##### Table of Contents

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FORM 10-Q



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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



(Mark One)

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



For the quarterly period ended September 30, 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 incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                             |  |           
|-------------------------------------------- |  | ----------
|2727 Allen Parkway, 13thFloor Houston, Texas |  | 77019     
|(Address of principal executive offices)     |  | (Zip Code)



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



---



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



Indicate by check mark whether the registrant is an accelerated filer (as defined in 12b-2 of
the Exchange Act).    Yes ̈No  x



There were 6,233,473 shares of the registrants common stock, $.001 par value,
outstanding, as of November 15, 2004. The net asset value of a share at September 30, 2004 was $10.77.



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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                                                                        |  |   
|                              |  |         | 
|                              |  |         |  | - September 30, 2004 and December 31, 2003                                            |  | 1 
|                              |  |         | 
|                              |  |         |  | Statements of Operations                                                              |  |   
|                              |  |         | 
|                              |  |         |  | - For the three months ended September 30, 2004 and 2003                              |  | 2 
|                              |  |         | 
|                              |  |         |  | - For the nine months ended September 30, 2004 and 2003                               |  | 3 
|                              |  |         | 
|                              |  |         |  | Statements of Changes in Net Assets                                                   |  |   
|                              |  |         | 
|                              |  |         |  | - For the nine months ended September 30, 2004 and 2003                               |  | 4 
|                              |  |         | 
|                              |  |         |  | Statements of Cash Flows                                                              |  |   
|                              |  |         | 
|                              |  |         |  | - For the nine months ended September 30, 2004 and 2003                               |  | 5 
|                              |  |         | 
|                              |  |         |  | Selected Per Share Data and Ratios                                                    |  |   
|                              |  |         | 
|                              |  |         |  | - For the nine months ended September 30, 2004 and 2003                               |  | 7 
|                              |  |         | 
|                              |  |         |  | Schedule of Portfolio Securities                                                      |  |   
|                              |  |         | 
|                              |  |         |  | - September 30, 2004                                                                  |  | 8 
|                              |  |         | 
|                              |  |         |  | Notes to Financial Statements                                                         |  | 13
|                              |  |         | 
|                              |  | Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 20
|                              |  |         | 
|                              |  | Item 3. |  | Quantitative and Qualitative Disclosure about Market Risk                             |  | 26
|                              |  |         | 
|                              |  | Item 4. |  | Controls and Procedures                                                               |  | 27
|                              | 
|PART II.
OTHER INFORMATION    |  |        
|                              |  |         | 
|                              |  | Item 2. |  | Changes in Securities, Use of Proceeds and Issuer Purchases on Equity Securities      |  | 28
|                              |  |         | 
|                              |  | Item 6. |  | Exhibits and Reports on Form 8-K                                                      |  | 28
|                              | 
|SIGNATURE                     |  | 29     





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##### Table of Contents

EQUUS II INCORPORATED

BALANCE SHEETS

SEPTEMBER 30, 2004 AND DECEMBER 31, 2003

(Unaudited)



|                                                                                                                      |  |      |            |   |      |   |             |  
|--------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ----------- | -
|                                                                                                                      |  | 2004 |            |   | 2003 |  
|Assets                                                                                                                |  |      |            |   |      |   |             |  
|Investments in portfolio securities at fair value (cost $52,280,271 and $83,129,763, respectively)                    |  | $    | 44,429,031 |   |      | $ | 75,553,608  |  
|Restricted cash & temporary investments, at cost which approximates fair value                                        |  |      | 24,628,392 |   |      |   | 52,695,202  |  
|Cash                                                                                                                  |  |      | 8,336      |   |      |   | 11,296      |  
|Temporary cash investments, at cost which approximates fair value                                                     |  |      | 18,320,080 |   |      |   | 375,583     |  
|Accounts receivable                                                                                                   |  |      | 13,904     |   |      |   | 15,469      |  
|Receivable from affiliates                                                                                            |  |      | 602,210    |   |      |   |            |  
|Accrued interest and dividends receivable                                                                             |  |      | 2,081,525  |   |      |   | 4,256,557   |  
|Escrowed receivables                                                                                                  |  |      | 2,468,719  |   |      |   |            |  
|                                                                                                                      |  |      |            |   |      |   |             |  
|Total Assets                                                                                                          |  |      | 92,552,197 |   |      |   | 132,907,715 |  
|                                                                                                                      |  |      |            |   |      |   |             |  
|Liabilities and net assets                                                                                            |  |      |            |   |      |   |             |  
|Liabilities:                                                                                                          |  |      |            |   |      |   |             |  
|Accounts payable                                                                                                      |  |      | 90,566     |   |      |   | 240,186     |  
|Accrued non-cash compensation                                                                                         |  |      | 425,848    |   |      |   |            |  
|Dividends payable                                                                                                     |  |      |           |   |      |   | 2,287,194   |  
|Due to management company                                                                                             |  |      | 338,451    |   |      |   | 357,692     |  
|Revolving line of credit                                                                                              |  |      |           |   |      |   | 5,000,000   |  
|Borrowings under margin account                                                                                       |  |      | 23,993,887 |   |      |   | 51,984,089  |  
|Note payable                                                                                                          |  |      |           |   |      |   | 1,500,000   |  
|                                                                                                                      |  |      |            |   |      |   |             |  
|Total Liabilities                                                                                                     |  |      | 24,848,752 |   |      |   | 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, 6,289,018 and 6,615,173 shares outstanding, respectively |  |      | 6,289      |   |      |   | 6,615       |  
|Additional paid-in capital                                                                                            |  |      | 82,241,845 |   |      |   | 84,497,378  |  
|Undistributed net investment income (losses)                                                                          |  |      | 2,416,456  |   |      |   | (695,282    | )
|Undistributed net capital gain (losses)                                                                               |  |      | (9,109,906 | ) |      |   | (4,694,002  | )
|Unrealized depreciation of portfolio securities, net                                                                  |  |      | (7,851,239 | ) |      |   | (7,576,155  | )
|                                                                                                                      |  |      |            |   |      |   |             |  
|Total net assets                                                                                                      |  | $    | 67,703,445 |   |      | $ | 71,538,554  |  
|                                                                                                                      |  |      |            |   |      |   |             |  
|Net assets per share                                                                                                  |  | $    | 10.77      |   |      | $ | 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 SEPTEMBER 30, 2004 AND 2003

