##### Table of Contents

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FORM 10-Q



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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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(Mark One)

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



For the quarterly period ended June 30, 2004 or



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



For the transition period
 to



Commission File Number 0-19509



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EQUUS II INCORPORATED

(Exact name of registrant as specified in its charter)



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



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



There were 6,414,668 shares of the
registrants common stock, $.001 par value, outstanding, as of August 13, 2004. The net asset value of a share at June 30, 2004 was $10.78.



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##### Table of Contents

EQUUS II INCORPORATED

(A Delaware Corporation)



INDEX



|          |  |                                                                                       |  |     
|--------- |  | ------------------------------------------------------------------------------------- |  | ----
|          |  |                                                                                       |  | PAGE
|PART I.   |  | FINANCIAL INFORMATION                                                                 |  |     
|          |  |                                                                                      
|Item 1.   |  | Financial Statements                                                                  |  |     
|          |  |                                                                                      
|          |  | Balance Sheets - June 30, 2004 and December 31, 2003                                  |  | 1   
|          |  |                                                                                      
|          |  | Statements of Operations - For the three months ended June 30, 2004 and 2003          |  | 2   
|          |  |                                                                                      
|          |  | - For the six months ended June 30, 2004 and 2003                                     |  | 3   
|          |  |                                                                                      
|          |  | Statements of Changes in Net Assets - For the six months ended June 30, 2004 and 2003 |  | 4   
|          |  |                                                                                      
|          |  | Statements of Cash Flows - For the six months ended June 30, 2004 and 2003            |  | 5   
|          |  |                                                                                      
|          |  | Selected Per Share Data and Ratios - For the six months ended June 30, 2004 and 2003  |  | 7   
|          |  |                                                                                      
|          |  | Schedule of Portfolio Securities - June 30, 2004                                      |  | 8   
|          |  |                                                                                      
|          |  | Notes to Financial Statements                                                         |  | 13  
|          |  |                                                                                      
|Item 2.   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 19  
|          |  |                                                                                      
|Item 3.   |  | Quantitative and Qualitative Disclosure about Market Risk                             |  | 25  
|          |  |                                                                                      
|Item 4.   |  | Controls and Procedures                                                               |  | 26  
|          |  |                                                                                      
|PART II.  |  | OTHER INFORMATION                                                                     |  |     
|          |  |                                                                                      
|Item 2.   |  | Changes in Securities, Use of Proceeds and Issuer Purchases on Equity Securities      |  | 27  
|          |  |                                                                                      
|Item 4.   |  | Submission of Matters to a Vote of Security Holders                                   |  | 27  
|          |  |                                                                                      
|Item 6.   |  | Exhibits and Reports on Form 8-K                                                      |  | 28  
|          | 
|SIGNATURE |  | 29                                                                                   



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##### Table of Contents

EQUUS II INCORPORATED

BALANCE SHEETS

JUNE 30, 2004 AND DECEMBER 31, 2003

(Unaudited)



|                                                                                                                      |  |      |             |   |      |   |             |  
|--------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                                                                      |  | 2004 |             |   | 2003 |  
|Assets                                                                                                                |  |      |             |   |      |   |             |  
|Investments in portfolio securities at fair value (cost $61,912,267 and $83,129,763, respectively)                    |  | $    | 46,546,430  |   |      | $ | 75,553,608  |  
|Restricted cash & temporary investments, at cost which approximates fair value                                        |  |      | 23,635,347  |   |      |   | 52,695,202  |  
|Cash                                                                                                                  |  |      | 6,647       |   |      |   | 11,296      |  
|Temporary cash investments, at cost which approximates fair value                                                     |  |      | 19,226,025  |   |      |   | 375,583     |  
|Accounts receivable                                                                                                   |  |      | 13,605      |   |      |   | 15,469      |  
|Accrued interest and dividends receivable                                                                             |  |      | 2,162,502   |   |      |   | 4,256,557   |  
|Escrowed receivables, at estimated fair value                                                                         |  |      | 2,513,000   |   |      |   |            |  
|                                                                                                                      |  |      |             |   |      |   |             |  
|Total Assets                                                                                                          |  |      | 94,103,556  |   |      |   | 132,907,715 |  
|                                                                                                                      |  |      |             |   |      |   |             |  
|Liabilities and net assets                                                                                            |  |      |             |   |      |   |             |  
|Liabilities:                                                                                                          |  |      |             |   |      |   |             |  
|Accounts payable                                                                                                      |  |      | 223,129     |   |      |   | 240,186     |  
|Dividends payable                                                                                                     |  |      |            |   |      |   | 2,287,194   |  
|Due to management company                                                                                             |  |      | 352,642     |   |      |   | 357,692     |  
|Revolving line of credit                                                                                              |  |      |            |   |      |   | 5,000,000   |  
|Payable for margin loan                                                                                               |  |      | 22,999,361  |   |      |   | 51,984,089  |  
|Note payable                                                                                                          |  |      |            |   |      |   | 1,500,000   |  
|                                                                                                                      |  |      |             |   |      |   |             |  
|Total Liabilities                                                                                                     |  |      | 23,575,132  |   |      |   | 61,369,161  |  
|                                                                                                                      |  |      |             |   |      |   |             |  
|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, 6,541,068 and 6,615,173 shares outstanding, respectively |  |      | 6,541       |   |      |   | 6,615       |  
|Additional paid-in capital                                                                                            |  |      | 83,620,846  |   |      |   | 84,497,378  |  
|Undistributed net investment income (loss)                                                                            |  |      | 2,825,726   |   |      |   | (695,282    | )
|Undistributed net capital gain (losses)                                                                               |  |      | (558,852    | ) |      |   | (4,694,002  | )
|Unrealized depreciation of portfolio securities, net                                                                  |  |      | (15,365,837 | ) |      |   | (7,576,155  | )
|                                                                                                                      |  |      |             |   |      |   |             |  
|Total net assets                                                                                                      |  | $    | 70,528,424  |   |      | $ | 71,538,554  |  
|                                                                                                                      |  |      |             |   |      |   |             |  
|Net assets per share                                                                                                  |  | $    | 10.78       |   |      | $ | 10.81       |  
|                                                                                                                      |  |      |             |   |      |   |             |  



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 JUNE 30, 2004 AND 2003

(Unaudited)



|                                                                               |  |      |             |   |      |   |            |  
|------------------------------------------------------------------------------ |  | ---- | ----------- | - | ---- | - | ---------- | -
|                                                                               |  | 2004 |             |   | 2003 |  
|Investment income:                                                             |  |      |             |   |      |   |            |  
|Interest income from portfolio securities                                      |  | $    | 455,641     |   |      | $ | 623,249    |  
|Dividend income from portfolio securities                                      |  |      | 48,100      |   |      |   | 3,751,140  |  
|Interest from temporary cash investments                                       |  |      | 24,848      |   |      |   | 714        |  
|Other income                                                                   |  |      | 30,000      |   |      |   |           |  
|                                                                               |  |      |             |   |      |   |            |  
|Total investment income                                                        |  |      | 558,589     |   |      |   | 4,375,103  |  
|                                                                               |  |      |             |   |      |   |            |  
|Expenses:                                                                      |  |      |             |   |      |   |            |  
|Management fees                                                                |  |      | 352,642     |   |      |   | 384,756    |  
|Director fees and expenses                                                     |  |      | 87,602      |   |      |   | 58,860     |  
|Professional fees                                                              |  |      | 227,369     |   |      |   | 71,072     |  
|Administrative fees                                                            |  |      | 12,500      |   |      |   | 12,500     |  
|Mailing, printing and other expenses                                           |  |      | 46,434      |   |      |   | 53,524     |  
|Interest expense                                                               |  |      | 12,358      |   |      |   | 340,283    |  
|Non-cash compensation expense (benefit)                                        |  |      | 23,629      |   |      |   | 206,044    |  
|Excise tax                                                                     |  |      |            |   |      |   | 36,832     |  
|Franchise taxes                                                                |  |      | 77,465      |   |      |   | 23,924     |  
|                                                                               |  |      |             |   |      |   |            |  
|Total expenses                                                                 |  |      | 839,999     |   |      |   | 1,187,795  |  
|                                                                               |  |      |             |   |      |   |            |  
|Net investment income                                                          |  |      | (281,410    | ) |      |   | 3,187,308  |  
|                                                                               |  |      |             |   |      |   |            |  
|Realized gain on sales of portfolio securities, net                            |  |      | 10,255,058  |   |      |   | 19,377     |  
|                                                                               |  |      |             |   |      |   |            |  
|Change in unrealized appreciation (depreciation) of portfolio securities, net: |  |      |             |   |      |   |            |  
|End of period                                                                  |  |      | (15,365,837 | ) |      |   | (881,020   | )
|Beginning of period                                                            |  |      | (6,778,991  | ) |      |   | 5,294,516  |  
|                                                                               |  |      |             |   |      |   |            |  
|Change in unrealized appreciation (depreciation), net                          |  |      | (8,586,846  | ) |      |   | (6,175,536 | )
|                                                                               |  |      |             |   |      |   |            |  
|Total increase (decrease) in net assets from operations                        |  | $    | 1,386,802   |   |      | $ | (2,968,851 | )
|                                                                               |  |      |             |   |      |   |            |  



