UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549






FORM 10-Q






(Mark One)

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

For the quarterly period ended September
30, 2012

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 814-00098








EQUUS TOTAL RETURN, INC.

(Exact name of registrant as specified in
its charter)










|                                                                       |                                             
|---------------------------------------------------------------------- | --------------------------------------------
|Delaware                                                               | 76-0345915                                  
|(State or other jurisdiction of
        incorporation or organization) | (I.R.S. Employer
        Identification No.)
|                                                                       |                                             
|Eight Greenway Plaza, Suite 930 Houston, Texas                         | 77046                                       
|(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
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).    Yes   ̈    No  
 ̈

Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and
large accelerated filer” in Rule 12b-2 of the Exchange Act.



|                          |                     |                         |                            
|------------------------- | ------------------- | ----------------------- | ---------------------------
|Large accelerated filer  ̈ | Accelerated filer  ̈ | Non-accelerated filer x | Smaller Reporting Company  ̈

Indicate by check mark whether the registrant
is a shell company.    Yes   ̈    No  
x

There were 10,561,646 shares of the
registrant’s common stock, $.001 par value, outstanding, as of November 14, 2012.













EQUUS TOTAL RETURN, INC.

(A Delaware Corporation)

INDEX



|                                                                                                  |     
|------------------------------------------------------------------------------------------------- | ----
|                                                                                                  | PAGE
|PART I. FINANCIAL INFORMATION                                                                     |     
|Item 1. Financial Statements                                                                      |     
|Balance
    Sheets                                                                                | 3   
|Statements
    of Operations                                                                      | 4   
|Statements
    of Changes in Net Assets                                                           | 5   
|Statements
    of Cash Flows                                                                      | 6   
|Supplemental
    Information—Selected Per Share Data and Ratios                                   | 7   
|Schedule
    of Investments                                                                       | 8   
|Notes
    to Financial Statements                                                                 | 13  
|Item 2.
    Management’s Discussion and Analysis of Financial Condition and Results of Operations | 23  
|Item 3.
    Quantitative and Qualitative Disclosure about Market Risk                             | 30  
|Item 4.
    Controls and Procedures                                                               | 30  
|PART
    II. OTHER INFORMATION                                                                    |     
|Item
    1. Legal Proceedings                                                                     | 30  
|Item
    1A. Risk Factors                                                                         | 31  
|Item 6.
    Exhibits                                                                              | 33  
|SIGNATURE                                                                                         | 34  

2





EQUUS TOTAL RETURN, INC.

BALANCE SHEETS



Item  1.	Financial
Statements

Part I. Financial Information





|(in thousands, except per share amounts)                                                       |  | September 30, 
2012 |         | December 31,
2011
|---------------------------------------------------------------------------------------------- |  | ------------------- | ------- | -----------------
|                                                                                               |  | (Unaudited)         |         |                  
|                                                                                               |  |                     |         |                  
|Assets                                                                                         |  |                     |         |                  
|Investments in portfolio securities at fair value:                                             |  |                     |         |                  
|Control investments (cost at $8,540 and $23,353 respectively)                                  |  | $                   | 375     |                  
|Affiliate investments (cost at $350 and $350 respectively)                                     |  |                     | 150     |                  
|Non-affiliate investments (cost at $13,178 and $12,878 respectively)                           |  |                     | 4,808   |                  
|Total investments in portfolio securities at fair value                                        |  |                     | 5,333   |                  
|Cash and cash equivalents                                                                      |  |                     | 26,246  |                  
|Restricted cash and temporary cash investments                                                 |  |                     | —       |                  
|Accounts receivable and other                                                                  |  |                     | 148     |                  
|Accrued interest receivable                                                                    |  |                     | 116     |                  
|Total assets                                                                                   |  |                     | 31,843  |                  
|Liabilities and net assets                                                                     |  |                     |         |                  
|Accounts payable and accrued liabilities                                                       |  |                     | 163     |                  
|Accounts payable to related parties                                                            |  |                     | 16      |                  
|Borrowing under margin account                                                                 |  |                     | —       |                  
|Total liabilities                                                                              |  |                     | 179     |                  
|Commitments and contingencies                                                                  |  |                     |         |                  
|Net assets                                                                                     |  | $                   | 31,664  |                  
|                                                                                               |  |                     |         |                  
|Net assets consist of:                                                                         |  |                     |         |                  
|Common stock, par value                                                                        |  | $                   | 10      |                  
|Capital in excess of par value                                                                 |  |                     | 59,104  |                  
|Undistributed net investment losses                                                            |  |                     | (10,715 | )                
|Unrealized depreciation of portfolio securities, net                                           |  |                     | (16,735 | )                
|Total net assets                                                                               |  | $                   | 31,664  |                  
|Shares of common stock issued and outstanding, $.001 par value,
    50,000 shares authorized   |  |                     | 10,562  |                  
|Shares of preferred stock issued and outstanding, $.001 par
    value, 5,000 shares authorized |  |                     | —       |                  
|Net asset value per share                                                                      |  | $                   | 3.00    |                  



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



3





EQUUS TOTAL RETURN, INC.

STATEMENTS OF OPERATIONS

(Unaudited)





|                                                                             |  | Three months ended |         | Nine months ended
|---------------------------------------------------------------------------- |  | ------------------ | ------- | -----------------
|                                                                             |  | September 30,      |         | September 30,    
|(in thousands,
    except per share amounts)                                 |  | 2012               |         | 2011             
|Investment income (loss), net:                                               |  |                    |         |                  
|Interest income (loss), net:                                                 |  |                    |         |                  
|Control investments                                                          |  | $                  | (101    | )                
|Affiliate investments                                                        |  |                    | —       |                  
|Non-affiliate investments                                                    |  |                    | —       |                  
|Total interest income (loss)                                                 |  |                    | (101    | )                
|Interest from temporary cash investments                                     |  |                    | —       |                  
|Total investment income (loss)                                               |  |                    | (101    | )                
|                                                                             |  |                    |         |                  
|Expenses:                                                                    |  |                    |         |                  
|Compensation expense                                                         |  |                    | 177     |                  
|Professional fees                                                            |  |                    | 273     |                  
|Director fees and expenses                                                   |  |                    | 73      |                  
|Mailing, printing and other expenses                                         |  |                    | 13      |                  
|General and administrative expense                                           |  |                    | 45      |                  
|Taxes                                                                        |  |                    | 3       |                  
|Interest expense                                                             |  |                    | —       |                  
|Offering costs                                                               |  |                    | —       |                  
|Settlement expense                                                           |  |                    | —       |                  
|Total expenses                                                               |  |                    | 584     |                  
|                                                                             |  |                    |         |                  
|Net investment loss                                                          |  |                    | (685    | )                
|                                                                             |  |                    |         |                  
|Net realized gain (loss):                                                    |  |                    |         |                  
|Control investments                                                          |  |                    | —       |                  
|Affiliate investments                                                        |  |                    | —       |                  
|Non-affiliate investments                                                    |  |                    | —       |                  
|Temporary cash investments                                                   |  |                    | —       |                  
|Net realized loss                                                            |  |                    | —       |                  
|                                                                             |  |                    |         |                  
|Net unrealized depreciation of portfolio securities:                         |  |                    |         |                  
|End of period                                                                |  |                    | (16,735 | )                
|Beginning of period                                                          |  |                    | (15,666 | )                
|Net change in unrealized appreciation (depreciation) of portfolio securities |  |                    | (1,069  | )                
|                                                                             |  |                    |         |                  
|Net decrease in net assets resulting from operations                         |  | $                  | (1,754  | )                
|                                                                             |  |                    |         |                  
|Net decrease in net assets resulting from operations per share:              |  |                    |         |                  
|Basic and diluted                                                            |  | $                  | (0.17   | )                
|Weighted average shares outstanding:                                         |  |                    |         |                  
|Basic and diluted                                                            |  |                    | 10,562  |                  