(Unaudited)



|                                                                               |  |      |             |   |      |   |           |  
|------------------------------------------------------------------------------ |  | ---- | ----------- | - | ---- | - | --------- | -
|                                                                               |  | 2004 |             |   | 2003 |  
|Investment income:                                                             |  |      |             |   |      |   |           |  
|Interest income from portfolio securities                                      |  | $    | 400,573     |   |      | $ | 800,605   |  
|Dividend income from portfolio securities                                      |  |      | 49,200      |   |      |   | 89,833    |  
|Interest from temporary cash investments                                       |  |      | 46,696      |   |      |   | 765       |  
|                                                                               |  |      |             |   |      |   |           |  
|Total investment income                                                        |  |      | 496,469     |   |      |   | 891,203   |  
|                                                                               |  |      |             |   |      |   |           |  
|Expenses:                                                                      |  |      |             |   |      |   |           |  
|Management fees                                                                |  |      | 338,451     |   |      |   | 388,998   |  
|Director fees and expenses                                                     |  |      | 63,144      |   |      |   | 57,893    |  
|Professional fees                                                              |  |      | 112,977     |   |      |   | 52,991    |  
|Administrative fees                                                            |  |      | 12,500      |   |      |   | 12,500    |  
|Mailing, printing and other expenses                                           |  |      | 4,899       |   |      |   | 31,954    |  
|Interest expense                                                               |  |      | 3,228       |   |      |   | 216,296   |  
|Compensation expense                                                           |  |      | 400,297     |   |      |   | 629,171   |  
|Excise tax                                                                     |  |      | (36,832     | ) |      |   |          |  
|Franchise taxes                                                                |  |      | 7,075       |   |      |   | 6,000     |  
|                                                                               |  |      |             |   |      |   |           |  
|Total expenses                                                                 |  |      | 905,739     |   |      |   | 1,395,803 |  
|                                                                               |  |      |             |   |      |   |           |  
|Net investment income (loss)                                                   |  |      | (409,270    | ) |      |   | (504,600  | )
|                                                                               |  |      |             |   |      |   |           |  
|Realized gain (loss) on sales of portfolio securities, net                     |  |      | (8,551,053  | ) |      |   | 279,572   |  
|                                                                               |  |      |             |   |      |   |           |  
|Change in unrealized appreciation (depreciation) of portfolio securities, net: |  |      |             |   |      |   |           |  
|End of period                                                                  |  |      | (7,851,239  | ) |      |   | (436,709  | )
|Beginning of period                                                            |  |      | (15,365,837 | ) |      |   | (881,020  | )
|                                                                               |  |      |             |   |      |   |           |  
|Change in unrealized appreciation (depreciation), net                          |  |      | 7,514,598   |   |      |   | 444,311   |  
|                                                                               |  |      |             |   |      |   |           |  
|Total increase (decrease) in net assets from operations                        |  | $    | (1,445,725  | ) |      | $ | 219,283   |  
|                                                                               |  |      |             |   |      |   |           |  
|Increase (decrease) in net assets from operations per share:                   |  |      |             |   |      |   |           |  
|Basic                                                                          |  | $    | (0.23       | ) |      | $ | 0.04      |  
|                                                                               |  |      |             |   |      |   |           |  
|Diluted                                                                        |  | $    | (0.23       | ) |      | $ | 0.04      |  
|                                                                               |  |      |             |   |      |   |           |  
|Weighted average shares outstanding, in thousands                              |  |      |             |   |      |   |           |  
|Basic                                                                          |  |      | 6,405       |   |      |   | 6,233     |  
|                                                                               |  |      |             |   |      |   |           |  
|Diluted                                                                        |  |      | 6,405       |   |      |   | 6,234     |  
|                                                                               |  |      |             |   |      |   |           |  



The accompanying notes
are an

integral part of these financial statements.



2



---

##### Table of Contents

EQUUS II INCORPORATED

STATEMENTS OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

(Unaudited)



|                                                                               |  |      |            |   |      |   |            |  
|------------------------------------------------------------------------------ |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                               |  | 2004 |            |   | 2003 |  
|Investment income:                                                             |  |      |            |   |      |   |            |  
|Interest income from portfolio securities                                      |  | $    | 1,552,468  |   |      | $ | 2,227,811  |  
|Dividend income from portfolio securities                                      |  |      | 3,669,300  |   |      |   | 3,883,973  |  
|Interest from temporary cash investments                                       |  |      | 71,806     |   |      |   | 3,888      |  
|Other income                                                                   |  |      | 30,000     |   |      |   |           |  
|                                                                               |  |      |            |   |      |   |            |  
|Total investment income                                                        |  |      | 5,323,574  |   |      |   | 6,115,672  |  
|                                                                               |  |      |            |   |      |   |            |  
|Expenses:                                                                      |  |      |            |   |      |   |            |  
|Management fees                                                                |  |      | 1,039,682  |   |      |   | 1,172,324  |  
|Director fees and expenses                                                     |  |      | 218,403    |   |      |   | 171,309    |  
|Professional fees                                                              |  |      | 401,245    |   |      |   | 191,187    |  
|Administrative fees                                                            |  |      | 37,500     |   |      |   | 37,500     |  
|Mailing, printing and other expenses                                           |  |      | 72,711     |   |      |   | 91,926     |  
|Interest expense                                                               |  |      | 266,941    |   |      |   | 739,644    |  
|Compensation expense                                                           |  |      | 123,446    |   |      |   | 835,215    |  
|Excise tax                                                                     |  |      | (36,832    | ) |      |   | 36,832     |  
|Franchise taxes                                                                |  |      | 88,740     |   |      |   | 29,924     |  
|                                                                               |  |      |            |   |      |   |            |  
|Total expenses                                                                 |  |      | 2,211,836  |   |      |   | 3,305,861  |  
|                                                                               |  |      |            |   |      |   |            |  
|Net investment income                                                          |  |      | 3,111,738  |   |      |   | 2,809,811  |  
|                                                                               |  |      |            |   |      |   |            |  
|Realized gain (loss) on sales of portfolio securities, net                     |  |      | (4,415,904 | ) |      |   | (7,801,775 | )
|                                                                               |  |      |            |   |      |   |            |  
|Change in unrealized appreciation (depreciation) of portfolio securities, net: |  |      |            |   |      |   |            |  
|End of period                                                                  |  |      | (7,851,239 | ) |      |   | (436,709   | )
|Beginning of period                                                            |  |      | (7,576,155 | ) |      |   | (5,417,014 | )
|                                                                               |  |      |            |   |      |   |            |  
|Change in unrealized appreciation (depreciation), net                          |  |      | (275,084   | ) |      |   | 4,980,305  |  
|                                                                               |  |      |            |   |      |   |            |  
|Total increase (decrease) in net assets from operations                        |  | $    | (1,579,250 | ) |      | $ | (11,659    | )
|                                                                               |  |      |            |   |      |   |            |  
|Decrease in net assets from operations per share:                              |  |      |            |   |      |   |            |  
|Basic                                                                          |  | $    | (0.24      | ) |      | $ |           |  
|                                                                               |  |      |            |   |      |   |            |  
|Diluted                                                                        |  | $    | (0.24      | ) |      | $ |           |  
|                                                                               |  |      |            |   |      |   |            |  
|Weighted average shares outstanding, in thousands                              |  |      |            |   |      |   |            |  
|Basic                                                                          |  |      | 6,533      |   |      |   | 6,233      |  
|                                                                               |  |      |            |   |      |   |            |  
|Diluted                                                                        |  |      | 6,533      |   |      |   | 6,233      |  
|                                                                               |  |      |            |   |      |   |            |  