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 SIX MONTHS ENDED JUNE 30, 2004 AND 2003

(Unaudited)



|                                                                               |  |      |             |   |      |   |            |  
|------------------------------------------------------------------------------ |  | ---- | ----------- | - | ---- | - | ---------- | -
|                                                                               |  | 2004 |             |   | 2003 |  
|Investment income:                                                             |  |      |             |   |      |   |            |  
|Interest income from portfolio securities                                      |  | $    | 1,151,895   |   |      | $ | 1,427,206  |  
|Dividend income from portfolio securities                                      |  |      | 3,620,100   |   |      |   | 3,794,140  |  
|Interest from temporary cash investments                                       |  |      | 25,110      |   |      |   | 3,123      |  
|Other income                                                                   |  |      | 30,000      |   |      |   |           |  
|                                                                               |  |      |             |   |      |   |            |  
|Total investment income                                                        |  |      | 4,827,105   |   |      |   | 5,224,469  |  
|                                                                               |  |      |             |   |      |   |            |  
|Expenses:                                                                      |  |      |             |   |      |   |            |  
|Management fees                                                                |  |      | 701,231     |   |      |   | 783,326    |  
|Director fees and expenses                                                     |  |      | 155,259     |   |      |   | 113,416    |  
|Professional fees                                                              |  |      | 288,268     |   |      |   | 138,196    |  
|Administrative fees                                                            |  |      | 25,000      |   |      |   | 25,000     |  
|Mailing, printing and other expenses                                           |  |      | 67,812      |   |      |   | 59,972     |  
|Interest expense                                                               |  |      | 263,713     |   |      |   | 523,347    |  
|Non-cash compensation expense (benefit)                                        |  |      | (276,851    | ) |      |   | 206,044    |  
|Excise tax                                                                     |  |      |            |   |      |   | 36,832     |  
|Franchise taxes                                                                |  |      | 81,665      |   |      |   | 23,924     |  
|                                                                               |  |      |             |   |      |   |            |  
|Total expenses                                                                 |  |      | 1,306,097   |   |      |   | 1,910,057  |  
|                                                                               |  |      |             |   |      |   |            |  
|Net investment income                                                          |  |      | 3,521,008   |   |      |   | 3,314,412  |  
|                                                                               |  |      |             |   |      |   |            |  
|Realized gain (loss) on sales of portfolio securities, net                     |  |      | 4,135,150   |   |      |   | (8,081,347 | )
|                                                                               |  |      |             |   |      |   |            |  
|Change in unrealized appreciation (depreciation) of portfolio securities, net: |  |      |             |   |      |   |            |  
|End of period                                                                  |  |      | (15,365,837 | ) |      |   | (881,020   | )
|Beginning of period                                                            |  |      | (7,576,155  | ) |      |   | (5,417,014 | )
|                                                                               |  |      |             |   |      |   |            |  
|Change in unrealized appreciation (depreciation), net                          |  |      | (7,789,682  | ) |      |   | 4,535,994  |  
|                                                                               |  |      |             |   |      |   |            |  
|Total increase (decrease) in net assets from operations                        |  | $    | (133,524    | ) |      | $ | (230,941   | )
|                                                                               |  |      |             |   |      |   |            |  



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 SIX MONTHS ENDED JUNE 30, 2004 AND 2003

(Unaudited)



|                                                                    |  |      |            |   |      |   |            |  
|------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                    |  | 2004 |            |   | 2003 |  
|Operations:                                                         |  |      |            |   |      |   |            |  
|Net investment income                                               |  | $    | 3,521,008  |   |      | $ | 3,314,412  |  
|Realized gain (loss) on sales of portfolio securities, net          |  |      | 4,135,150  |   |      |   | (8,081,347 | )
|Unrealized appreciation (depreciation) of portfolio securities, net |  |      | (7,789,682 | ) |      |   | 4,535,994  |  
|                                                                    |  |      |            |   |      |   |            |  
|Increase (decrease) in net assets from operations                   |  |      | (133,524   | ) |      |   | (230,941   | )
|                                                                    |  |      |            |   |      |   |            |  
|Capital Transactions:                                               |  |      |            |   |      |   |            |  
|Non-cash compensation expense (benefit)                             |  |      | (302,402   | ) |      |   | 206,044    |  
|Capital stock repurchased                                           |  |      | (574,204   | ) |      |   |           |  
|                                                                    |  |      |            |   |      |   |            |  
|Increase (decrease) in net assets from capital transactions         |  |      | (876,606   | ) |      |   | 206,044    |  
|                                                                    |  |      |            |   |      |   |            |  
|Increase (decrease) in net assets                                   |  |      | (1,010,130 | ) |      |   | (24,897    | )
|Net assets at beginning of period                                   |  |      | 71,538,554 |   |      |   | 76,976,095 |  
|                                                                    |  |      |            |   |      |   |            |  
|Net assets at end of period                                         |  | $    | 70,528,424 |   |      | $ | 76,951,198 |  
|                                                                    |  |      |            |   |      |   |            |  



The accompanying notes
are an

integral part of these financial statements.



4



---

##### Table of Contents

EQUUS II INCORPORATED

STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003

(Unaudited)



|                                                                  |  |      |              |   |      |   |             |  
|----------------------------------------------------------------- |  | ---- | ------------ | - | ---- | - | ----------- | -
|                                                                  |  | 2004 |              |   | 2003 |  
|Cash flows from operating activities:                             |  |      |              |   |      |   |             |  
|Interest and dividends received                                   |  | $    | 5,718,631    |   |      | $ | 289,451     |  
|Cash paid to management company, directors, bank and suppliers    |  |      | (1,630,605   | ) |      |   | (1,800,818  | )
|Purchase of portfolio securities                                  |  |      | (596,800     | ) |      |   | (1,205,000  | )
|Proceeds from sales of portfolio securities                       |  |      | 24,393,973   |   |      |   | 1,436,040   |  
|Principal payments from portfolio securities                      |  |      | 245,000      |   |      |   | 2,074,547   |  
|Sales (purchases) of restricted cash & temporary investments, net |  |      | 29,059,855   |   |      |   | 1,537,152   |  
|Decrease in accounts receivable                                   |  |      | 1,864        |   |      |   |            |  
|Advances to portfolio companies                                   |  |      |             |   |      |   | (36         | )
|                                                                  |  |      |              |   |      |   |             |  
|Net cash provided by operating activities                         |  |      | 57,191,918   |   |      |   | 2,331,336   |  
|                                                                  |  |      |              |   |      |   |             |  
|Cash flows from financing activities:                             |  |      |              |   |      |   |             |  
|Borrowings under margin account                                   |  |      | 72,998,161   |   |      |   | 110,897,876 |  
|Repayments under margin account                                   |  |      | (101,982,887 | ) |      |   | (54,959,521 | )
|Advances from bank                                                |  |      | 3,034,044    |   |      |   | 2,325,000   |  
|Repayments to bank                                                |  |      | (8,034,044   | ) |      |   | (61,100,000 | )
|Dividends paid                                                    |  |      | (2,287,195   | ) |      |   |            |  
|Repurchase of common stock                                        |  |      | (574,204     | ) |      |   |            |  
|Payment of promissory note payable                                |  |      | (1,500,000   | ) |      |   |            |  
|                                                                  |  |      |              |   |      |   |             |  
|Net cash used by financing activities                             |  |      | (38,346,125  | ) |      |   | (2,836,645  | )
|                                                                  |  |      |              |   |      |   |             |  
|Net increase (decrease) in cash and cash equivalents              |  |      | 18,845,793   |   |      |   | (505,309    | )
|Cash and cash equivalents at beginning of period                  |  |      | 386,879      |   |      |   | 516,678     |  
|                                                                  |  |      |              |   |      |   |             |  
|Cash and cash equivalents at end of period                        |  | $    | 19,232,672   |   |      | $ | 11,369      |  
|                                                                  |  |      |              |   |      |   |             |  