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



4





EQUUS TOTAL RETURN, INC.

STATEMENTS OF CHANGES IN NET ASSETS

(Unaudited)



|                                                                     |  | Nine months ended September 30,
|-------------------------------------------------------------------- |  | -------------------------------
|(in thousands)                                                       |  | 2012                           
|Net decrease in net assets resulting from operations                 |  | $                              
|Capital share transactions:                                          |  |                                
|Shares issued for portfolio securities                               |  |                                
|Net increase in net assets resulting from capital share transactions |  |                                
|Increase (decrease) in net assets                                    |  |                                
|Net assets at beginning of period                                    |  |                                
|Net assets at end of period                                          |  | $                              





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



5





EQUUS TOTAL RETURN, INC.

STATEMENTS OF CASH FLOWS

(Unaudited)





|                                                                                                                            |  | Nine months ended September 30,
|--------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------
|(in thousands)                                                                                                              |  | 2012                           
|Reconciliation of decrease in net assets resulting from operations to net cash provided by operating activities:            |  |                                
|Net decrease in net assets resulting from operations                                                                        |  | $                              
|Adjustments to reconcile net decrease in net assets resulting from operations to net cash provided by operating activities: |  |                                
|Net realized loss                                                                                                           |  |                                
|Net change in unrealized depreciation of portfolio securities                                                               |  |                                
|Changes in operating assets and liabilities:                                                                                |  |                                
|Purchase of portfolio securities                                                                                            |  |                                
|Net proceeds from dispositions of portfolio securities                                                                      |  |                                
|Principal payments received from portfolio securities                                                                       |  |                                
|Cash settlement of collateral                                                                                               |  |                                
|Sales of temporary cash investments, net                                                                                    |  |                                
|(Increase) decrease in accounts receivable and other                                                                        |  |                                
|Decrease in accrued interest receivable                                                                                     |  |                                
|Decrease in deferred offering costs                                                                                         |  |                                
|Increase in accounts payable and accrued liabilities                                                                        |  |                                
|Decrease in accounts payable-related parties                                                                                |  |                                
|Net cash provided by operating activities                                                                                   |  |                                
|                                                                                                                            |  |                                
|Cash flows from financing activities:                                                                                       |  |                                
|Deferred offering costs                                                                                                     |  |                                
|Borrowings under margin account                                                                                             |  |                                
|Repayments under margin account                                                                                             |  |                                
|Net cash used in financing activities                                                                                       |  |                                
|Net increase in cash and cash equivalents                                                                                   |  |                                
|Cash and cash equivalents at beginning of period                                                                            |  |                                
|Cash and cash equivalents at end of period                                                                                  |  | $                              
|Non-cash operating and financing activities:                                                                                |  |                                
|Shares issued in lieu of cash dividend                                                                                      |  | $                              
|Accrued interest exchanged for portfolio securities                                                                         |  | $                              
|Supplemental disclosure of cash flow information:                                                                           |  |                                
|Interest paid                                                                                                               |  | $                              
|Income taxes paid                                                                                                           |  | $                              





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



6





EQUUS TOTAL RETURN, INC.

SUPPLEMENTAL INFORMATION—SELECTED PER
SHARE DATA AND RATIOS

(Unaudited)





|                                                                                    |  | Nine months ended September 30,
|----------------------------------------------------------------------------------- |  | -------------------------------
|                                                                                    |  | 2012                           
|                                                                                    |  |                                
|Investment income                                                                   |  | $                              
|Expenses                                                                            |  |                                
|Net investment loss                                                                 |  |                                
|Net realized loss                                                                   |  |                                
|Net change in unrealized depreciation of portfolio securities                       |  |                                
|Net decrease in net assets resulting from operations                                |  |                                
|Capital transactions:                                                               |  |                                
|Shares issued for portfolio securities                                              |  |                                
|Dilutive effect of shares issued                                                    |  |                                
|Net decrease in net assets resulting from capital transactions                      |  |                                
|Net decrease in net assets                                                          |  |                                
|Net assets at beginning of period                                                   |  |                                
|Net assets at end of period, basic and diluted                                      |  | $                              
|                                                                                    |  |                                
|Weighted average number of shares outstanding during period, in thousands           |  |                                
|Market price per share:                                                             |  |                                
|Beginning of period                                                                 |  | $                              
|End of period                                                                       |  | $                              
|Selected information and ratios:                                                    |  |                                
|Ratio of expenses to average net assets                                             |  |                                
|Ratio of net investment loss to average net assets                                  |  |                                
|Ratio of net decrease in net assets resulting from operations to average net assets |  |                                
|Total return on market price (1)                                                    |  |                                





(1)Total
return = [(ending market price per share - beginning price per share) / beginning market price per share].



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



7





EQUUS TOTAL RETURN, INC.