The accompanying notes
are an

integral part of these financial statements.



3



---

##### Table of Contents

EQUUS II INCORPORATED

STATEMENTS OF CHANGES IN NET ASSETS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

(Unaudited)



|                                                                    |  |      |            |   |      |   |            |  
|------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                    |  | 2004 |            |   | 2003 |  
|Operations:                                                         |  |      |            |   |      |   |            |  
|Net investment income                                               |  | $    | 3,111,738  |   |      | $ | 2,809,811  |  
|Realized gain (loss) on sales of portfolio securities, net          |  |      | (4,415,904 | ) |      |   | (7,801,775 | )
|Unrealized appreciation (depreciation) of portfolio securities, net |  |      | (275,084   | ) |      |   | 4,980,305  |  
|                                                                    |  |      |            |   |      |   |            |  
|Increase (decrease) in net assets from operations                   |  |      | (1,579,250 | ) |      |   | (11,659    | )
|                                                                    |  |      |            |   |      |   |            |  
|Capital Transactions:                                               |  |      |            |   |      |   |            |  
|Compensation expense (benefit)                                      |  |      | (302,402   | ) |      |   | 835,215    |  
|Officer notes settlement                                            |  |      | 602,210    |   |      |   |           |  
|Capital stock repurchased                                           |  |      | (2,555,667 | ) |      |   |           |  
|                                                                    |  |      |            |   |      |   |            |  
|Increase (decrease) in net assets from capital transactions         |  |      | (2,255,859 | ) |      |   | 835,215    |  
|                                                                    |  |      |            |   |      |   |            |  
|Increase (decrease) in net assets                                   |  |      | (3,835,109 | ) |      |   | 823,556    |  
|                                                                    |  |     
|Net assets at beginning of period                                   |  |      | 71,538,554 |   |      |   | 76,976,095 |  
|                                                                    |  |      |            |   |      |   |            |  
|Net assets at end of period                                         |  | $    | 67,703,445 |   |      | $ | 77,799,651 |  
|                                                                    |  |      |            |   |      |   |            |  



The accompanying notes
are an

integral part of these financial statements.



4



---

##### Table of Contents

EQUUS II INCORPORATED

STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

(Unaudited)



|                                                                  |  |      |              |   |      |   |              |  
|----------------------------------------------------------------- |  | ---- | ------------ | - | ---- | - | ------------ | -
|                                                                  |  | 2004 |              |   | 2003 |  
|Cash flows from operating activities:                             |  |      |              |   |      |   |              |  
|Interest and dividends received                                   |  | $    | 6,045,758    |   |      | $ | 3,877,952    |  
|Cash paid to management company, directors, bank and suppliers    |  |      | (2,257,251   | ) |      |   | (2,554,442   | )
|Purchase of portfolio securities                                  |  |      | (1,695,142   | ) |      |   | (2,280,000   | )
|Proceeds from sales of portfolio securities                       |  |      | 24,747,561   |   |      |   | 2,664,011    |  
|Principal payments from portfolio securities                      |  |      | 2,365,000    |   |      |   | 2,184,547    |  
|Sales (purchases) of restricted cash & temporary investments, net |  |      | 28,066,810   |   |      |   | (6,670,715   | )
|Decrease in accounts receivable                                   |  |      | 1,864        |   |      |   |             |  
|Advances to portfolio companies                                   |  |      |             |   |      |   | (123         | )
|                                                                  |  |      |              |   |      |   |              |  
|Net cash provided (used) by operating activities                  |  |      | 57,274,600   |   |      |   | (2,778,770   | )
|                                                                  |  |      |              |   |      |   |              |  
|Cash flows from financing activities:                             |  |      |              |   |      |   |              |  
|Borrowings under margin account                                   |  |      | 96,992,047   |   |      |   | 240,888,503  |  
|Repayments under margin account                                   |  |      | (124,982,249 | ) |      |   | (176,897,555 | )
|Advances from bank                                                |  |      | 3,034,044    |   |      |   | 3,965,000    |  
|Repayments to bank                                                |  |      | (8,034,044   | ) |      |   | (65,675,000  | )
|Dividends paid                                                    |  |      | (2,287,194   | ) |      |   |             |  
|Repurchase of common stock                                        |  |      | (2,555,667   | ) |      |   |             |  
|Payment of promissory note payable                                |  |      | (1,500,000   | ) |      |   |             |  
|                                                                  |  |      |              |   |      |   |              |  
|Net cash provided (used) by financing activities                  |  |      | (39,333,063  | ) |      |   | 2,280,948    |  
|                                                                  |  |      |              |   |      |   |              |  
|Net increase (decrease) in cash and cash equivalents              |  |      | 17,941,537   |   |      |   | (497,822     | )
|                                                                  |  |     
|Cash and cash equivalents at beginning of period                  |  |      | 386,879      |   |      |   | 516,678      |  
|                                                                  |  |      |              |   |      |   |              |  
|Cash and cash equivalents at end of period                        |  | $    | 18,328,416   |   |      | $ | 18,856       |  
|                                                                  |  |      |              |   |      |   |              |  



The accompanying notes
are an

integral part of these financial statements.