The accompanying notes
are an

integral part of these financial statements.



5



---

##### Table of Contents

EQUUS II INCORPORATED

STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003

(Unaudited)

(Continued)



|                                                                                                                |  |      |            |   |      |   |            |  
|--------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                |  | 2004 |            |   | 2003 |  
|Reconciliation of increase in net assets from operations to net cash provided by operating activities:          |  |      |            |   |      |   |            |  
|                                                                                                                |  |     
|(Decrease) in net assets from operations                                                                        |  | $    | (133,524   | ) |      | $ | (230,941   | )
|                                                                                                                |  |     
|Adjustments to reconcile (decrease) in net assets from operations to net cash provided by operating activities: |  |      |            |   |      |   |            |  
|                                                                                                                |  |     
|Realized (gain) loss on sales of portfolio securities, net                                                      |  |      | (4,135,150 | ) |      |   | 8,081,347  |  
|Change in unrealized (appreciation) depreciation, net                                                           |  |      | 7,789,682  |   |      |   | (4,535,994 | )
|Accrued interest and dividends exchanged for portfolio securities                                               |  |      | (1,202,528 | ) |      |   | (624,112   | )
|(Increase) decrease in accrued interest receivable                                                              |  |      | 2,094,055  |   |      |   | (4,310,906 | )
|Non-cash compensation expense (benefit)                                                                         |  |      | (276,851   | ) |      |   | 206,044    |  
|(Decrease) in accounts payable                                                                                  |  |      | (42,607    | ) |      |   | (96,681    | )
|(Decrease) in due to management company                                                                         |  |      | (5,051     | ) |      |   | (124       | )
|Purchase of portfolio securities                                                                                |  |      | (596,800   | ) |      |   | (1,205,000 | )
|Proceeds from sales of portfolio securities                                                                     |  |      | 24,393,973 |   |      |   | 1,436,040  |  
|Principal payments from portfolio securities                                                                    |  |      | 245,000    |   |      |   | 2,074,547  |  
|Sales (purchases) of restricted cash & temporary investments, net                                               |  |      | 29,059,855 |   |      |   | 1,537,152  |  
|Decrease in accounts receivable                                                                                 |  |      | 1,864      |   |      |   |           |  
|Advances to portfolio companies                                                                                 |  |      |           |   |      |   | (36        | )
|                                                                                                                |  |      |            |   |      |   |            |  
|Net cash provided by operating activities                                                                       |  | $    | 57,191,918 |   |      | $ | 2,331,336  |  
|                                                                                                                |  |      |            |   |      |   |            |  



The accompanying notes
are an

integral part of these financial statements.



6



---

##### Table of Contents

EQUUS II INCORPORATED

SUPPLEMENTAL INFORMATION  SELECTED PER SHARE DATA AND RATIOS

FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003

(Unaudited)



|                                                                                 |  |      |       |   |      |   |       |  
|-------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                                                                 |  | 2004 |       |   | 2003 |  
|Investment income                                                                |  | $    | 0.73  |   |      | $ | 0.84  |  
|                                                                                 |  |     
|Expenses                                                                         |  |      | 0.20  |   |      |   | 0.31  |  
|                                                                                 |  |      |       |   |      |   |       |  
|Net investment income                                                            |  |      | 0.53  |   |      |   | 0.53  |  
|                                                                                 |  |     
|Realized gain (loss) on sale of portfolio securities, net                        |  |      | 0.63  |   |      |   | (1.30 | )
|                                                                                 |  |     
|Increase (decrease) in unrealized depreciation of portfolio securities, net      |  |      | (1.18 | ) |      |   | 0.73  |  
|                                                                                 |  |      |       |   |      |   |       |  
|(Decrease) in net assets from operations                                         |  |      | (0.02 | ) |      |   | (0.04 | )
|                                                                                 |  |      |       |   |      |   |       |  
|Capital Transactions:                                                            |  |      |       |   |      |   |       |  
|Non-cash compensation expense (benefit)                                          |  |      | (0.04 | ) |      |   | 0.04  |  
|Common stock repurchases                                                         |  |      | 0.03  |   |      |   |      |  
|                                                                                 |  |      |       |   |      |   |       |  
|Increase (decrease) in net assets from capital transactions                      |  |      | (0.01 | ) |      |   | 0.04  |  
|                                                                                 |  |      |       |   |      |   |       |  
|Net increase (decrease) in net assets                                            |  |      | (0.03 | ) |      |   |      |  
|                                                                                 |  |     
|Net assets at beginning of period                                                |  |      | 10.81 |   |      |   | 12.35 |  
|                                                                                 |  |      |       |   |      |   |       |  
|Net assets at end of period                                                      |  | $    | 10.78 |   |      | $ | 12.35 |  
|                                                                                 |  |      |       |   |      |   |       |  
|Net assets at end of period-diluted                                              |  | $    | 10.75 |   |      | $ | 12.28 |  
|                                                                                 |  |      |       |   |      |   |       |  
|Weighted average number of shares outstanding during period, in thousands        |  |      | 6,597 |   |      |   | 6,233 |  
|                                                                                 |  |     
|Market value                                                                     |  | $    | 7.72  |   |      | $ | 7.96  |  
|                                                                                 |  |     
|Ratio of expenses to average net assets                                          |  |      | 1.83  | % |      |   | 2.48  | %
|                                                                                 |  |     
|Ratio of net investment income to average net assets                             |  |      | 4.96  | % |      |   | 4.31  | %
|                                                                                 |  |     
|Ratio of increase (decrease) in net assets from operations to average net assets |  |      | -0.19 | % |      |   | -0.30 | %
|                                                                                 |  |     
|Total return on market price                                                     |  |      | -4.10 | % |      |   | 19.88 | %



