,717 and $150,158 for
the three and nine months ended September 30, 2005, from the same period in 2004 due primarily to proxy solicitation, printing and mailing relating to the new Adviser.



Interest expense increased/(decreased) by $35,369 and ($164,685) for the three and nine months ended September 30, 2005
and 2004, respectively. The increase for the three months was due primarily to higher margin interest expense in September 2005. The decrease for the nine months was primarily due to the payoff of the revolving line of credit in April 2004.



Prior to June 30, 2005, certain options issued by the
Fund were accounted for using variable plan accounting. Such accounting resulted in non-cash compensation expense (benefit) of $552,760 and $123,446 during the nine months ended September 30, 2005 and 2004, respectively. The change is due to
the fluctuation in the Funds closing stock market price from the beginning of the year to the price at the end of June in relation to the exercise price of the stock options. In 2005, the market price increased from a January 1, 2005
market price of $7.71 to an ending market price at June 30, 2005 (option plan was cancelled on June 30, 2005) of $8.25. In 2004, the market price increased from a market price at January 1, 2004 of $8.05 to an ending market price at
September 30, 2004 of $8.19.



Franchise taxes and excise
taxes increased by $46,507 and $129,213 for the three and nine months ended September 30, 2005 and 2004, respectively. Excise taxes for 2005 are $ 0. In the third quarter of 2004, there was a ($36,832) credit to expense for the reversal of a
prior year accrual. In addition, franchise taxes increased $9,675 and $92,381 in the first three and nine months ended September 30, 2005 and 2004, respectively, primarily due to increases in Texas franchise taxes because a larger percentage of
income was from Texas-based companies.



The Fund agreed to
reimburse the Administrator certain one time costs and expenses (Special Administrative Fee) associated with the change in administrators upon receiving approval from the Funds shareholders. The Special Administrative Fee, in the
amount of $535,000 has been paid as of September 30, 2005 and is included in expenses in the nine month Statements of Operations.



Realized Gains and Losses on Sales of Portfolio Securities



During the nine months ended September 30, 2005, we realized net capital gains of $2,283,878 from the disposition of securities in one portfolio
company and a reduction in the discounts on the escrow receivable related to the sales of two former portfolio companies. We sold 1,033,457 shares of ENGlobal Corporation (ENG) common stock, realizing a capital gain of $1,890,142. We
increased the value of the escrow account of Strategic Holdings, Inc. for a capital gain of $331,000 and increased the value of the escrow account of Alenco Holding Corp. for a capital gain of $45,000. In addition, we realized a short-term capital
gain of $17,736 on our U.S. Treasury Bills.



During the nine
months ended September 30, 2004, the Fund realized net capital losses of $4,415,904. We sold a portion of our preferred stock in Container Acquisition, Inc., and exchanged the balance of our preferred stock and all of our warrants for the
common stock of ConGlobal Industries, Inc., realizing a capital loss of $7,832,017. We exchanged our note from Container Acquisition, Inc. for a new note from ConGlobal Industries, Inc. and realized a capital loss of $1,028,343 on the note exchange.
We sold 1,154,316 shares of ENGlobal, Inc. (ENG) common stock, realizing a capital loss of $119,803. We exchanged our investment in Turfgrass America, Inc. (TAI) for an investment in a new entity that acquired the assets and
business of TAI,



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realizing a capital loss of $6,049,696. We sold our interests in Alenco and Strategic Materials, and received a cash distribution from AWHLLC, realizing
capital gains of $10,438,432. In addition, we had other capital gains of $172,003 and realized a short term capital gain of $3,520 on our U.S. Treasury bills.