5



---

##### Table of Contents

EQUUS II INCORPORATED

STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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                                                                        |  | $    | (1,579,250 | ) |      | $ | (11,659    | )
|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                                                      |  |      | 4,415,904  |   |      |   | 7,801,775  |  
|Change in unrealized (appreciation) depreciation, net                                                           |  |      | 275,085    |   |      |   | (4,980,305 | )
|Accrued interest and dividends exchanged for portfolio securities                                               |  |      | (1,452,847 | ) |      |   | (944,870   | )
|(Increase) decrease in accrued interest receivable                                                              |  |      | 2,175,032  |   |      |   | (1,292,850 | )
|Non-cash compensation expense                                                                                   |  |      | 123,446    |   |      |   | 835,215    |  
|(Decrease) in accounts payable                                                                                  |  |      | (149,620   | ) |      |   | (87,914    | )
|Increase (decrease) in due to management company                                                                |  |      | (19,243    | ) |      |   | 4,118      |  
|Purchase of portfolio securities                                                                                |  |      | (1,695,142 | ) |      |   | (2,280,000 | )
|Proceeds from sales of portfolio securities                                                                     |  |      | 24,747,561 |   |      |   | 2,664,011  |  
|Principal payments from portfolio securities                                                                    |  |      | 2,365,000  |   |      |   | 2,184,547  |  
|Sales (purchases) of restricted cash & temporary investments, net                                               |  |      | 28,066,810 |   |      |   | (6,670,715 | )
|Decrease in accounts receivable                                                                                 |  |      | 1,864      |   |      |   |           |  
|Advances to portfolio companies                                                                                 |  |      |           |   |      |   | (123       | )
|                                                                                                                |  |      |            |   |      |   |            |  
|Net cash provided (used) by operating activities                                                                |  | $    | 57,274,600 |   |      | $ | (2,778,770 | )
|                                                                                                                |  |      |            |   |      |   |            |  



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 NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

(Unaudited)



|                                                                                 |  |      |       |   |      |   |       |  
|-------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                                                                 |  | 2004 |       |   | 2003 |  
|Investment income                                                                |  | $    | 0.82  |   |      | $ | 0.98  |  
|Expenses                                                                         |  |      | 0.34  |   |      |   | 0.53  |  
|                                                                                 |  |      |       |   |      |   |       |  
|Net investment income                                                            |  |      | 0.48  |   |      |   | 0.45  |  
|                                                                                 |  |     
|Realized gain (loss) on sale of portfolio securities, net                        |  |      | (0.68 | ) |      |   | (1.25 | )
|                                                                                 |  |     
|Increase (decrease) in unrealized depreciation of portfolio securities, net      |  |      | (0.04 | ) |      |   | 0.80  |  
|                                                                                 |  |      |       |   |      |   |       |  
|(Decrease) in net assets from operations                                         |  |      | (0.24 | ) |      |   |      |  
|                                                                                 |  |      |       |   |      |   |       |  
|Capital Transactions:                                                            |  |      |       |   |      |   |       |  
|Compensation expense (benefit)                                                   |  |      | (0.05 | ) |      |   | 0.13  |  
|Officer notes settlement                                                         |  |      | 0.09  |   |      |   |      |  
|Common stock repurchases                                                         |  |      | 0.16  |   |      |   |      |  
|                                                                                 |  |      |       |   |      |   |       |  
|Increase in net assets from capital transactions                                 |  |      | 0.20  |   |      |   | 0.13  |  
|                                                                                 |  |      |       |   |      |   |       |  
|Net increase (decrease) in net assets                                            |  |      | (0.04 | ) |      |   | 0.13  |  
|                                                                                 |  |     
|Net assets at beginning of period                                                |  |      | 10.81 |   |      |   | 12.35 |  
|                                                                                 |  |      |       |   |      |   |       |  
|Net assets at end of period                                                      |  | $    | 10.77 |   |      | $ | 12.48 |  
|                                                                                 |  |      |       |   |      |   |       |  
|Weighted average number of shares outstanding during period, in thousands        |  |      | 6,533 |   |      |   | 6,233 |  
|                                                                                 |  |     
|Market value, end of period                                                      |  | $    | 8.19  |   |      | $ | 8.60  |  
|                                                                                 |  |     
|Ratio of expenses to average net assets                                          |  |      | 3.14  | % |      |   | 4.27  | %
|                                                                                 |  |     
|Ratio of net investment income to average net assets                             |  |      | 4.47  | % |      |   | 3.63  | %
|                                                                                 |  |     
|Ratio of increase (decrease) in net assets from operations to average net assets |  |      | -2.19 | % |      |   | -0.02 | %



The accompanying notes
are an

integral part of these financial statements.



7



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##### Table of Contents

EQUUS II INCORPORATED

SCHEDULE OF PORTFOLIO SECURITIES

SEPTEMBER 30, 2004

(Unaudited)



|                                                                                       |  |                            |  |      |           |            |   |           
|-------------------------------------------------------------------------------------- |  | -------------------------- |  | ---- | --------- | ---------- | - | ----------
|Portfolio Company                                                                      |  | Date of Initial Investment |  | Cost |           | Fair Value
|Alenco Window Holdings, LLC                                                            |  | February 2001              |  |      |           |            |   |           
|(formerly Reliant Window Holdings, LLC)                                                |  |                            |  |      |           |            |   |           
|Holds cash and escrowed receivables                                                    |  |                            |  |      |           |            |   |           
|- 32.25% membership interest                                                           |  |                            |  | $    |          |            | $ | 360,000   
|                                                                                       |  |                            | 
|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)                                                               |  |                            |  |      | 459,546   |            |   |          
|- 1,335,000 shares of preferred stock                                                  |  |                            |  |      | 1,335,000 |            |   |          
|- Warrant to buy 2,229,450 shares of common stock for $0.01 through May 2008           |  |                            |  |      | 1         |            |   |          
|                                                                                       |  |                            | 
|Champion Window Holdings, Inc.                                                         |  | March 1999                 |  |      |           |            |   |           
|Manufacturer & distributor of residential windows                                      |  |                            |  |      |           |            |   |           
|- 1,410,000 shares of common stock(1)                                                  |  |                            |  |      | 1,471,800 |            |   | 15,200,000
|- 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    
|                                                                                       |  |                            | 
|ConGlobal Industries, Inc.                                                             |  | February 1997              |  |      |           |            |   |           
|(formerly Container Acquisition, Inc.)                                                 |  |                            |  |      |           |            |   |           
|Shipping container repair & storage                                                    |  |                            |  |      |           |            |   |           
|- Promissory note(1)(3)                                                                |  |                            |  |      | 2,664,242 |            |   | 680,000   
|- 24,397,303 shares of common stock                                                    |  |                            |  |      | 1,370,495 |            |   |          
|- 100% membership interest in CCI-ANI Finance, LLC(1)(3)                               |  |                            |  |      | 1,926,942 |            |   | 570,000   



The accompanying notes
are an

integral part of these financial statements.