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

JUNE 30, 2004

(Unaudited)



|                                                                                                 |  |                           |  |      |           |            |   |           
|------------------------------------------------------------------------------------------------ |  | ------------------------- |  | ---- | --------- | ---------- | - | ----------
|Portfolio Company                                                                                |  | Date of InitialInvestment |  | Cost |           | Fair Value
|Alenco Window Holdings, LLC                                                                      |  | February 2001             |  |      |           |            |   |           
|(formerly Reliant Window Holdings, LLC)                                                          |  |                           |  |      |           |            |   |           
|Holds cash and escrowed receivables                                                              |  |                           |  |      |           |            |   |           
|- 32.25% membership interest                                                                     |  |                           |  | $    |          |            | $ | 460,000   
|                                                                                                 |  |                           | 
|American Trenchless Technology, LLC                                                              |  | February 2001             |  |      |           |            |   |           
|Boring, tunneling and directional drilling                                                       |  |                           |  |      |           |            |   |           
|- 4,160 shares of common stock                                                                   |  |                           |  |      | 1,324,694 |            |   |          
|- 50% membership interest in Glendale, LLC                                                       |  |                           |  |      | 300,000   |            |   |          
|                                                                                                 |  |                           | 
|The Bradshaw Group                                                                               |  | May 2000                  |  |      |           |            |   |           
|Sells and services midrange and high-speed printing equipment                                    |  |                           |  |      |           |            |   |           
|- Prime + 2% promissory note with a face amount of $398,383(2)                                   |  |                           |  |      |          |            |   |          
|- 15% promissory note(2)                                                                         |  |                           |  |      | 459,545   |            |   |          
|- 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 |            |   | 15,400,000
|- Warrants to buy 10,000 shares of common stock for $12.50 per share through June 2009           |  |                           |  |      |          |            |   |          
|                                                                                                 |  |                           | 
|CMC Investments, LLC                                                                             |  | December 2001             |  |      |           |            |   |           
|Holds cash                                                                                       |  |                           |  |      |           |            |   |           
|- 21% membership interest                                                                        |  |                           |  |      | 525,000   |            |   | 65,000    
|                                                                                                 |  |                           | 
|Container Acquisition, Inc.                                                                      |  | February 1997             |  |      |           |            |   |           
|Shipping container repair & storage                                                              |  |                           |  |      |           |            |   |           
|- Promissory note                                                                                |  |                           |  |      | 3,797,418 |            |   | 1,100,000 
|- 78,318 shares of preferred stock                                                               |  |                           |  |      | 7,831,800 |            |   |          
|- Conditional warrant to buy up to 370,588 shares of common stock at $0.01 through February 2007 |  |                           |  |      | 1,000     |            |   |          
|- 1,370,000 shares of common stock                                                               |  |                           |  |      | 1,370,000 |            |   |          
|- 87% membership interest in CCI-ANI Finance, LLC                                                |  |                           |  |      | 1,571,000 |            |   | 650,000   



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

JUNE 30, 2004

(Unaudited)

(Continued)



|                                                                                            |  |                           |  |      |           |            |   |          
|------------------------------------------------------------------------------------------- |  | ------------------------- |  | ---- | --------- | ---------- | - | ---------
|Portfolio Company                                                                           |  | Date of InitialInvestment |  | Cost |           | Fair Value
|Doane PetCare Enterprises, Inc.                                                             |  | October 1995              |  |      |           |            |   |          
|Manufacturer of private label pet food                                                      |  |                           |  |      |           |            |   |          
|- 1,943,598 shares of common stock                                                          |  |                           |  | $    | 3,936,644 |            | $ | 500,000  
|                                                                                            |  |                           | 
|The Drilltec Corporation                                                                    |  | August 1998               |  |      |           |            |   |          
|Provides protection & packaging for pipe & tubing                                           |  |                           |  |      |           |            |   |          
|- Prime + 9.75% promissory note(2)                                                          |  |                           |  |      | 1,000,000 |            |   |         
|                                                                                            |  |                           | 
|ENGlobal, Inc. (AMEX: ENG)                                                                  |  | December 2001             |  |      |           |            |   |          
|Engineering and consulting services                                                         |  |                           |  |      |           |            |   |          
|- 9.5% promissory note(1)                                                                   |  |                           |  |      | 2,120,000 |            |   | 2,120,000
|- 1,216,935 shares of common stock                                                          |  |                           |  |      | 711,304   |            |   | 1,706,295
|- Options to acquire 200,000 shares of common stock exercisable only upon change of control |  |                           |  |      |          |            |   |         
|                                                                                            |  |                           | 
|Equicom, Inc.                                                                               |  | July 1997                 |  |      |           |            |   |          
|Radio stations                                                                              |  |                           |  |      |           |            |   |          
|- 10% promissory notes                                                                      |  |                           |  |      | 3,806,730 |            |   | 2,000,000
|- 657,611 shares of preferred stock                                                         |  |                           |  |      | 6,576,110 |            |   |         
|- 452,000 shares of common stock                                                            |  |                           |  |      | 141,250   |            |   |         
|                                                                                            |  |                           | 
|Jones Industrial Services, Inc.                                                             |  | July 1998                 |  |      |           |            |   |          
|Field service for petrochemical & power generation industries                               |  |                           |  |      |           |            |   |          
|- 35,000 shares of preferred stock                                                          |  |                           |  |      | 3,500,000 |            |   | 3,200,000
|- Warrant to buy 63,637 shares of common stock at $0.01 through June 2008                   |  |                           |  |      | 100       |            |   |         
|                                                                                            |  |                           | 
|PalletOne, Inc.                                                                             |  | October 2001              |  |      |           |            |   |          
|Wooden pallet manufacturer                                                                  |  |                           |  |      |           |            |   |          
|- 3,811,500 shares of preferred stock(1)(3)                                                 |  |                           |  |      | 3,811,500 |            |   | 4,000,000
|- 350,000 shares of common stock                                                            |  |                           |  |      | 350,000   |            |   |         



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

JUNE 30, 2004

(Unaudited)

(Continued)



|                                                                                       |  |                           |  |      |            |            |   |           
|-------------------------------------------------------------------------------------- |  | ------------------------- |  | ---- | ---------- | ---------- | - | ----------
|Portfolio Company                                                                      |  | Date of InitialInvestment |  | Cost |            | Fair Value
|Sovereign Business Forms, Inc.                                                         |  | August 1996               |  |      |            |            |   |           
|Business forms manufacturer                                                            |  |                           |  |      |            |            |   |           
|- 15% promissory notes(1)                                                              |  |                           |  | $    | 4,555,137  |            | $ | 4,555,137 
|- 21,863 shares of preferred stock(1)(3)                                               |  |                           |  |      | 2,186,300  |            |   | 2,186,300 
|- Warrant to buy 551,894 shares of common stock at $1 per share through August 2006    |  |                           |  |      |           |            |   | 263,600   
|- Warrant to buy 25,070 shares of common stock at $1.25 per share through October 2007 |  |                           |  |      |           |            |   | 5,700     
|- Warrant to buy 273,450 shares of common stock at $1 per share through October 2009   |  |                           |  |      |           |            |   | 130,700   
|                                                                                       |  |                           | 
|Spectrum Management, LLC                                                               |  | December 1999             |  |      |            |            |   |           
|Business & personal property protection                                                |  |                           |  |      |            |            |   |           
|- 285,000 units of Class A equity interest                                             |  |                           |  |      | 2,850,000  |            |   | 4,500,000 
|- 16% subordinated promissory note(1)                                                  |  |                           |  |      | 1,303,698  |            |   | 1,303,698 
|                                                                                       |  |                           | 
|Sternhill Partners I, LP                                                               |  | March 2000                |  |      |            |            |   |           
|Venture capital fund                                                                   |  |                           |  |      |            |            |   |           
|- 3% limited partnership interest                                                      |  |                           |  |      | 2,326,604  |            |   | 750,000   
|                                                                                       |  |                           | 
|Turf Grass Holdings, Inc.                                                              |  | May 1999                  |  |      |            |            |   |           
|Grows, sells & installs warm season turfgrasses                                        |  |                           |  |      |            |            |   |           
|- 1,000 shares of common stock                                                         |  |                           |  |      | 949,632    |            |   | 900,000   
|                                                                                       |  |                           | 
|Vanguard VII, L.P.                                                                     |  | June 2000                 |  |      |            |            |   |           
|Venture capital fund                                                                   |  |                           |  |      |            |            |   |           
|- 1.3% limited partnership interest                                                    |  |                           |  |      | 1,800,000  |            |   | 750,000   
|                                                                                       |  |                           |  |      |            |            |   |           
|Total                                                                                  |  |                           |  | $    | 61,912,267 |            | $ | 46,546,430
|                                                                                       |  |                           |  |      |            |            |   |           

---

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

|(2) | As of June 30, 2004, 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

JUNE 30, 2004

(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 American Trenchless Technology, LLC (ATT), Champion Window Holdings, Inc., Container Acquisition, 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. The fair value of the Funds investment in ENGlobal, Inc. (ENG) includes a discount of $298,648 from the closing market price to reflect the
estimated effect of restrictions on the sale of such securities at June 30, 2004.