SCHEDULE OF INVESTMENTS

September 30, 2012

(Unaudited)

(in thousands, except share data)





|Name and Location of                                                                           |                                | Date of Initial |                                                                                           |        |           |       | Cost of    |   | Fair    
|---------------------------------------------------------------------------------------------- | ------------------------------ | --------------- | ----------------------------------------------------------------------------------------- | ------ | --------- | ----- | ---------- | - | --------
|Portfolio Company                                                                              | Industry                       | Investment      | Investment                                                                                |        | Principal |       | Investment |   | Value(1)
|                                                                                               |                                |                 |                                                                                           |        |          
|Control Investments:  Majority-owned
    (3):                                                  |                                |                 |                                                                                           |        |           |       |            |  
|Equus Energy, LLC 
Houston, TX                                                                 | Energy                         | December 2011   | Member interest (100%)                                                                    |        |           | $     | 250        | $ | 92      
|Equus Media Development Company, LLC 
Houston, TX                                              | Media                          | January 2007    | Member interest (100%)                                                                    |        |           |       | 3,000      |   | 146     
|Spectrum Management, LLC 
Carrolton, TX                                                        | Business products and services | December 1999   | 285,000 units of Class A member interest (92.1%/82.5% fully diluted)                      |        |           |       | 2,850      |   | -       
|                                                                                               |                                |                 | 16% subordinated promissory notes due 11/11(2)                                            | $      | 2,440     |       | 2,440      |   | 137     
|                                                                                               |                                |                 |                                                                                           |        |           |       | 5,290      |   | 137     
|Total Control Investments: Majority-owned (represents 7.0% of total investments at fair value) |                                |                 | $                                                                                         | 8,540  | $`        | 375  
|Affiliate Investments (4):                                                                     |                                |                 |                                                                                           |        |           |       |            |   |         
|PalletOne, Inc. 
Bartow, FL                                                                    | Shipping products and services | October 2001    | 350,000 shares of common stock (18.70%)                                                   |        |           | $     | 350        | $ | 150     
|Total Affiliate Investments (represents 2.8% of total investments at fair value)               |                                |                 | $                                                                                         | 350    | $`        | 150  
|Non-Affiliate Investments (less than 5% owned):                                                |                                |                 |                                                                                           |        |           |      
|The Bradshaw Group
Richardson, TX                                                              | Business products and services | May 2000        | 576,828 Class B shares (12.25%)  preferred stock                                          |        |           | $     | 1,795      | $ | -       
|                                                                                               |                                |                 | 38,750 Class C shares preferred stock                                                     |        |           |       | -          |   | -       
|                                                                                               |                                |                 | 788,649 Class D shares 15% preferred stock                                                |        |           |       | -          |   | -       
|                                                                                               |                                |                 | 2,218,109 Class E shares 8% preferred stock                                               |        |           |       | -          |   | -       
|                                                                                               |                                |                 | Warrant to buy 2,229,450 shares of common stock through 5/16                              |        |           |       | -          |   | -       
|                                                                                               |                                |                 |                                                                                           |        |           |       | 1,795      |   | -       
|Infinia Corporation
Ogden, UT                                                                  | Alternative energy             | June 2007       | 115,180 shares common stock (0.06%)                                                       |        |           |       | 8,000      |   | -       
|                                                                                               |                                |                 | Option to purchase 16,000 shares of common stock at $6.50 per share through 12/12         |        |           |       | -          |   | -       
|                                                                                               |                                |                 |                                                                                           |        |           |       | 8,000      |   | -       
|Orco Property Group
Paris, France                                                              | Real estate                    | April 2011      | 1,102,445 ordinary shares                                                                 |        |           |       | 1,877      |   | 2,395   
|                                                                                               |                                |                 | 471,211 ordinary shares                                                                   |        |           |       | 802        |   | 1,024   
|                                                                                               |                                |                 | 10% Promissory note due 2/18 (5)                                                          | $      | 704       |       | 704        |   | 1,389   
|                                                                                               |                                |                 |                                                                                           |        |           |       | 3,383      |   | 4,808   
|Trulite, Inc. 
Columbia, SC                                                                    | Alternative energy             | August 2008     | Warrants to buy 8,934,211 shares of common stock at $0.01 - $0.38 per share through 11/15 |        |           |       | -          |   | -       
|Total Non-Affiliate Investments (represents 90.2% of total investments at fair value)          |                                |                 | $                                                                                         | 13,178 | $         | 4,808
|Total Investments in Portfolio Securities                                                      |                                |                 |                                                                                           | $      | 22,068    | $     | 5,333     
|Total Investments                                                                              |                                |                 |                                                                                           | $      | 22,068    | $     | 5,333     





|(1) |  | See Note 3 to the financial statements, Valuation of Investments.
|--- |  | -----------------------------------------------------------------

|(2) |  | Non-income producing.
|--- |  | ---------------------

|(3) |  | Majority owned investments are generally defined under the Investment Company Act
of 1940 as companies in which we own more than 50% of the voting securities of the company.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Affiliate investments are generally defined under the Investment Company Act of 1940
as companies in which we own at least 5% but not more than 25% voting securities of the company.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Income producing.
|--- |  | -----------------



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



8





EQUUS TOTAL RETURN, INC.

SCHEDULE OF INVESTMENTS – (Continued)

September 30, 2012

(Unaudited)

Except for our holding of ordinary shares
of in Orco Property Group S.A. (“OPG”), substantially all of our portfolio securities are restricted from public sale
without prior registration under the Securities Act of 1933 or other relevant foreign regulatory authority. We negotiate certain
aspects of the method and timing of the disposition of our investment in each portfolio company, including registration rights
and related costs.

As defined in the Investment Company
Act of 1940, all of our investments, except for our holding in OPG are in eligible
portfolio companies. We provide significant managerial assistance to portfolio companies that comprise 9.8% of the total value
of the investments in portfolio securities as of September 30, 2012

Our investments in portfolio securities
consist of the following types of securities as of September 30, 2012 (in thousands):



|Type of Securities            |  | Cost |        | Fair Value |  | Fair
    Value as Percentage of Net
    Assets
|----------------------------- |  | ---- | ------ | ---------- |  | ----------------------------------------------
|Common stock                  |  | $    | 11,029 |            |  | $                                             
|Secured and subordinated debt |  |      | 3,144  |            |  |                                               
|Limited liability company     |  |      | 6,100  |            |  |                                               
|Preferred stock               |  |      | 1,795  |            |  |                                               
|Total                         |  | $    | 22,068 |            |  | $                                             





Accrued interest has been impaired on notes
receivable included in secured and subordinated debt with a fair value of $0.1 million.

The following is a summary by industry
of the Fund’s investments in portfolio securities as of September 30, 2012 (in thousands):



|Industry                       |  | Fair Value |       | Fair
    Value as Percentage of Net
    Assets
|------------------------------ |  | ---------- | ----- | ----------------------------------------------
|Real estate                    |  | $          | 4,808 |                                               
|Media                          |  |            | 146   |                                               
|Business products and services |  |            | 137   |                                               
|Shipping products and services |  |            | 150   |                                               
|Energy                         |  |            | 92    |                                               
|Total                          |  | $          | 5,333 |                                               



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

9







EQUUS
TOTAL RETURN, INC.