8



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##### Table of Contents

EQUUS II INCORPORATED

SCHEDULE OF PORTFOLIO SECURITIES

SEPTEMBER 30, 2004

(Unaudited)

(Continued)



|                                                                                            |  |                           |  |      |           |            |   |          
|------------------------------------------------------------------------------------------- |  | ------------------------- |  | ---- | --------- | ---------- | - | ---------
|Portfolio Company                                                                           |  | Date ofInitial Investment |  | Cost |           | Fair Value
|Doane PetCare Enterprises, Inc.                                                             |  | October 1995              |  |      |           |            |   |          
|Manufacturer of private label pet food                                                      |  |                           |  |      |           |            |   |          
|- 1,943,598 shares of common stock                                                          |  |                           |  | $    | 3,936,644 |            | $ | 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                                                         |  |                           |  |      |           |            |   |          
|- 1,216,935 shares of common stock                                                          |  |                           |  |      | 711,304   |            |   | 1,254,696
|- Options to acquire 200,000 shares of common stock exercisable only upon change of control |  |                           |  |      |          |            |   |         
|                                                                                            |  |                           | 
|Equicom, Inc.                                                                               |  | July 1997                 |  |      |           |            |   |          
|Radio stations                                                                              |  |                           |  |      |           |            |   |          
|- 8.81% promissory note(1)                                                                  |  |                           |  |      | 1,038,342 |            |   | 1,038,342
|- 10% promissory notes                                                                      |  |                           |  |      | 3,806,730 |            |   | 1,416,658
|- 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 |            |   | 4,150,000
|- 350,000 shares of common stock                                                            |  |                           |  |      | 350,000   |            |   | 400,000  



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

SEPTEMBER 30, 2004

(Unaudited)

(Continued)



|                                                                                       |  |                    |  |      |            |            |   |           
|-------------------------------------------------------------------------------------- |  | ------------------ |  | ---- | ---------- | ---------- | - | ----------
|Portfolio Company                                                                      |  | Initial Investment |  | Cost |            | Fair Value
|Sovereign Business Forms, Inc.                                                         |  | August 1996        |  |      |            |            |   |           
|Business forms manufacturer                                                            |  |                    |  |      |            |            |   |           
|- 15% promissory notes(1)                                                              |  |                    |  | $    | 4,555,137  |            | $ | 4,555,137 
|- 22,355 shares of preferred stock(1)(3)                                               |  |                    |  |      | 2,235,500  |            |   | 2,235,500 
|- 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  |            |   | 5,000,000 
|- 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  |            |   | 850,000   
|                                                                                       |  |                    | 
|Turf Grass Holdings, Inc.                                                              |  | May 1999           |  |      |            |            |   |           
|Grows, sells & installs warm season turfgrasses                                        |  |                    |  |      |            |            |   |           
|- 1,000 shares of common stock                                                         |  |                    |  |      | 959,632    |            |   | 500,000   
|                                                                                       |  |                    | 
|Vanguard VII, L.P.                                                                     |  | June 2000          |  |      |            |            |   |           
|Venture capital fund                                                                   |  |                    |  |      |            |            |   |           
|- 1.3% limited partnership interest                                                    |  |                    |  |      | 1,800,000  |            |   | 750,000   
|                                                                                       |  |                    |  |      |            |            |   |           
|Total                                                                                  |  |                    |  | $    | 52,280,271 |            | $ | 44,429,031
|                                                                                       |  |                    |  |      |            |            |   |           

---

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

|(2) | As of September 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

SEPTEMBER 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., 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 $225,924 from the closing market price to reflect the estimated effect of restrictions on the
sale of such securities at September 30, 2004.



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



Income was earned in the amount of $5,100,249 and $4,993,897 for the nine months ended September 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 $121,519 and $873,267 for the nine months ended September 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, Sternhill Partners I, L.P., and Vanguard VII, L.P. The Fund provides significant managerial assistance to portfolio companies that comprise 92% of the total value of the investments in portfolio companies
at September 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

SEPTEMBER 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 September 30, 2004:



|                                      |  |      |            |            |   |                         |  |       
|------------------------------------- |  | ---- | ---------- | ---------- | - | ----------------------- |  | ------
|Type of Securities                    |  | Cost |            | Fair Value |   | Percentageof Fair Value
|Common Stock                          |  | $    | 10,265,819 |            | $ | 17,854,696              |  | 40.2% 
|Secured and Subordinated Debt         |  |      | 14,827,695 |            |   | 8,993,835               |  | 20.2% 
|Preferred Stock                       |  |      | 17,458,110 |            |   | 9,585,500               |  | 21.6% 
|Limited Liability Company Investments |  |      | 5,601,942  |            |   | 5,995,000               |  | 13.5% 
|Options and Warrants                  |  |      | 101        |            |   | 400,000                 |  | 0.9%  
|Limited Partnership Investments       |  |      | 4,126,604  |            |   | 1,600,000               |  | 3.6%  
|                                      |  |      |            |            |   |                         |  |       
|Total                                 |  | $    | 52,280,271 |            | $ | 44,429,031              |  | 100.0%
|                                      |  |      |            |            |   |                         |  |       



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



|                                    |  |            |            |                         |       
|----------------------------------- |  | ---------- | ---------- | ----------------------- | ------
|Industry                            |  | Fair Value |            | Percentageof Fair Value
|Business Products and Services      |  | $          | 13,494,335 |                         | 30.4% 
|Consumer Goods                      |  |            | 500,000    |                         | 1.1%  
|Engineering and Consulting Services |  |            | 1,254,696  |                         | 2.8%  
|Industrial Products and Services    |  |            | 3,200,000  |                         | 7.2%  
|Media                               |  |            | 2,455,000  |                         | 5.5%  
|Residential Building Products       |  |            | 15,560,000 |                         | 35.0% 
|Shipping Products and Services      |  |            | 5,800,000  |                         | 13.1% 
|Turfgrass and Landscape Products    |  |            | 500,000    |                         | 1.1%  
|Venture Funds and Other             |  |            | 1,665,000  |                         | 3.8%  
|                                    |  |            |            |                         |       
|Total                               |  | $          | 44,429,031 |                         | 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

SEPTEMBER 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 accounting principles generally accepted in the United States of America have been omitted. The unaudited financial statements have been prepared consistent with the accounting policies reflected in the Funds annual financial
statements included in the Companys Form 10-K for the year ended December 31, 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 September 30, 2004, the Fund had $18,328,416 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 September 30, 2004, the
Fund had repurchased 326,155 shares of common stock (of which 225,000 shares were purchased from a significant shareholder) for a total of $2,555,667. Since the shares were purchased at a discount to net asset value, these purchases added $0.16 to
the net asset value per share as of September 30, 2004.