As defined in the Investment Company Act of 1940, at June 30, 2004, the Fund was considered to have a controlling interest in Champion Window Holdings, Inc., Container Acquisition, Inc., The Drilltec Corporation,
Equicom, Inc. (Equicom), PalletOne, Inc., Sovereign Business Forms, Inc., and Spectrum Management LLC.



Income was earned in the amount of $4,668,007 and $4,556,184 for the six months ended June 30, 2004 and 2003, respectively, on portfolio securities of
companies in which the Fund has a controlling interest. Income was earned in the amount of $103,988 and $641,956 for the six months ended June 30, 2004 and 2003, respectively, on portfolio securities of companies that are affiliates of the Fund but
are not controlled by the Fund.



As defined in the Investment
Company Act of 1940, 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), ENG, Equicom, Sternhill Partners I, L.P., and Vanguard VII, L.P. The Fund provides significant managerial assistance to portfolio companies that comprise 83% of the total
value of the investments in portfolio companies at June 30, 2004.



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

JUNE 30, 2004

(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 June 30, 2004:



|                                      |  |      |            |            |   |                        |  |       
|------------------------------------- |  | ---- | ---------- | ---------- | - | ---------------------- |  | ------
|Type of Securities                    |  | Cost |            | Fair Value |   | Percentageof FairValue
|Common Stock                          |  | $    | 10,255,324 |            | $ | 18,506,295             |  | 39.8% 
|Secured and Subordinated Debt         |  |      | 17,042,529 |            |   | 11,078,835             |  | 23.8% 
|Preferred Stock                       |  |      | 25,240,709 |            |   | 9,386,300              |  | 20.2% 
|Limited Liability Company Investments |  |      | 5,246,000  |            |   | 5,675,000              |  | 12.2% 
|Options and Warrants                  |  |      | 1,101      |            |   | 400,000                |  | 0.9%  
|Limited Partnership Investments       |  |      | 4,126,604  |            |   | 1,500,000              |  | 3.1%  
|                                      |  |      |            |            |   |                        |  |       
|Total                                 |  | $    | 61,912,267 |            | $ | 46,546,430             |  | 100.0%
|                                      |  |      |            |            |   |                        |  |       



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

|
|



|                                    |  |            |            |            |       
|----------------------------------- |  | ---------- | ---------- | ---------- | ------
|Industry                            |  | Fair Value |            | Percentage
|Business Products and Services      |  | $          | 12,945,135 |            | 27.8% 
|Consumer Goods                      |  |            | 500,000    |            | 1.1%  
|Engineering and Consulting Services |  |            | 3,826,295  |            | 8.2%  
|Industrial Products and Services    |  |            | 3,200,000  |            | 6.9%  
|Media                               |  |            | 2,000,000  |            | 4.3%  
|Residential Building Products       |  |            | 15,860,000 |            | 34.1% 
|Shipping Products and Services      |  |            | 5,750,000  |            | 12.4% 
|Turfgrass and Landscape Products    |  |            | 900,000    |            | 1.9%  
|Venture Funds and Other             |  |            | 1,565,000  |            | 3.3%  
|                                    |  |            |            |            |       
|Total                               |  | $          | 46,546,430 |            | 100.0%
|                                    |  |            |            |            |       



The accompanying notes
are an

integral part of these financial statements.



12



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##### Table of Contents

EQUUS II INCORPORATED

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2004 AND 2003

(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 Investment Company Act of 1940. For tax purposes, the Fund has elected to be
treated as a regulated investment company (RIC). The Fund has entered into a management agreement with Equus Capital Management Corporation, a Delaware corporation (the Management Company).



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 generally accepted accounting principles 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, 2003 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  At June 30, 2004, the Fund had $19,232,672 in cash and cash equivalents, most of which was invested in money market accounts.



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.



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.



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 Investment Company Act of 1940 and the Securities Exchange Act of 1934. At June 30, 2004, the Fund had repurchased 74,105 shares of common stock (of which 50,000 shares were sold by a
significant shareholder) for a total of $574,204. Since the shares were purchased at a discount to net asset value, these purchases added $0.03 to the net asset value per share at June 30, 2004.



13



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##### Table of Contents

Effective March 15, 2004, the Fund entered into a $6,500,000 revolving line of credit loan with Frost
National Bank. The new line of credit extends through March 31, 2005. The proceeds of the new line of credit were utilized to payoff the previous line of credit. The Fund had no balance outstanding under the line of credit at June 30, 2004.



The new loan is collateralized by the Funds investments
in portfolio securities. The provisions of the new revolver include a borrowing base which cannot exceed 10% of the total value of eligible portfolio securities, as defined. As of August 14, 2004, the Funds availability under the revolving
line of credit is approximately $4 million.



Interest on the
new revolving line of credit is payable quarterly at a rate of .50% above the Frost National Bank floating prime rate, adjusted daily. A facility fee of .25% per annum on the unused portion of the line of credit is payable quarterly in arrears and
the Fund paid a commitment fee of $65,000 at the closing of the loan. The line of credit restricts the Funds ability to incur additional indebtedness, pay dividends, merge with another entity, dispose of assets outside the ordinary course of
business and engage in certain transactions with affiliates.



Under certain circumstances, the Fund may be called on to make follow-on investments in certain Portfolio Companies. As of June 30, 2004, the Fund has committed to invest up to an additional $1.6 million in the two venture capital funds and
one of its portfolio companies.



At June 30, 2003, the Fund had
$12 million outstanding on its line of credit and was being charged interest at a rate of 8.25%. The average daily balances outstanding on the Funds line of credit during the six months ended June 30, 2004, and 2003 were $2,725,877 and
$11,624,144, respectively. During the six months ended June 30, 2004 and 2003, the amount of interest and loan fees paid in cash were $292,455 and $524,976, respectively.



RIC Borrowings, Restricted Cash and Temporary Investments - Because of the nature and size of its portfolio
investments, the Fund periodically borrows money utilizing a margin account with a securities brokerage firm to make qualifying investments to maintain its tax status as a RIC under the Internal Revenue Code. As of June 30, 2004 and 2003, the Fund
borrowed $22,999,361 and $55,938,355, respectively. The Fund collateralized such borrowings with restricted cash and temporary investments of $23,635,347 and $59,804,792, at June 30, 2004 and 2003, respectively. The temporary qualifying investments
were sold, and the total amount borrowed was repaid in July 2004 and 2003, 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 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:



14



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##### Table of Contents

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 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 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 Management Company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 Management Company 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.



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 $46,546,430 (including $1,706,295 in publicly-traded securities) and $75,553,608 (including $3,494,377 in publicly-traded securities) at June 30, 2004 and December 31, 2003, 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.



15



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##### Table of Contents

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 - Upon the sale of securities of certain portfolio companies, the Fund and other sellers were
required to place a portion of the proceeds into escrow to secure representations and warranties made to the buyers. If no claims are made against the escrowed amounts, the Fund could receive up to approximately $3.5 million in additional sales
proceeds over the next three years ending in May, 2007. The Fund has recorded these escrowed amounts at their estimated fair value of $2,513,000 at June 30, 2004.