Changes in Unrealized Appreciation/Depreciation of Portfolio Securities



Net unrealized appreciation on investments increased by $14,533,187 during the nine months ended September 30, 2005,
from a net unrealized depreciation of ($4,573,310) to a net unrealized appreciation of $9,959,877. The increase in appreciation resulted from increases in the estimated fair values of six of our portfolio companies aggregating $20,262,463, of which
Champion Window Holdings, Inc. accounted for $11,000,000 and Doane PetCare Enterprises, Inc.(Doane) accounted for $6,462,463. The Doane increase is due to a completed sales transaction with Ontario Teachers Pension Fund. The Fund
had decreases in the estimated fair values of eight of our portfolio companies aggregating ($3,839,135), with ConGlobal Industries, Inc. accounting for ($1,395,702), Equicom, Inc. ($954,098) and Sternhill Partners I, LP ($555,406). The Fund also
transferred ($1,890,142) in unrealized appreciation to realized capital gains from the sale of all its common stock of ENG.



Net unrealized depreciation on investments increased by $275,084 during the nine months ended September 30, 2004 from $7,576,155 to $7,851,239. Such
increase in unrealized depreciation is due to the sale of Alenco and Strategic Materials, which transferred $10,039,384 of unrealized appreciation at December 31, 2003, to realized gains at September 30, 2004, offset by the transfer of
$11,924,235 in unrealized depreciation to realized capital losses from the exchange of assets at Turfgrass America, Inc. and ConGlobal Industries, Inc. The Fund had additional decreases in unrealized depreciation which resulted from increases in the
estimated fair value of five of our portfolio companies aggregating $3,913,407, which was offset partially by the $3,525,000 recapitalization dividend declared by Champion Window Holdings, Inc. in March 2004 which increased unrealized depreciation.
The Fund had additional increases in unrealized depreciation which resulted from decreases in the estimated fair value of four of our portfolio companies aggregating $2,573,342.



Dividends



We declared no dividends for the nine months ended September 30, 2005 and 2004. On January 16, 2005 we paid cash dividends of $1,589,377 for
dividends declared in 2004. On January 16, 2004, we paid cash dividends of $2,287,194 for dividends declared in 2003.



Portfolio Investments



During the nine months ended September 30, 2005, we made follow-on investments of $1,877,847 in four portfolio companies and one venture capital
fund, including $780,347 of accrued interest, dividends, and original issue discount received in the form of additional portfolio securities.



For the nine months ended September 30, 2005, we received an additional 1,578 shares amounting to $157,800 of preferred stock of Sovereign Business
Forms, Inc. (Sovereign) in dividends. In addition, Sovereign elected to convert $182,248 of accrued interest into the balance of the 15% promissory notes due to us.



In January 2005, Spectrum Management, LLC elected to convert $223,657 of accrued interest into a new 12.75% promissory note
with interest and principal due at maturity on January 31, 2006.



During the first three months of 2005, all 1,033,457 shares of ENG common stock were sold, realizing a capital gain of $1,890,142.



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During the nine months ended September 30, 2005, Equicom, Inc. made nine principal payments on its
8.81% promissory note of $48,193, reducing the note balance to $984,107. Equicom also elected to convert $70,941 of accrued interest into the balance of the 10% promissory note due to us.



For the nine months ended September 30, 2005, we recorded $145,702 as amortization of original issue discount on our
non-interest bearing note receivable from ConGlobal Industries, Inc.



On June 15, 2005, the Fund made a $1,000,000 follow-on investment to ConGlobal Industries, Inc., through a 66.67% members interest in J.L. Madre, LLC. The 10% senior participating note due from J. L. Madre is to mature in
September 2007.



On May 16, 2005, we invested an
additional $97,500 in Sternhill Partners I, L.P. pursuant to a $3,000,000 commitment made in March 2000. There is $442,500 remaining on the commitment at September 30, 2005.



Subsequent Events



On October 3, 2005, the Fund sold U.S. Treasury bills for $40,000,000 and repaid the margin loan.



On October 11, 2005, the Fund received a cash dividend payment from
PalletOne, Inc. for $104,816. This amount was included in dividends receivable at September 30, 2005.