SCHEDULE OF INVESTMENTS

DECEMBER 31, 2011

(in thousands, except share data)



|Name and Location of                                                                                |                                | Date of Initial |                                                                        |        |           |        | Cost of    |   | Fair    
|--------------------------------------------------------------------------------------------------- | ------------------------------ | --------------- | ---------------------------------------------------------------------- | ------ | --------- | ------ | ---------- | - | --------
|Portfolio Company                                                                                   | Industry                       | Investment      | Investment                                                             |        | Principal |        | Investment |   | Value(1)
|                                                                                                    |                                |                 |                                                                        |        |          
|Control Investments:  Majority-owned (5):                                                           |                                |                 |                                                                        |        |           |        |            |  
|Equus Energy, LLC 
Houston, TX                                                                      | Energy                         | December 2011   | Member interest (100%)                                                 |        |           | $      | 250        | $ | 236     
|Equus Media Development Company, LLC
Houston, TX                                                    | Media                          | January 2007    | Member interest (100%)                                                 |        |           |        | 3,000      |   | 163     
|Sovereign Business Forms, Inc. 
Houston, TX                                                         | Business products and services | August 1996     | 1,214,630 shares of common stock (64.67% / 55.00% fully diluted)       |        |           |        | 5,080      |   | 4,488   
|                                                                                                    |                                |                 |                                                                        |        |           |        |            |   |         
|                                                                                                    |                                |                 | 12% subordinated promissory notes due 
5/13(2)                         | $      | 2,363     |        | 2,363      |   | 2,363   
|                                                                                                    |                                |                 |                                                                        |        |           |        | 7,443      |   | 6,851   
|Spectrum Management, LLC
Carrolton, TX                                                              | Business products and services | December 1999   | 285,000 units of Class A member interest (92.1% / 82.5% fully diluted) |        |           |        | 2,850      |   | -       
|                                                                                                    |                                |                 |                                                                        |        |           |        |            |   |         
|                                                                                                    |                                |                 | 16% subordinated promissory notes due 
11/11(3)(4)                     |        | 2,440     |        | 2,440      |   | 319     
|                                                                                                    |                                |                 |                                                                        |        |           |        | 5,290      |   | 319     
|Total Control Investments: Majority-owned (represents 30.1% of total investments at fair value)     |                                |                 | $                                                                      | 15,983 | $         | 7,569 
|Control Investments: Non-majority owned(6):                                                         |                                |                 |                                                                        |        |           |       
|ConGlobal Industries Holding, Inc.
San Ramon, CA                                                    | Shipping products and services | February 1997   | 24,397,303 shares of common stock (34.2%)                              |        |           | $      | 1,370      | $ | -       
|                                                                                                    |                                |                 | 7% subordinated promissory note due 12/12(3)                           | $      | 6,000     |        | 6,000      |   | 5,729   
|                                                                                                    |                                |                 |                                                                        |        |           |        | 7,370      |   | 5,729   
|Total Control Investments: Non-majority owned (represents 22.7% of total investments at fair value) |                                |                 | $                                                                      | 7,370  | $         | 5,729 
|Total Control Investments: (represents 52.8% of total investments at fair value)                    |                                |                 | $                                                                      | 23,353 | $         | 13,298
|Affiliate Investments (7):                                                                          |                                |                 |                                                                        |        |           |        |            |   |         
|PalletOne, Inc. 
Bartow, FL                                                                         | Shipping products and services | October 2001    | 350,000 shares of common stock (18.70%)                                |        |           | $      | 350        | $ | 150     
|Total Affiliate Investments (represents 0.6% of total investments at fair value)                    |                                |                 | $                                                                      | 350    | $         | 150   







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



















10





EQUUS
TOTAL RETURN, INC.

SCHEDULE OF INVESTMENTS—(Continued)

DECEMBER 31, 2011

(in thousands, except share data)



|Name and Location of                                                                   |                                | Date of Initial |                                                                                           |        |           |       | Cost of    |   | Fair     
|-------------------------------------------------------------------------------------- | ------------------------------ | --------------- | ----------------------------------------------------------------------------------------- | ------ | --------- | ----- | ---------- | - | ---------
|Portfolio Company                                                                      | Industry                       | Investment      | Investment                                                                                |        | Principal |       | Investment |   | Value (1)
|                                                                                       |                                |                 |                                                                                           |        |          
|Non-Affiliate Investments (less than 5% owned):                                        |                                |                 |                                                                                           |        |           |      
|The Bradshaw Group Richardson, TX                                                      | Business products and services | May 2000        | 576,828 Class B shares (12.25%) preferred stock                                           |        |           | $     | 1,795      | $ | -        
|                                                                                       |                                |                 | 38,750 Class C shares preferred stock                                                     |        |           |       | -          |   | -        
|                                                                                       |                                |                 | 788,649 Class D shares 15% preferred stock                                                |        |           |       | -          |   | -        
|                                                                                       |                                |                 | 2,218,109 Class E shares 8% preferred stock                                               |        |           |       | -          |   | -        
|                                                                                       |                                |                 | Warrant to buy 2,229,450 shares of common stock through 5/16                              |        |           |       | -          |   | -        
|                                                                                       |                                |                 |                                                                                           |        |           |       | 1,795      |   | -        
|Infinia Corporation
Kennewick, WA                                                      | Alternative energy             | June 2007       | 115,180 shares common stock (0.13%)                                                       |        |           |       | 8,000      |   | -        
|                                                                                       |                                |                 | Option to purchase 16,000 shares of common stock at $6.50 per share through 12/12         |        |           |       | -          |   | -        
|                                                                                       |                                |                 |                                                                                           |        |           |       | 8,000      |   | -        
|Orco Germany S.A. 
Berlin, Germany                                                     | Real estate                    | April 2011      | 8,890 4% Corporate Bonds due 5/12                                                         | $      | 8,113     |       | 3,083      |   | 5,734    
|Trulite, Inc. 
Columbia, SC                                                            | Alternative energy             | August 2008     | Warrants to buy 8,934,211 shares of common stock at $0.01 - $0.38 per share through 11/15 |        |           |       | -          |   | -        
|Total Non-Affiliate Investments (represents 22.8% of total investments at fair value)  |                                |                 | $                                                                                         | 12,878 | $         | 5,734
|Total Investments in Portfolio Securities                                              |                                |                 |                                                                                           | $      | 36,581    | $     | 19,182    
|Temporary Cash Investments                                                             |                                |                 |                                                                                           |        |           |       |            |   |          
|U.S. Treasury Bill (8)                                                                 | Government                     | December 2011   | UST 0% due 3/12                                                                           | $      | 6,000     | $     | 6,000      | $ | 6,000    
|Total Temporary Cash Investments (represents 23.8% of total investments at fair value) |                                |                 | $                                                                                         | 6,000  | $         | 6,000
|Total Investments                                                                      |                                |                 |                                                                                           |        |           | $     | 42,581     | $ | 25,182   