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 September 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 November 13, 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 September 30, 2004, the Fund has committed to invest up to an additional $1.4 million in the two venture capital
funds.



At September 30, 2003, the Fund had $11 million
outstanding on its line of credit and was being charged interest at a rate of 8.00%. The average daily balances outstanding on the Funds line of credit during the nine months ended September 30, 2004, and 2003 were $1,810,619 and $10,994,432,
respectively. During the nine months ended September 30, 2004 and 2003, the amount of interest and loan fees paid in cash were $295,081 and $732,214, respectively.



RIC Borrowings, Restricted Cash and Temporary Investments - Because of the nature and size of its portfolio
investments, the Fund periodically borrows money utilizing a margin account with a securities brokerage firm to make qualifying investments to maintain its tax status as a RIC under the Internal Revenue Code. As of September 30, 2004 and 2003, the
Fund borrowed $23,993,887 and $63,990,948, respectively. The Fund collateralized such borrowings with restricted cash and temporary investments of $24,628,392 and $58,000,000, at September 30, 2004 and 2003, respectively. The temporary qualifying
investments were sold, and the total amount borrowed was repaid in October 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 of America and the financial reporting policies of the SEC. The applicable
methods prescribed by such principles and policies are described below:



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



14



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##### Table of Contents

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
$44,429,031 (including $1,254,696 in publicly-traded securities) and $78,769,052 (including $5,095,306 in publicly-traded securities) at September 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.



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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- 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 2007. The Fund has recorded these escrowed amounts at their estimated recovery value of $2,468,719 at September 30, 2004.



The Funds management regularly analyzes and reviews the reasonableness of the discount of approximately $1 million recorded against the escrowed amounts. If
adjustments are required, the discount may be adjusted on a quarterly basis. At September 30, 2004, the escrow receivable was increased by $65,719. This amount was recorded as additional capital gains.



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 nine
months ended September 30, 2004 and 2003, respectively, would have been:



|                                                                             |  |      |            |   |      |   |         |  
|---------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ------- | -
|                                                                             |  | 2004 |            |   | 2003 |  
|(Decrease) in net assets from operations, as reported                        |  | $    | (1,579,250 | ) |      | $ | (11,659 | )
|                                                                             |  |     
|Stock-based employee compensation expense included in net investment income  |  |      | 123,446    |   |      |   | 835,215 |  
|                                                                             |  |     
|Stock-based employee compensation expense determined using fair value method |  |      | (37,256    | ) |      |   | (53,909 | )
|                                                                             |  |      |            |   |      |   |         |  
|Pro forma increase (decrease) in net assets from operations                  |  | $    | (1,493,060 | ) |      | $ | 769,647 |  
|                                                                             |  |      |            |   |      |   |         |  
|Net increase (decrease) in net assets from operations per share              |  |      |            |   |      |   |         |  
|Basic, as reported                                                           |  | $    | (0.24      | ) |      | $ |        |  
|                                                                             |  |      |            |   |      |   |         |  
|Basic, pro-forma                                                             |  | $    | (0.24      | ) |      | $ |        |  
|                                                                             |  |      |            |   |      |   |         |  
|Diluted, as reported                                                         |  | $    | (0.23      | ) |      | $ | 0.12    |  
|                                                                             |  |      |            |   |      |   |         |  
|Diluted, pro-forma                                                           |  | $    | (0.23      | ) |      | $ | 0.12    |  
|                                                                             |  |      |            |   |      |   |         |  



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



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federal income taxes on otherwise taxable income (including net realized capital gains) which is distributed to
stockholders. Therefore, no provision for federal income taxes is recorded in the financial statements. The Fund borrows money from time to time to maintain its tax status under the Internal Revenue Code as a RIC. See Note 2 for further discussion
of the Funds RIC borrowings.



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



The Fund has entered into a 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 $37,500 related to such services for each of the nine months ended September 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, whose principal officers are also officers of the Fund, 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 $8,181,597, 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 nine months ended September 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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##### Table of Contents

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



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



During the nine months ended September 30, 2003, the Fund made follow-on investments of $3,224,870 in eight companies, including $944,870 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 $7,801,775 during the nine months ended September 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
1,019,500 and 1,105,500 shares of the Funds common stock with a weighted average exercise price of $8.48 and $8.41 per share were outstanding at September 30, 2004 and 2003, respectively. Of these options, 832,110 and 752,938 options, with a
weighted average exercise price of $8.65 and $8.75 were exercisable at September 30, 2004 and 2003, respectively. Of the outstanding options at September 30, 2004, 962,300 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 August 8, 2003, options to
purchase 5,500 shares of the Funds common stock at a price of $8.63 per share were issued to a new director, upon his election to the board of directors of the Fund. 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 December
24, 2003, options to purchase 40,000 shares at $7.85 per share were issued to the Funds chief financial officer. 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. Because of these rights, the options are accounted for using variable plan accounting. Variable plan accounting resulted in non-cash compensation expense (benefit) of $123,446 during the nine months ended
September 30, 2004. The fund has recorded an accrued liability of $425,848 related to the non-cash compensation, equivalent to the value of the options at September 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. The



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Fund subsequently withdrew the exemptive application in June 2004. 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. If the 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 raised certain issues with respect to the manner in which the officer notes were settled in 2001 (the loan transactions). In November 2003, the Funds board of directors appointed a special committee
to address the SEC staffs issues and retained Dechert LLP as independent legal counsel to the special committee of the board with respect to the issues raised by the SEC. The Fund has responded to the staffs questions and supplied
additional information, and the special committee and counsel met personally with the SEC staff. In September 2004, the independent directors of the Fund unanimously approved a proposal to resolve the issues surrounding the loan transactions by
unwinding the loan transactions and attempting to place the Fund in the position it would have been in had the loan transactions never taken place. The proposal communicated to the officers and former officers of the Fund provided that the Fund
would formally release each of the Funds officers and former officers from any and all claims that the Fund might have with respect to the loan transactions, in exchange for repayment of the balance of benefits received as a result of the loan
transactions. The aggregate amount requested from individual current and former officers under the proposal is approximately $863,000. The amount of $602,210 has been recorded as a receivable at September 30, 2004. On November 12, 2004, the Fund
issued releases to three current officers of the Fund in consideration of their payment to the Fund of an aggregate of $602,210 in cash.