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



Stock-Based Compensation The 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 six months ended June 30, 2004 and 2003, respectively,
would have been:



|                                                                                                                  |  |      |          |   |      |   |          |  
|----------------------------------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                                                                                                  |  | 2004 |          |   | 2003 |  
|(Decrease) in net assets from operations, as reported                                                             |  | $    | (133,524 | ) |      | $ | (230,941 | )
|Stock-based employee compensation expense (benefit) included in increase (decrease) in net assets from operations |  |      | (276,851 | ) |      |   | 206,044  |  
|Stock-based employee compensation expense determined using fair value method                                      |  |      | (24,837  | ) |      |   | (37,272  | )
|                                                                                                                  |  |      |          |   |      |   |          |  
|Pro forma (decrease) in net assets from operations                                                                |  | $    | (435,212 | ) |      | $ | (62,169  | )
|                                                                                                                  |  |      |          |   |      |   |          |  
|Net decrease in net assets per share, as reported                                                                 |  | $    | (0.03    | ) |      | $ |         |  
|                                                                                                                  |  |      |          |   |      |   |          |  
|Net decrease in net assets per share, proforma                                                                    |  | $    | (0.07    | ) |      | $ | (0.01    | )
|                                                                                                                  |  |      |          |   |      |   |          |  



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.



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(4) Management



The Fund has entered into a management agreement with the Management Company. Pursuant to such agreement, the Management
Company performs certain services, including management and administrative services necessary for the operation of the Fund. The Management Company receives a management fee at an annual rate of 2% of the net assets of the Fund, paid quarterly in
arrears. The Management Company also receives compensation for providing certain investor communication services. The accompanying Statements of Operations include $25,000 related to such services for each of the six months ended June 30, 2004 and
2003. The management fees paid by the Fund represent the Management Companys primary source of revenue and support. The Management Company is controlled by a privately-owned corporation.



As compensation for services to the Fund, each director who is not an officer
of the Fund receives an annual fee of $20,000 paid quarterly in arrears, a fee of $2,000 for each meeting of the Board of Directors attended in person, a fee of $1,000 for participation in each telephonic meeting of the Board of Directors and a fee
of $1,000 for each committee meeting attended, and reimbursement of all out-of-pocket expenses relating to attendance at such meetings. In addition, each director who is not an officer of the Fund is granted incentive stock options to purchase
shares of the Funds stock from time to time. (See Note 8). Certain officers of the Fund serve as directors of Portfolio Companies, and may receive and retain fees, including non-employee director stock options, from such Portfolio Companies in
consideration for such service.



The Management Agreement will
continue in effect until June 30, 2005, and from year-toyear thereafter provided such continuance is approved at least annually by (i) a vote of a majority of the outstanding shares of the Fund or (ii) a majority of the directors who are not
interested persons of the Fund, at a meeting called for the purpose of voting on such approval. The Management Agreement may be terminated at any time, without the payment of any penalty, by a vote of the Board of Directors of the Fund
or the holders of a majority of the Funds shares on 60 days written notice to the Management Company, and would automatically terminate in the event of its assignment (as defined in the Investment Company Act).



(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 for 2003 under income tax regulations. As of December 31, 2003, the Fund had a capital loss carryforward of $8,023,608, which may be used to offset future taxable capital
gains. If not utilized, the loss carryforward will expire beginning in 2007.



(6) Dividends



The Fund
declared no dividends during the six months ended June 30, 2004 and 2003. On January 16, 2004, the Fund paid $2,287,194 in cash for a dividend which had been declared in the fourth quarter of 2003.



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(7) Portfolio Securities



During the six months ended June 30, 2004, the Fund made follow-on
investments of $1,799,328 in four companies and two venture funds, including $302,528 in accrued interest and dividends in the form of additional portfolio securities and $949,632 recorded as the cost of securities acquired in an exchange for
securities of a new company that acquired the business and assets of a former portfolio company. In addition, the Fund realized a net capital gain of $4,135,150 during the six months ended June 30, 2004.



During the six months ended June 30, 2003, the Fund made follow-on
investments of $1,829,112 in eight companies, including $624,112 in accrued interest and dividends in the form of additional portfolio securities and accretion of original issue discount on promissory notes. In addition, the Fund realized a net
capital loss of $8,081,347 during the six months ended June 30, 2003.



(8) Stock Option Plan



The Equus II Incorporated 1997 Stock Incentive Plan (Stock Incentive Plan) authorizes the Fund to issue options to the directors and officers of the Fund in an aggregate amount of up to 20% of the outstanding shares of common
stock of the Fund. The Stock Incentive Plan 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 are issued to the officers of the Fund at the discretion of the compensation committee. The options have a ten year life and vest 50% six months after the grant date and 162/3% on the first, second and third anniversaries of the date of the grant.



Under the Stock Incentive Plan, options to purchase 1,049,200 and 1,100,000 shares of the Funds common stock with a
weighted average exercise price of $8.46 and $8.41 per share were outstanding at June 30, 2004 and 2003, respectively. Of these options, 855,950 and 750,188 shares, with a weighted average exercise price per share of $8.62 and $8.75 were exercisable
at June 30, 2004 and 2003, respectively. Of the outstanding options at June 30, 2004, 992,000 have exercise prices ranging from $7.43 to $9.03 and the remaining options have exercise prices ranging from $14.15 to $24.95. These options expire in
November 2007 through May 2014.



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 May 12, 2003, options to acquire a total of 13,200 shares at $7.43 per share were issued to the non-officer directors.



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. Generally accepted accounting principles require that the options be accounted for using variable plan accounting. Variable plan accounting resulted in
non-cash compensation expense (benefit) of ($276,851) during the six months ended June 30, 2004.



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. 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. 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.
Accordingly, the Fund may be required to obtain a new exemptive order from the SEC permitting the Fund to issue dividend equivalent rights. Based on the ongoing discussion with the SEC, the Fund has not recorded any associated compensation expense
for the 2003 dividend applicable to dividend equivalent rights, and the Fund has withdrawn the exemptive order application previously filed in January 2002. If the



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dividend equivalent rights had been in effect, additional non-cash compensation expense of approximately $650,000, with
an offsetting credit to additional paid in capital, would have been recognized under variable plan accounting in the fourth quarter of 2003. Such recognition of the non-cash compensation expense would not have changed the Funds reported net
assets.



On September 30, 1999, options to purchase 719,794
shares of common stock of the Fund were exercised by the officers of the Fund for $15.45 per share. The exercise price of $11,124,086 was paid in the form of promissory notes from the officers to the Fund. In September 2001, the officers of the Fund
surrendered 802,662 shares in satisfaction of their notes receivable and accrued interest aggregating $10,505,551.



During its review of the exemptive application discussed above, the SEC staff also raised certain issues with respect to the manner in which the officer
notes were settled. The Fund has responded to the staffs questions and supplied additional information. Although the ultimate resolution of this matter cannot be determined at this time, management of the Fund believes that the resolution of
this matter will not have an adverse financial impact on the Fund.



If all outstanding options for which the average market price exceeds the exercise price at June 30, 2004 and December 31, 2003, had been exercised, the funds net asset value would have been reduced by $0.03 and $0.06 per share,
respectively, 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 July 1, 2004, the Fund sold U.S. Treasury bills for $23,000,000 and repaid the margin loan.



The Fund may repurchase its shares, subject to the restrictions of the
Investment Company Act of 1940 and the Securities Exchange Act of 1934. During July, the Fund repurchased 126,400 shares (of which 125,000 shares were sold by a significant shareholder) of its common stock in the open market for $985,102 at an
average discount of approximately 26% from net asset value.



On
July 28, 2004, the Fund received $2,159,176 from ENG as payment in full of its outstanding 9.5% promissory note. The promissory note had a face value of $2,120,000 and the remaining $39,176 was for accrued interest.



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 attempt to limit risk by investing in a portfolio of companies involved in different industries. We limit our initial investment in any company to no more than 15% of the Funds net
assets.



We had investments in fourteen Portfolio Companies and
two venture capital funds at June 30, 2004. We did not make any new investments during the six months ended June 30, 2004 or 2003.



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 Management Company, subject to the approval of the Board of Directors, and are based on a
number of relevant factors.