|(1) | See Note 3 to the financial statements, Valuation
of Investments.
|--- | -----------------------------------------------------------------



| | (2) | Income-producing.
| | --- | -----------------

| | (3) | Income on these securities is accrued to maturity.
| | --- | --------------------------------------------------

| | (4) | Non-income producing.
| | --- | ---------------------

| | (5) | Majority owned investments are generally defined under the Investment Company Act of 1940 as companies in which we own more
than 50% of the voting securities of the company.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (6) | Non-majority owned control investments are generally defined under the Investment Company Act of 1940 as companies in which
we own more than 25% but not more than 50% of the voting securities of the company.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (7) | Affiliate investments are generally defined under the Investment Company Act of 1940 as companies in which we own at least
5% but not more than 25% voting securities of the company.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (8) | The Fund has included U.S. Treasury Bills in “Restricted Cash and Temporary Cash Investments” on the balance sheet.
| | --- | -------------------------------------------------------------------------------------------------------------------



















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

11





EQUUS TOTAL RETURN,
INC.

SCHEDULE OF INVESTMENTS
– (Continued)

DECEMBER 31, 2011

(in thousands, except
share data)



Except for our holding of 8,890 4% bonds issued
by Orco Germany S.A., substantially all of our portfolio securities are restricted from public sale without prior registration
under the Securities Act of 1933. We negotiate certain aspects of the method and timing of the disposition of our investment in
each portfolio company, including registration rights and related costs.



As defined in the Investment Company Act of
1940, all of our investments, except for our holding of 8,890 Orco Germany bonds, are in eligible portfolio companies. We provide
significant managerial assistance to portfolio companies that comprise 70.1% of the total value of the investments in portfolio
securities as of December 31, 2011.



Our investments in portfolio securities consist
of the following types of securities as of December 31, 2011 (in thousands):





|Type of Securities            |  | Cost |        | Fair Value |  | Fair Value as Percentage of Net Assets
|----------------------------- |  | ---- | ------ | ---------- |  | --------------------------------------
|Secured and subordinated debt |  | $    | 13,886 |            |  | $                                     
|Common stock                  |  |      | 14,800 |            |  |                                       
|Limited liability company     |  |      | 6,100  |            |  |                                       
|Preferred stock               |  |      | 1,795  |            |  |                                       
|Total                         |  | $    | 36,581 |            |  | $                                     





Cash payments of interest are currently being
received and/or accrued on notes aggregating $13.8 million in fair value, while accrued interest has been impaired on notes receivable
included in secured and subordinated debt with a fair value of $0.3 million.



The following is a summary by industry of our
investments in portfolio securities as of December 31, 2011 (in thousands):





|Industry                       |  | Fair Value |        | Fair Value as Percentage of Net Assets
|------------------------------ |  | ---------- | ------ | --------------------------------------
|Business products and services |  | $          | 7,170  |                                       
|Shipping products and services |  |            | 5,879  |                                       
|Real estate                    |  |            | 5,734  |                                       
|Energy                         |  |            | 236    |                                       
|Media                          |  |            | 163    |                                       
|Total                          |  | $          | 19,182 |                                       









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

12





EQUUS TOTAL RETURN, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2012

(Unaudited)



(1) Description of Business and Basis of Presentation



Description of Business—Equus
Total Return, Inc. (“we,” “us,” “our,” “Equus” the
“Company” and 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. Our shares
trade on the New York Stock Exchange under the symbol EQS. On August 11, 2006, our shareholders approved the change of the Fund’s
investment strategy to a total return investment objective. This new strategy seeks to provide the highest total return, consisting
of capital appreciation and current income. In connection with this strategic investment change, the shareholders also approved
the change of name from Equus II Incorporated to Equus Total Return, Inc.



We attempt to maximize the return to stockholders
in the form of current investment income and long-term capital gains by investing in the debt and equity securities of companies
with a total enterprise value of between $15.0 million and $75.0 million, although we may engage in transactions with smaller or
larger investee companies from time to time. We seek to invest primarily in companies pursuing growth either through acquisition
or organically, leveraged buyouts, management buyouts and recapitalizations of existing businesses or special situations. Our income-producing
investments consist principally of debt securities including bonds, subordinate debt, debt convertible into common or preferred
stock, or debt combined with warrants and common and preferred stock. Debt and preferred equity financing
may also be used to create long-term capital appreciation through the exercise and sale of warrants received in connection with
the financing.We seek 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.Given market conditions over the past several years and the performance of our portfolio, our management and board of directors
believe it prudent to continue to review alternatives to refine and further clarify the current strategies.



We elected to be treated as a business development
company under the Investment Company Act of 1940 (“1940 Act”). We currently qualify as a regulated investment company
(“RIC”) for federal income tax purposes and, therefore, are not required to pay corporate income taxes on any income
or gains that we distribute to our stockholders. We have certain wholly owned taxable subsidiaries (“Taxable Subsidiaries”)
each of which holds one or more portfolio investments listed on our Schedules of Investments. The purpose of these Taxable Subsidiaries
is to permit us to hold portfolio companies organized as limited liability companies, or LLCs, (or other forms of pass-through
entities) and still satisfy the RIC tax requirement that at least 90% of our gross revenue for income tax purposes must consist
of investment income. Absent the Taxable Subsidiaries, a portion of the gross income of any LLC (or other pass-through entity)
portfolio investment would flow through directly to us for the 90% test. To the extent that such income did not consist of investment
income, it could jeopardize our ability to qualify as a RIC and, therefore, cause us to incur significant federal income taxes.
The income of the LLCs (or other pass-through entities) owned by Taxable Subsidiaries is taxed to the Taxable Subsidiaries and
does not flow through to us, thereby helping us preserve our RIC status and resultant tax advantages. We do not consolidate the
Taxable Subsidiaries for income tax purposes and they may generate income tax expense because of the Taxable Subsidiaries’
ownership of the portfolio companies. We reflect any such income tax expense on our Statements of Operations.



Basis of Presentation—In accordance
with Article 6 of Regulation S-X under the Securities Act of 1933 and Securities Exchange Act of 1934, we do not consolidate portfolio
company investments, including those in which we have a controlling interest. Our interim unaudited financial statements were prepared
in accordance with accounting principles generally accepted in the United States of America, or GAAP, for interim financial information
and in accordance with the requirements of reporting on Form 10-Q and Article 10 of Regulation S-X, under the Securities Exchange
Act of 1934, as amended. Accordingly, they are unaudited and exclude some disclosures required for annual financial statements.
Management believes it has made all adjustments, consisting solely of normal recurring accruals, necessary for the fair presentation
of these interim financial statements.