If all outstanding options for which the average market price exceeds the exercise price at September 30, 2004 and December 31, 2003, had been exercised,
the funds net asset value would have been reduced by $0.01 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. If the Fund did not use the proceeds to repurchase shares, the net asset value would have been reduced by $0.40 and $0.39 per share, respectively.



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



On October 1, 2004, the Fund sold U.S. Treasury bills for $24,000,000 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 October and November 2004, the Fund repurchased 55,545 shares of its common stock in the open market for $453,125 at an average discount of approximately 25% from net
asset value. This completes the Funds previously announced $3 million stock repurchase program.



Subsequent to September 30, 2004, approximately $8 million of the Funds cash was invested in 6 month and 9 month government securities to obtain a
higher interest rate.



On November 12, 2004, the Fund issued
releases related to the loan transactions to the current officers of the Fund in consideration of their payment to the Fund of an aggregate of $602,210 in cash (see footnote 8).



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In November 2004, the Fund declared a net investment income dividend for 2004 of $0.57 per share. The
dividend is payable to the shareholders of record on December 8, 2004. The dividend will be paid by the issuance of additional shares of common stock, unless shareholders request payment by cash, by specific election. Payment of the dividend is
expected to occur in January 2005.



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 September 30, 2004. We did not make any new investments during the nine months ended September 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.



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 nine months ended
September 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.



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In May through September of 2004, the Fund repurchased 326,155 shares (of which 225,000 shares were sold
by a significant shareholder) of its common stock for $2,555,667, pursuant to a plan to spend up to $3,000,000 to repurchase our common stock in the open market. The 326,155 shares were repurchased at an average discount rate of approximately 27%
from net asset value, and the effect of these transactions added approximately $0.16 per share to the net asset value of our outstanding shares. Subsequent to quarter end, the Funds previously announced $3 million stock repurchase program was
completed.



In August 2004, the Board of Directors appointed
Harry O. Nicodemus IV as Chief Compliance Officer of the Fund. In October 2004, the Board met with the Chief Compliance Officer and reviewed the Funds Compliance program. The Chief Compliance Officer provides the Board access to a single
person with overall compliance responsibility who answers directly to the Board.



Significant Accounting Policies



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



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



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



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



Most of our common equity investments are appraised at a
multiple of free cash flow generated by the Portfolio Company in its 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



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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 $8,181,600, 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.



Liquidity and Capital Resources



At September
30, 2004, we had $18,328,416 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 $44,429,031 of our total assets of $92,538,951 invested in portfolio securities of fourteen operating companies and two venture capital funds. $23,993,887 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.



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
November 15, 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.



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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.



On September 24, 2004, the Fund bought secured
senior notes payable of Equicom, Inc. for $1,038,342 from CIT.



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 September 30, 2004, we have committed to invest up to an additional $1.4 million in the two venture capital funds.



Net cash provided by operating activities was $ 57,274,600 and $2,778,770 for
the nine months ended September 30, 2004 and 2003, respectively. Approximately $9 million in estimated value of our investments are in the form of notes receivable from Portfolio Companies. However, we are currently receiving cash interest on notes
which aggregate $5.9 million in fair value. Certain of the promissory notes provide that interest may be paid in kind or that the original issue discount may be accreted over the life of the notes, by adding such amounts to the principal of the
notes.



Because of the nature and size of our portfolio
investments, we periodically borrow funds to make qualifying investments to maintain our tax status as a RIC. During the nine months ended September 30, 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.



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 loss after all expenses was $409,270 and $504,600 for the
three months ended September 30, 2004 and 2003, respectively. Net investment income after all expenses amounted to $3,111,738 and $2,809,811 for the nine months ended September 30, 2004 and 2003, respectively. Total income from portfolio securities
was $449,773 and $890,438 for the three months ended September 30, 2004 and 2003,



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respectively. Total income from portfolio securities was $5,221,768 for the nine months ended September 30, 2004 and
$6,111,784 for the comparable period in 2003. The decrease was primarily due to a reduction in the aggregate principal amount of notes receivable from portfolio companies because of principal payments received and realized losses.



The Fund pays the Management Company management fee compensation at an annual
rate of 2% of the net assets of the Fund paid quarterly in arrears. For the three months ended September 30, 2004 and 2003, the fees were $338,451 and $388,998, respectively. Such fees amounted to $1,039,682 and $1,172,324 during the nine months
ended September 30, 2004 and 2003, respectively. The decreases in management fees were due to a decrease in net assets between the two periods.



Professional fees increased by $59,986 and $210,058 for the three and nine months ended September 30, 2004 over the comparable periods for 2003. These
increases are 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 by $213,068 and $472,703 for the
three and nine months ended September 30, 2004 from the same periods in 2003 due to the payoff of the revolving line of credit. Excise taxes estimated at $36,832 which were expensed in the second quarter of 2003 were reversed in the third quarter of
2004, as it was determined the previous accrual was not needed. In addition, franchise taxes increased $58,816 in the first nine months of 2004 over 2003, primarily due to increases in Texas franchise taxes because a larger percentage of income was
from Texas-based companies.



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 decreases of $228,874 and $711,769 for the three and nine months ended September
30, 2004 compared to the same periods in 2003. Fluctuation in the recorded expenses are a result of fluctuations in the market price of our stock.



Realized Gains and Losses on Sales of Portfolio Securities



During the nine months ended September 30, 2004, the Fund realized net capital losses of $4,415,904. We sold a portion of our preferred stock in Container
Acquisition, Inc., and exchanged the balance of our preferred stock and all of our warrants for the common stock of ConGlobal Industries, Inc., realizing a capital loss of $7,832,017. We exchanged our note from Container Acquisition, Inc. for a new
note from ConGlobal Industries, Inc. and realized a capital loss of $1,028,343 on the note exchange. We sold 1,154,316 shares of ENGlobal, Inc. (ENG) common stock, realizing a capital loss of $119,803. We exchanged our investment in
Turfgrass America, Inc. (TAI) for an investment in a new entity that acquired the assets and business of TAI, realizing a capital loss of $6,049,696. We sold our interests in Alenco and Strategic Materials, and received a cash
distribution from AWHLLC, realizing capital gains of $10,438,432. In addition, we had other capital gains of $172,003 and realized a short term capital gain of $3,520 on our U.S. Treasury bills.