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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 administrative costs, management fees to the Management Company overseeing the portfolio, 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. Historically, our cash flow from interest and dividends has not been sufficient to cover our expenses and follow-on investments. Because our investments are illiquid, we
have utilized leverage to provide the required funds, and the leverage is then repaid from the sale of portfolio securities. Our previous lender required that all proceeds from sale or repayment of our portfolio securities be applied to its loan,
and reduced its commitment to advance funds under the loan agreement by a like amount. In April and May of 2004, we sold our interests in Strategic Holdings, Inc., SMIP, Inc. and Alenco Holding Corporation. Proceeds from such sales were used to pay
off our existing borrowings, and the remaining proceeds may be used for new or follow-on investments or other corporate purposes.



We have distributed to our stockholders any net taxable investment income or realized capital gains on an annual basis. We declared a dividend of $0.72
per share in 2003, including $0.57 per share in qualifying dividend income and $0.15 per share as a return of capital. We did not declare a dividend for the six months ended June 30, 2004.



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 have traded at a discount from our net asset value, our Board of Directors has determined that it would be in the best interest of our stockholders to attempt to reduce or
eliminate the market value discount. Accordingly, from time to time we may repurchase our shares to attempt to reduce the discount or to increase the net asset value of our remaining 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.



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.



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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 trailing twelve months, 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 Management Company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 Management Company 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.



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.



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 (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. As of December 31, 2003, we had a capital loss carryforward of approximately $8,024,000, which may be used to offset future
taxable capital gains. We borrow money from time to time to maintain our tax status as a RIC.



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Liquidity and Capital Resources



At June 30, 2004, we had $19,232,672 in cash and cash equivalents, most of which was invested in money market accounts. Such
cash may be used to pay operating expenses, for new and follow-on investments in portfolio securities, to pay dividends to our shareholders or to repurchase shares of our common stock. We had $46,546,430 of our total assets of $94,103,557 invested
in portfolio securities of fourteen operating companies and two venture capital funds. $22,999,361 of our remaining assets were invested in U.S. Treasury Bills for the purpose of satisfying the diversification requirement to maintain our
pass-through tax treatment. 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 in July, 2004.



Effective March 15, 2004, we entered
into a new $6,500,000 revolving line of credit loan with Frost National Bank. The new line of credit extends through March 31, 2005. The proceeds of the new loan were utilized to pay off the previous line of credit. As of August 14, 2004, there is
no amount outstanding under the new line of credit and the availability of such line is approximately $4 million at such date.



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 10% of the total value of eligible portfolio securities. Interest on the new revolving line of credit is payable quarterly at a rate of .50% above the floating prime rate, adjusted daily. A facility fee of .25% per annum on the
unused portion of the line of credit is payable quarterly in arrears, and we paid a commitment fee of $65,000 at the closing of the loan.



On April 8, 2004, we sold our interest in Strategic Holdings, Inc and SMIP, Inc. (Strategic Materials), and received proceeds of $13.8
million. A portion of the proceeds was used to pay off our existing borrowings under our line of credit and the promissory note payable. During the second quarter of 2004, we sold our interest in Alenco Holding Corporation (Alenco),
received a cash distribution from Alenco Window Holdings, LLC (AWHLLC) and sold 868,022 shares of common stock of ENG. We received cash of $11.8 million from such sales and the distribution.



In the fourth quarter of 2003, we declared a dividend of $0.72 per share, of
which $0.15 was considered a return of capital. We paid $2,287,194 in cash for this dividend in January, 2004, and issued 286,540 shares of common stock at $7.919 per share effective December 31, 2003.



Under certain circumstances, we may be called on to make follow-on
investments in certain Portfolio Companies. As of June 30, 2004, we have committed to invest up to an additional $1.6 million in the two venture capital funds and one of our portfolio companies.



Net cash provided by operating activities was $ 57,191,918 and $2,331,336 for
the six months ended June 30, 2004 and 2003, respectively. Approximately $11.1 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 $7,978,835 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 six months ended June 30, 2004 and 2003, 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.



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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 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 income after all expenses amounted to $3,521,008 and
$3,314,412 for the six months ended June 30, 2004 and 2003, respectively. Total income from portfolio securities was $4,771,995 for the six months ended June 30, 2004 and $5,221,346 for the comparable period in 2003.



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 $701,231 and $783,326 during the six months ended June 30, 2004 and 2003, respectively. The decrease in management fees during the six months ended June 30, 2004
was due to a decrease in net assets between the two periods.



Professional fees increased by $150,072 for the first six months of 2004 over the comparable period for 2003. This increase is primarily due to the legal fees incurred in connection with the refinancing of our line of credit and in
responding to the SECs questions regarding the manner in which the officer option notes were settled during 2001.



Interest expense decreased to $263,713 for the first six months of 2004 from $523,347 in 2003 due to the payoff of the revolving line of credit. In
addition, franchise taxes increased from $23,924 in 2003 to $81,665 in 2004 primarily due to the timing of the Texas franchise taxes.



Generally accepted accounting principles require that certain options issued by the Fund be accounted for using variable plan accounting. Such accounting
resulted in non-cash compensation expense (benefit) of $(276,851) and $206,044 during the six months ended June 30, 2004 and 2003, respectively.



Realized Gains and Losses on Sales of Portfolio Securities



During the six months ended June 30, 2004, we realized a capital gain of $4,135,150. 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, realizing a capital loss of $6,049,696. In the
second quarter of 2004 we sold our interests in Alenco and Strategic Materials, and received a cash distribution from AWHLLC, realizing capital gains of $10,201,126. In addition, we realized a short term capital gain of $3,520 on our U.S. Treasury
Bills.



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During the six months ended June 30, 2003, we realized a capital loss of $8,081,347 from the sale of
securities of six Portfolio Companies. We received $197,986 for our remaining investment in Milam Enterprises, LLC, realizing a capital gain of $196,075. We received $2,406,398 from Doane PetCare Enterprises, Inc. for payment in full of our 15%
promissory note, realizing a capital gain of $551,850 relating to the unamortized original issue discount. The Fund received $500,000 for its investment in FS Strategies, Inc., realizing a capital loss of $8,758,667. The Fund sold 4,432 shares of
Weatherford International common stock for $183,005, realizing a capital loss of $73,800. We received $3,199 from ENG in payment for 3,332 shares of common stock, realizing a capital gain of $1,251 and we also realized a short-term capital gain of
$1,944 from the sale of U.S. Treasury Bills.



Changes in Unrealized
Appreciation/Depreciation of Portfolio Securities



Net
unrealized depreciation on investments increased by $7,789,682 during the six months ended June 30, 2004 from $7,576,155 to $15,365,837. Such increase in unrealized depreciation is due primarily to the sale of Alenco and Strategic Materials, which
transferred $9,939,384 of unrealized appreciation at December 31, 2003, to realized gains at June 30, 2004. Excluding the sale of Alenco and Strategic Materials, the net unrealized depreciation decreased by $2,149,702. Such decrease resulted from
increases in the estimated fair value of six of our Portfolio Companies aggregating $9,364,702 and decreases in the estimated fair value of seven of our Portfolio Companies aggregating $7,215,000. The decrease in the estimated fair value of the
Portfolio Companies is partially a result of the recapitalization dividend declared by Champion Window Holdings, Inc. in March 2004, from which the Fund received $3,525,000 in cash.



Net unrealized depreciation on investments decreased by $4,535,994 during the six months ended June 30, 2003 from $5,417,014
to $881,020. Such change resulted from increases in the estimated fair value of six of our Portfolio Companies aggregating $6,623,459, decreases in the estimated fair value of eleven of the Funds Portfolio Companies aggregating $11,426,899 and
the transfer of $9,339,434 in net unrealized depreciation to net capital loss from the sale or disposition of investments in three of the Funds Portfolio Companies. The decrease in the estimated fair value of the Portfolio Companies was
partially a result of the dividend declared by Champion Window Holdings, Inc. in June 2003, from which the Fund received $3,500,000 in cash.