The results of operations for the
three and nine months ended September 30, 2012 are not necessarily indicative of results that ultimately may be achieved for
the year. The interim unaudited financial statements and notes thereto should be read in conjunction with the financial
statements and notes thereto included in the Fund’s Form 10-K for the fiscal year ended December 31, 2011, as
filed with the Securities and Exchange Commission (“SEC”).



(2) Liquidity and Financing Arrangements



Liquidity—There are several factors
that may materially affect the Fund’s liquidity during the reasonably foreseeable future. The Fund views this period as the
twelve month period from the date of the financial statements in this Form 10-Q, i.e., the period through September 30,
2013.



13





We are evaluating the impact of current market
conditions on our portfolio company valuations and their ability to provide current income. We have followed valuation techniques
in a consistent manner; however, we are cognizant of current market conditions that might affect future valuations of portfolio
securities. We believe that our operating cash flow and cash on hand will be sufficient to meet operating requirements and to finance
routine capital expenditures through the next twelve months.



Cash and Temporary Cash Investments—As
of September 30, 2012, we had cash and cash equivalents of $26.2 million. We had $5.3 million of our net assets of $31.7 million
invested in portfolio securities.



As of December 31, 2011, we had cash and
cash equivalents of $16.8 million. We had $19.2 million of our net assets of $38.1 million invested in portfolio securities. We
also had $6.1 million of restricted cash and temporary cash investments, including primarily the proceeds of a quarter-end margin
loan that we incurred to maintain the diversification requirements applicable to a RIC to maintain our pass-through tax treatment.
Of this amount, $6.0 million was invested in U.S. Treasury bills and $0.1 million represented a required 1% brokerage margin deposit.
These securities were held by a securities brokerage firm and pledged along with other assets to secure repayment of the margin
loan. The U.S. Treasury bills were sold and the margin loan was repaid to the brokerage firm on January 3, 2012.



Dividends— We will pay out net
investment income and/or realized capital gains, if any, on an annual basis as required under the Investment Company Act of 1940.



Investment Commitments—As of September
30, 2012, we had no outstanding commitments to our portfolio company investments.



Under certain circumstances, we may be called
on to make follow-on investments in certain portfolio companies. If we do not have sufficient funds to make follow-on investments,
the portfolio company in need of the investment may be negatively impacted. Also, our equity interest in the estimated fair value
of the portfolio company could be reduced.



RIC Borrowings, Restricted Cash and Temporary
Cash Investments—We may periodically borrow sufficient funds to maintain the Fund’s RIC status 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 the Fund’s net investment income and realized capital gains, and distributions to stockholders would be subject
to income tax as ordinary dividends. Failure to continue to qualify as a RIC could be materially adverse to us and our stockholders.



We had no RIC borrowings or restricted cash
as of September 30, 2012.



As of December 31, 2011, we borrowed $6.0
million to make qualifying investments to maintain our RIC status by utilizing a margin account with a securities brokerage firm.
We collateralized such borrowings with restricted cash and temporary cash investments in U.S. Treasury bills of $6.1 million.
The U.S. Treasury bills were sold on January 3, 2012 and the margin loan was repaid at that time.



Certain Risks and
Uncertainties— Economic conditions during the previous three and a half years and resulting market dislocations
have resulted in a significant decline in the availability of debt and equity capital declining significantly. Generally, the
limited amount of available debt financing has shorter maturities, higher interest rates and fees, and more restrictive terms
than debt facilities available in the past. In addition, during these years and continuing through the nine months ended
September 30, 2012, the price of our common stock continued to fall well below our net asset value, thereby making
it undesirable to issue additional shares of our common stock. Because of these challenges, our near-term strategies
shifted from originating debt and equity investments to preserving liquidity necessary to meet our operational needs. Key
initiatives that we have previously undertaken to provide necessary liquidity include monetizations, the suspension of
dividends and the internalization of management. Although we cannot assure you that such initiatives will be sufficient, we
believe we have sufficient liquidity to meet our 2012 operating requirements.



(3) Significant Accounting Policies



The following is a summary of significant accounting
policies followed by the Fund in the preparation of its financial statements:

14







Use of Estimates—The preparation
of financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
requires us to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Although
we believe the estimates and assumptions used in preparing these financial statements and related notes are reasonable in light
of known facts and circumstances, actual results could differ from those estimates.



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 Securities and Exchange Commission (“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 generally valued at their quoted market price at the close of business on
the valuation date.



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 would be 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 estimated values arrived at by the Fund may differ materially from amounts actually received upon the disposition of portfolio
securities.



During the first twelve months after an investment
is made, the original investment value is utilized to determine the fair value unless significant developments have occurred during
this twelve month period which would indicate a material effect on the portfolio company (such as results of operations or changes
in general market conditions). After the twelve month period, or if material events have occurred within the twelve month period,
Fund management considers a two step process when appraising investments of privately held companies. The first step involves
determining the enterprise value of the portfolio company. During this step, Fund management considers three different valuation
approaches: a market approach, an income approach, and an asset approach. The particular facts and circumstances of each portfolio
company determine which approach, or combination of approaches, will be utilized. The second step when appraising equity investments
of privately held companies involves allocating value to the various debt and equity securities of the company. Fund management
allocates value to these securities based on their relative priorities. For equity securities such as warrants, the Fund may also
incorporate alternative methodologies including the Black-Scholes Option Pricing Model.



Market approach—The market approach
typically employed by Fund management calculates the enterprise value of a company as a multiple of earnings before interest,
taxes, depreciation and amortization (“EBITDA”) generated by the company for the trailing twelve month period. 
Adjustments to the company’s EBITDA, including those for non-recurring items, may be considered. Multiples are estimated
based on current market conditions and past experience in the private company marketplace and are subjective in nature. The Fund
will apply liquidity and other discounts it deems appropriate to equity valuations where applicable. 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.



Income approach—The income approach
typically utilized by Fund management calculates the enterprise value of a company utilizing a discounted cash flow model incorporating
projected future cash flows of the company.  Projected future cash flows consider the historical performance of the company
as well as current and projected market participant performance. Discount rates are estimated based on current market conditions
and past experience in the private company marketplace and are subjective in nature. The Fund will apply liquidity and other discounts
it deems appropriate to equity valuations where applicable.



Asset approach—The Fund considers
the asset approach to determine the fair value of significantly deteriorated investments demonstrating circumstances indicative
of a liquidation analysis. This situation may arise when a portfolio company: 1) cannot generate adequate cash flow to meet the
principal and interest payments on its indebtedness; 2) is not successful in refinancing its debt upon maturity; 3) Fund
management believes the credit quality of a loan has deteriorated due to changes in the business and underlying asset or market
conditions which may result in the company’s inability to meet future obligations; or 4) the portfolio company’s reorganization
or bankruptcy. Consideration is also given as to whether a liquidation event would be orderly or forced.