On November 3, 2005, the Fund received a cash payment from Doane PetCare Enterprises, Inc. (Doane) for $5,916,759, representing the
Funds entire interest in Doane excluding estimated escrow of $546,000.



|Item 3. | Quantitative and Qualitative Disclosure about Market Risk
|------- | ---------------------------------------------------------



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



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



Borrowings under our lines of credit expose the Fund to certain market risks.
Based on the average outstanding borrowings under our lines of credit for the six months ended September 30, 2004 of approximately $1,810,619, a change of one percent in the interest rate would have caused a change in interest expense of
approximately $14,000. This change would have resulted in a change of $0.002 in the net asset value per share at September 30, 2004. On July 28, 2005 the Fund formally terminated its revolving line of credit loan with The Frost National
Bank due to its present cash position and projected ongoing cash requirements, which made it unlikely that the existing line would be utilized in the foreseeable future. There were no borrowings outstanding during the nine months ended
September 30, 2005. See Managements



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Discussion and Analysis of Financial Condition and Results of Operations regarding our liquidity and capital resources.



On July 28, 2005 the Fund formally terminated its revolving line of
credit loan with The Frost National Bank due to its present cash position and projected ongoing cash requirements, which made it unlikely that the existing line would be utilized in the foreseeable future.



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



The Fund is classified as a non-diversified investment company
under the Investment Company Act, which means we are not limited in the proportion of our assets that may be invested in the securities of a single user. The value of one of our investments, in a business which manufactures residential windows
primarily for new construction, was 30% of our net asset value and 42% of our investments in portfolio company securities (at fair value) at September 30, 2005. Changes in business or industry trends or in the financial condition, results of
operations, or the markets assessment of any single portfolio company will affect our net asset value and the market price of our common stock to a greater extent than would be the case if we were a diversified company holding
numerous investments.



|Item 4. | Controls and Procedures
|------- | -----------------------



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



The Funds management, with the participation of the Funds Chairman and Chief Executive Officer and Chief
Financial Officer, have evaluated the effectiveness of the design and operations of the Funds disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of September 30,
2005. Based on their evaluation, the Funds Chairman and Chief Executive Officer and Chief Financial Officer concluded that the Funds disclosure controls and procedures are effective in timely making known to them material information
relating to the Fund required to be disclosed in the Funds reports file or submitted under the Exchange Act. There has been no change in the Funds internal control over financial reporting during the quarter ended September 30,
2005, that has materially affected, or is reasonably likely to materially affect, the Funds internal control over financial reporting.



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Part II. Other Information



|Item 6. | Exhibits
|------- | --------



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



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



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



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



Material Contracts



| | (a) | Investment Advisory Agreement dated June 30, 2005, between the Fund and Moore, Clayton Capital Advisors, Inc.
| | --- | -------------------------------------------------------------------------------------------------------------



| | (b) | Administration Agreement dated June 30, 2005, between the Fund and Equus Capital Administration Company.
| | --- | --------------------------------------------------------------------------------------------------------



| | (c) | Former 1997 Stock Incentive Plan [Incorporated by reference to Exhibit B to the Registrants Definitive Proxy Statement dated February 24, 1997.]
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) | Form of Indemnification Agreement between Equus II Incorporated and its directors and certain officers.
| | --- | -------------------------------------------------------------------------------------------------------



| | (e) | Form of Release Agreement between Equus II Incorporated and certain of its officers and former officers.
| | --- | --------------------------------------------------------------------------------------------------------



| | (f) | Joint Code of Ethics of Equus II Incorporated and Equus Capital Management Corporations (Rule 17j-1)
| | --- | ----------------------------------------------------------------------------------------------------



|14. | Code of Business Conduct and Ethics for Members of the Board of Directors, Officers, And Employees. [Incorporated by reference to Exhibit 14 to the Registrants Annual Report
of Form 10-K for the year ended December 31, 2004.]
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



|32. | Section 1350 Certification
|--- | --------------------------



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



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



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SIGNATURE



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



|                        |  |  |  |                             
|----------------------- |  |  |  | ----------------------------
|Date: November 14, 2005 |  |  |  | EQUUS II INCORPORATED       
|                        |  | 
|                        |  |  |  | /s/    HARRY O. NICODEMUS
IV
|                        |  |  |  | Harry O. Nicodemus IV       
|                        |  |  |  | Chief Financial Officer     



31