Dividends



We declared no dividends for the six months ended June 30, 2004 and 2003. On January 16, 2004, we paid cash of $2,287,194 for dividends declared in the
fourth quarter of 2003.



Portfolio Investments



During the six months ended June 30, 2004, we made follow-on investments of
$1,799,328 in four portfolio companies and two venture funds, including $302,528 in accrued interest and dividends received in the form of additional portfolio securities and $949,632 recorded as the cost of securities acquired in an exchange for
securities of a new company that acquired the business and the assets of a former portfolio company.



For the six months ended June 30, 2004, we received an additional 951 shares of preferred stock of Sovereign Business Forms, Inc. (Sovereign)
in dividends. In addition, Sovereign elected to convert $302,528 of accrued interest into the balance of the 15% promissory notes due to us.



On January 12, 2004, we advanced $75,000 to Equicom pursuant to a 10% promissory note, thereby reducing the guarantee commitment to Equicoms lender
by a like amount.



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In February and May, 2004, ENG made two principal payments of $110,000 each (total of $220,000) on its
9.5% promissory note, reducing the note balance to $2,120,000. This note was paid off in its entirety on July 28, 2004.



On February 24, 2004, we exercised warrants to acquire 10,000 shares of common stock in Champion Window Holdings, Inc. for $71,800 .



On March 3, 2004, we invested an additional $300,000 in Vanguard VII, L.P.
pursuant to a $3,000,000 commitment made in June 2000. $1,800,000 of such commitment has been funded through June 30, 2004.



On March 16, 2004, we exchanged our investment in TAI, including accrued interest, notes receivable and preferred stock with costs aggregating
$6,999,328, for an interest in a newly formed company which acquired substantially all of the assets of TAI. The newly formed company is controlled by a new investor. Our investment in the newly formed company has a cost basis of $949,632 and we
recorded a realized loss of $6,049,696 in conjunction with this transaction.



On June 8, 2004, we invested an additional $150,000 in Sternhill Partners I, L.P., pursuant to a $2,550,000 commitment made in March 2000. $2,355,000 of such commitment has been funded through June 30, 2004.



Subsequent Events



On July 1, 2004, we sold U.S. Treasury bills for $23,000,000 and repaid our
margin loan.



During July, 2004 the Fund repurchased 126,400
shares (of which 125,000 shares were sold by a significant shareholder) of its common stock in the open market for $985,102 at an average discount of approximately 26% from net asset value.



On July 28, 2004, the Fund received $2,159,176 from ENG, as payment in full
of its outstanding 9.5% promissory note. The promissory note had a face value of $2,120,000 and the remaining $39,176 was for accrued interest.



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 June 30, 2004 and 2003, respectively, of approximately $2,725,877 and $11,624,111, a change of one percent in the interest rate would have caused a change
in interest expense of approximately $14,000 and $58,000. This change would have resulted in a change of $0.002 and $0.009 in the net asset value per share at June 30, 2004 and 2003, respectively. We did not enter into our credit facility for
trading purposes and the line of credit carries interest at a pre-agreed upon percentage point spread from the prime rate. We obtained a new line of credit effective March 15, 2004, which expires on March 31, 2005.



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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. At June 30, 2004, we had investments in 14 Portfolio Companies and two venture capital funds. The value of one of our investments, in a business
which manufactures residential windows primarily for new construction, was 22% of our net asset value and 33% of our investments in Portfolio Company securities (at fair value) at June 30, 2004. 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 June 30, 2004. Based on their evaluation, the Funds
Chairman and Chief Executive Officer and Chief Financial Officer concluded that the Funds disclosure controls and procedures are effective in timely making known to them material information relating to the Fund required to be disclosed in the
Funds reports file or submitted under the Exchange Act. There has been no change in the Funds internal control over financial reporting during the quarter ended June 30, 2004, 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 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities



|                   |  |                                |  |                        |      |                                                   |        |                                                               |   |          
|------------------ |  | ------------------------------ |  | ---------------------- | ---- | ------------------------------------------------- | ------ | ------------------------------------------------------------- | - | ---------
|Period             |  | Total Numberof SharesPurchased |  | Avg PricePaidPer Share |      | SharesPurchased asPart of aPubliclyAnnounced Plan |        | Dollar Value of Shares that may yet bepurchasedunder plan (1)
|April 1 - April 30 |  |                               |  |                        |     |                                                   |       |                                                               |   |         
|May 1 - May 31     |  | 7,305                          |  | $                      | 7.66 |                                                   | 7,305  |                                                               | $ | 2,944,016
|June 1 - June 30   |  | 66,800                         |  | $                      | 7.76 |                                                   | 66,800 |                                                               | $ | 2,425,796
|                   |  |                                |  |                        |      |                                                   |        |                                                               |   |          
|Total              |  | 74,105                         |  | $                      | 7.75 |                                                   | 74,105 |                                                               | $ | 2,425,796

---

|(1) | On May 24, 2004, the Fund announced that the Board of Directors had authorized the purchase of up to $3 million of the Funds common stock through open market transactions.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



The Fund held its annual meeting of shareholders on May 6, 2004. At the meeting, shareholders voted on (i) the election of the persons named in the Proxy Statement as Directors of the Fund for the terms described
therein, and (ii) the ratification of the selection of PricewaterhouseCoopers LLP as the Funds independent auditors for the fiscal year ending December 31, 2004.



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



|                       |  |           |  |         
|---------------------- |  | --------- |  | --------
|Name of Nominee        |  | For       |  | Withheld
|Sam P. Douglass        |  | 5,440,748 |  | 186,474 
|Gregory J. Flanagan    |  | 5,488,938 |  | 138,284 
|Robert L. Knauss       |  | 5,487,937 |  | 139,285 
|Nolan Lehmann          |  | 5,488,925 |  | 138,927 
|Brad Orvieto           |  | 5,489,276 |  | 137,946 
|Gary R. Peterson       |  | 5,488,938 |  | 138,284 
|John W. Storms         |  | 5,488,938 |  | 138,284 
|Dr. Francis D. Tuggle  |  | 5,489,194 |  | 138,028 
|Dr. Edward E. Williams |  | 5,489,194 |  | 138,028 



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



|                         |  |           |  |         |  |        
|------------------------ |  | --------- |  | ------- |  | -------
|Proposal                 |  | For       |  | Against |  | Abstain
|Ratification of Auditors |  | 5,540,766 |  | 47,809  |  | 38,645 



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



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



| | (a) | Exhibits
| | --- | --------



| | 31. | Form of Quarterly Certification Required by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934
| | --- | -------------------------------------------------------------------------------------------------------------



| | (1) | Certification by Chairman and Chief Executive Officer
| | --- | -----------------------------------------------------



| | (2) | Certification by Chief Financial Officer
| | --- | ----------------------------------------



| | 32. | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
| | --- | -----------------------------------------------------------------------



| | (1) | Certification by Chairman and Chief Executive Officer
| | --- | -----------------------------------------------------



| | (2) | Certification by Chief Financial Officer
| | --- | ----------------------------------------



| | (b) | Reports on Form 8-K
| | --- | -------------------



On May 13, 2004, we filed a Current Report on Form 8-K, which reported on Item 12, Results of Operation and Financial Condition, and included a press
release announcing our financial results for the quarter ended March 31, 2004.



On May 20, 2004, we filed a Current Report on Form 8-K, which reported on Item 12, Results of Operation and Financial Condition, and included a press release announcing the sale of our investment in Alenco Holding
Corporation.



On May 24, 2004, we filed a Current Report on
Form 8-K, which reported on Item 12, Results of Operation and Financial Condition, and included a press release announcing our stock repurchase program.



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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: August 13, 2004 |  | EQUUS II INCORPORATED    
|                      | 
|                      |  | /s/ Harry O. Nicodemus IV
|                      |  | Harry O. Nicodemus IV    
|                      |  | Chief Financial Officer  



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