The Fund bases adjustments upon such factors
as the 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 Fund may base a portfolio company’s fair value upon the company’s estimated liquidation
value. Fair valuations are necessarily subjective, and management’s estimate of fair value may differ materially from amounts
actually received upon the disposition of its portfolio securities. Also, any failure by a portfolio company to achieve its business
plan or obtain and maintain its financing arrangements could result in increased volatility and result in a significant and rapid
change in its value.



15











Fund management considers that the Fund’s
general intent is to hold its loans to maturity when appraising its privately held debt investments. As such, Fund management believes
that the fair value will not exceed the cost of the investment. However, in addition to the previously described analysis involving
allocation of value to the debt instrument, the Fund performs a yield analysis to determine if a debt security has been impaired.



Certificates of deposit purchased by the Fund
generally will be valued at their face value, plus interest accrued to the date of valuation.



The Audit Committee of the Board of Directors
may engage independent, third-party valuation firms to conduct independent appraisals and review management’s preliminary
valuations of each privately-held investment in order to make their own independent assessment. Any third-party valuation data
would be considered as one of many factors in a fair value determination. The Audit Committee then would recommend the fair values
for all privately-held securities based on all relevant factors to the Board of Directors for final approval.



Because of the inherent uncertainty of the
valuation of portfolio securities which do not have readily ascertainable market values, amounting to $5.3 million and $19.2 million
as of September 30, 2012 and December 31, 2011, respectively, our fair value determinations may materially differ from the values
that would have been used had a ready market existed for the securities. One of the Fund’s portfolio investments, consisting
of 1,102,455 ordinary shares of Orco Property Group S.A. (“OPG”), is publicly listed on the NYSE Euronext Paris Exchange
as of September 30, 2012. See Subsequent Events, describing the receipt of the additional OPG shares and the New OPG Notes,
as well as the sale of 1,500,000 of the Fund’s OPG Shares for cash in October 2012.



On a daily basis, we adjust our net asset value
for the changes in the value of our publicly held securities, if applicable, and material changes in the value of private securities,
generally determined on a quarterly basis or as announced in a press release, and reports those amounts to Lipper Analytical Services,
Inc. Weekly and daily net asset values appear in various publications, including Barron’sand The Wall Street Journal.



Deferred Offering Costs—Accumulation
of costs related to the offering whereby we will sell additional shares or rights to acquire shares at a market price that may
have been below net asset value. The main components of the costs are legal fees and consultant’s fees specifically related
to the offering.



Foreign Exchange—We record temporary
changes in foreign exchange rates of portfolio securities denominated in foreign currencies as changes in fair value. These changes
are therefore reflected as unrealized gains or losses until realized.



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

We classify our investments in accordance with
the requirements of the 1940 Act. Under the 1940 Act, “Control Investments” are defined as investments in companies
in which EQS owns more than 25% of the voting securities or maintains greater than 50% of the board representation. Under the 1940
Act, “Affiliate Investments” are defined as those non-control investments in companies in which EQS owns between 5%
and 25% of the voting securities. Under the 1940 Act, “Non-affiliate Investments” are defined as investments that are
neither Control Investments nor Affiliate Investments.



Interest Income Recognition—We
record interest income, adjusted for amortization of premium and accretion of discount, on an accrual basis to the extent that
we expect to collect such amounts. We stop accruing interest on investments when we determine that interest is no longer collectible.
We may also impair the accrued interest when we determine that all or a portion of the current accrual is uncollectible. If we
receive any cash after determining that interest is no longer collectible, we treat such cash as payment on the principal balance
until the entire principal balance has been repaid, before we recognize any additional interest income. We accrete or amortize
discounts and premiums on securities purchased over the life of the respective security using the effective yield method. The
amortized cost of investments represents the original cost adjusted for the accretion of discount and/or amortization of premium
on debt securities.



Payment in Kind Interest (PIK)—We
have loans in our portfolio that may pay PIK interest. We add PIK interest, if any, computed at the contractual rate specified
in each loan agreement, to the principal balance of the loan and record it as interest income. To maintain our status as a RIC,
we must pay out to stockholders this non-cash source of income in the form of dividends even if we have not yet collected any cash
in respect of such investments.

16











Cash Flows—For purposes of the
Statements of Cash Flows, we consider all highly liquid temporary cash investments purchased with an original maturity of three
months or less to be cash equivalents. We include our investing activities within cash flows from operations. We exclude “Restricted
Cash & Temporary Cash Investments” used for purposes of complying with RIC requirements from cash equivalents. See
Note 2 for further discussion of the Fund’s RIC borrowings.



Income Taxes—We intend to comply
with the requirements of the Code necessary for us to qualify as a RIC. So long as we comply with these requirements, we generally
will not be subject to corporate-level federal income taxes on otherwise taxable income (including net realized capital gains)
distributed to stockholders. Therefore, we did not record a provision for federal income taxes in our financial statements. We
borrow money from time to time to maintain our tax status under the Internal Revenue Code as a RIC. See Note 2 for further discussion
of the Fund’s RIC borrowings.



Texas margin tax applies to legal entities
conducting business in Texas. The margin tax is based on our Texas sourced taxable margin. The tax is calculated by applying a
tax rate to a base that considers both revenue and expenses and therefore has the characteristics of an income tax. As a result,
we did not owe state income tax for the year ended December 31, 2011.



Fair Value Measurement—Fair value
is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. We have categorized all investments recorded at fair value based upon the level of
judgment associated with the inputs used to measure their fair value. Hierarchical levels, directly related to the amount of subjectivity
associated with the inputs to fair valuation of these assets and liabilities, are as follows:



Level 1—Inputs are unadjusted, quoted prices in active markets
for identical assets at the measurement date. The types of assets carried at Level 1 fair value generally are equities listed in
active markets.



Level 2—Inputs (other than quoted prices included in Level
1) are either directly or indirectly observable for the asset in connection with market data at the measurement date and for the
extent of the instrument’s anticipated life. Fair valued assets that are generally included in this category are warrants
held in a public company.



Level 3—Inputs reflect management’s best estimate of
what market participants would use in pricing the asset at the measurement date. It includes prices or valuations that require
inputs that are both significant to the fair value measurement and unobservable. Generally, assets carried at fair value and included
in this category are debt, warrants and/or other equity investments held in a private company. As previously described, Fund management
considers a two step process when appraising investments of privately held companies. The first step involves determining the enterprise
value of the portfolio company. During this step, Fund management considers three different valuation approaches: a market approach,
an income approach, and a cost approach. The particular facts and circumstances of each portfolio company determine which approach,
or combination of approaches, will be utilized. The second step when appraising equity investments of privately held companies
involves allocating value to the various debt and equity securities of the company. Fund management allocates value to these securities
based on their relative priorities. For equity securities such as warrants, the Fund may also incorporate alternative methodologies
including the Black-Scholes Option Pricing Model. Yield analysis is also employed to determine if a debt security has been impaired.