During the nine months ended September 30, 2003, the Fund realized net
capital losses of $8,081,347 from the sale of securities of seven Portfolio Companies. The Fund received $197,986 for its remaining investment in Milam Enterprises, LLC, realizing a capital gain of $196,075. The Fund 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. Also, the Fund sold 8,863 shares of Weatherford International common stock for $353,409, realizing a capital loss of $160,202. The Fund received $3,452 from ENGlobal Corporation in payment for 3,596 shares of common
stock, realizing a capital gain of $1,350. On September 30,2003, the Fund received $690,000 from the liquidation of GCS RE, Inc., realizing a capital gain of $369,076. The Fund also realized a short-term capital loss of $1,258 from the purchase and
sale of U.S. Treasury bills during 2003.



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Changes in Unrealized Appreciation/Depreciation of Portfolio Securities



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



Net unrealized depreciation on investments decreased by
$4,980,305 during the nine months ended September 30, 2003 from $5,417,014 to $436,709. Such change resulted from increases in the estimated fair value of eight of our Portfolio Companies aggregating $7,395,883, decreases in the estimated fair value
of eleven of the Funds Portfolio Companies aggregating $11,547,082 and the transfer of $9,131,504 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 nine months ended September 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 nine months ended September 30,
2004, the Fund made follow-on investments of $5,917,549 in five companies and two venture funds, including $351,729 in accrued interest and dividends received in the form of additional portfolio securities and $3,870,679 recorded as the cost of
securities received in exchange for securities previously held in acquired or merged companies. In addition, the Fund realized a net capital loss of $4,415,904 during the nine months ended September 30, 2004.



For the nine months ended September 30, 2004, we received an additional 1443
shares of preferred stock of Sovereign Business Forms, Inc. (Sovereign) in dividends with a cost basis of $144,300. In addition, Sovereign elected to convert $207,428 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.



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 September 30, 2004.



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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 $959,632 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 September 30, 2004.



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.



On September 3, 2004, Container Acquisition, Inc. and Global Intermodal
Systems completed a merger, with the surviving entity changing its name to ConGlobal Industries, Inc. The Fund sold a portion of its former investment in preferred stock and exchanged the balance for 23,027,303 shares of common stock at a cost of
$495. The Fund also exchanged its former note receivable for certain assets and a new note with a face value of $3,265,762 (which is reduced by $516,555 original issue discount). The Fund also acquired additional members interest in CCI-ANI
Finance, LLC, for $355,942, of which only $50,000 was paid in cash. These transactions resulted in recorded realized capital losses of $8,860,360.



On September 24, 2004, the Fund purchased all of the secured senior debt of Equicom from its lender for $1,038,342 in cash.



Subsequent Events



On October 1, 2004, we sold U.S. Treasury bills for $24,000,000 and repaid our margin loan.



Subsequent to September 30, the Fund repurchased 55,545 shares of its common
stock in the open market for $453,125 at an average discount of approximately 25% from net asset value. This completes the Funds previously announced $3 million stock repurchase program.



Subsequent to September 30, approximately $8 million in cash was invested in
6 month and 9 month government securities to obtain a higher interest rate.



On November 12, 2004, the Fund issued releases related to the loan transactions to the current officers of the Fund in consideration of their payment to the Fund of an aggregate of $602,210 in cash (see footnote 8).



In November 2004, the Fund declared a net investment income
dividend for 2004 of $0.57 per share. The dividend is payable to the shareholders of record on December 8, 2004. The dividend will be paid by the issuance of additional shares of common stock, unless shareholders request payment by cash, by specific
election. Payment of the dividend is expected to occur in January 2005.



Item 3. Quantitative and Qualitative Disclosure about Market Risk



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



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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 lines of credit expose the Fund to certain market risks.
Based on the average outstanding borrowings under our lines of credit for the nine months ended September 30, 2004 and 2003, respectively, of approximately $1,810,619 and $10,994,432, a change of one percent in the interest rate would have caused a
change in interest expense of approximately $14,000 and $82,000. This change would have resulted in a change of $0.002 and $0.013 in the net asset value per share at September 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, and is currently
unutilized.



A major portion of the Funds investment
portfolio consists of debt and equity investments in private companies. Modest changes in public market equity prices generally do not significantly impact the estimated fair value of these investments. However, significant changes in market equity
prices can have a longer-term effect on valuations of private companies, which could affect the carrying value and the amount and timing of gains or losses realized on these investments. A small portion of 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 September 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 34% of our investments in Portfolio
Company securities (at fair value) at September 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 September 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 September 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 PricePaid Per Share |      | SharesPurchased asPart of aPubliclyAnnounced Plan |         | Dollar Value of Shares that may yet bepurchased under plan (1)
|Jan 1 - Apr 30   |  |                               |  |                         |     |                                                   |        |                                                                |   |         
|May 1 - May 31   |  | 7,305                          |  | $                       | 7.66 |                                                   | 7,305   |                                                                | $ | 2,944,016
|Jun 1 - Jun 30   |  | 66,800                         |  | $                       | 7.76 |                                                   | 66,800  |                                                                | $ | 2,425,796
|Jul 1 - Jul 31   |  | 126,400                        |  | $                       | 7.79 |                                                   | 126,400 |                                                                | $ | 1,440,707
|Aug 1 - Aug 31   |  | 3,850                          |  | $                       | 7.60 |                                                   | 3,850   |                                                                | $ | 1,411,461
|Sept 1 - Sept 30 |  | 121,800                        |  | $                       | 7.94 |                                                   | 121,800 |                                                                | $ | 444,333  
|                 |  |                                |  |                         |      |                                                   |         |                                                                |   |          
|Total            |  | 326,155                        |  | $                       | 7.84 |                                                   | 326,155 |                                                                | $ | 444,333  

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|(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 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



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



On August 11, 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 June 30, 2004.



On September 16, 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 merger of Container-Care
International, one of our portfolio companies, with Global Intermodal Systems.



SIGNATURE



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



|                        |  |                          
|----------------------- |  | -------------------------
|Date: November 15, 2004 |  | EQUUS II INCORPORATED    
|                        | 
|                        |  | /s/ Harry O. Nicodemus IV
|                        |  | Harry O. Nicodemus IV    
|                        |  | Chief Financial Officer  



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