We will record unrealized depreciation on investments
when we determine that the fair value of a security is less than its cost basis, and will record unrealized appreciation when we
determine that the fair value is greater than its cost basis.



17





As of September 30, 2012, investments measured
at fair value on a recurring basis are categorized in the tables below based on the lowest level of significant input to the valuations:





|                          |  |       |       | Fair
    Value Measurements As of September 30, 2012 (unaudited)  
|------------------------- |  | ----- | ----- | ------------------------------------------------------------------
|(in thousands)            |  | Total |       | Quoted
    Prices in Active Markets for Identical Assets (Level 1)
|Assets                    |  |       |       |                                                                   
|Investments:              |  |       |       |                                                                   
|Control investments       |  | $     | 375   |                                                                   
|Affiliate investments     |  |       | 150   |                                                                   
|Non-affiliate investments |  |       | 4,808 |                                                                   
|Total investments         |  | $     | 5,333 |                                                                   





As of December 31, 2011, investments measured
at fair value on a recurring basis are categorized in the tables below based on the lowest level of significant input to the valuations:



|                                                 |  |       |        | Fair
    Value Measurements As of December 31, 2011               
|------------------------------------------------ |  | ----- | ------ | ------------------------------------------------------------------
|(in thousands)                                   |  | Total |        | Quoted
    Prices in Active Markets for Identical Assets (Level 1)
|Assets                                           |  |       |        |                                                                   
|Investments:                                     |  |       |        |                                                                   
|Control investments                              |  | $     | 13,298 |                                                                   
|Affiliate investments                            |  |       | 150    |                                                                   
|Non-affiliate investments                        |  |       | 5,734  |                                                                   
|Total investments                                |  |       | 19,182 |                                                                   
|Temporary cash investments                       |  |       | 6,000  |                                                                   
|Total investments and temporary cash investments |  | $     | 25,182 |                                                                   





18









The following table provides a reconciliation
of fair value changes during the nine months ended September 30, 2012 for all investments for which we determine fair value using
unobservable (Level 3) factors:







|                                                 |  | Fair
    value measurements using significant unobservable inputs (Level 3)
|------------------------------------------------ |  | ---------------------------------------------------------------------------
|(in thousands)                                   |  | Control
    Investments                                                    
|Fair value as of December 31, 2011               |  | $                                                                          
|Realized gains (losses)                          |  |                                                                            
|Change in unrealized appreciation (depreciation) |  |                                                                            
|Purchases of portfolio securities                |  |                                                                            
|Proceeds from sales/dispositions                 |  |                                                                            
|Transfers in (out) of Level 3                    |  |                                                                            
|Fair value as of September 30, 2012              |  | $                                                                          





The following table provides a reconciliation
of fair value changes during the nine months ended September 30, 2011 for all investments for which we determine fair value using
unobservable (Level 3) factors:





|                                                 |  | Fair
    value measurements using significant unobservable inputs (Level 3)
|------------------------------------------------ |  | ---------------------------------------------------------------------------
|(in
    thousands)                               |  | Control
    Investments                                                    
|Fair value as of December 31, 2010               |  | $                                                                          
|Total realized gains (losses)                    |  |                                                                            
|Change in unrealized appreciation (depreciation) |  |                                                                            
|Purchases, issuances and settlements, net        |  |                                                                            
|Transfers in (out) of Level 3                    |  |                                                                            
|Fair value as of September 30, 2011              |  | $                                                                          



Significant Unobservable
Inputs—Our investment portfolio is not composed of homogeneous debt and equity securities that can be valued with a
small number if inputs. Instead, the majority of our investment portfolio is composed of complex debt and equity securities
with distinct contract terms and conditions. As such, our valuation of each investment in our portfolio is unique and
complex, often factoring in numerous different inputs, including historical and forecasted financial and operational
performance of the portfolio company, projected cash flows, market multiples of comparable market transactions, the priority of
our securities compared with those of other investors, credit risk, interest rates, independent valuations and reviews and
other inputs.



The following table summarizes
the significant unobservable inputs in the fair value measurements of our level 3 investments by category of investment and
valuation technique as of September 30, 2012:





|                                          |  |                                    |       |                          |  |                          |  | Range                                     
|----------------------------------------- |  | ---------------------------------- | ----- | ------------------------ |  | ------------------------ |  | ------------------------------------------
|(in
    thousands)                        |  | Fair
    Value 
    (in thousands) |       | Valuation
    Techniques |  | Unobservable
    Inputs  |  | Minimum                                   
|Secured
    and subordinated debt         |  | $                                  | 1,526 |                          |  | Yield
    Analysis;      |  | Market
    interest rate(s);              
|                                          |  |                                    |       |                          |  | Pending
    Transaction; |  | Discount(s)
    for lack of marketability;
|                                          |  |                                    |       |                          |  | Asset
    Approach       |  | Recovery
    rate(s)                      
|Common
    stock                          |  |                                    | 1,174 |                          |  | Pending
    Transaction  |  | Discount(s)                               
|Limited
    liability company investments |  |                                    | 238   |                          |  | Asset
    Approach       |  | Recovery
    rate(s)                      
|                                          |  | $                                  | 2,938 |                          |  |                          |  |                                           







19













(4) Related Party Transactions and Agreements





Except as noted below, as compensation
for services to the Fund, each Independent Director receives an annual fee of $20,000 paid quarterly in arrears, a fee of
$2,000 for each meeting of the Board of Directors attended in person, a fee of $1,000 for participation in each telephonic
meeting of the Board and a fee of $1,000 for each committee meeting attended, and reimbursement of all out-of-pocket expenses
relating to attendance at such meetings. A quarterly fee of $15,000 is paid to the Chairman of the
Audit Committee and a quarterly fee of $3,750 is paid to the Chairman of the Independent Directors. We may also pay other
one-time or recurring fees to members of our Board of Directors in special circumstances. During the nine months ended
September 30, 2012 and 2011, we paid Fraser Atkinson a fee of $45,000, respectively, in lieu of his standard
compensation as Chairman of the Audit Committee for additional duties undertaken in connection with the Fund’s review
and analysis of its portfolio holdings for the year. Neither Mr. Bertrand des Pallieres, an Independent Director, nor any of
our interested directors, receive annual fees for their service on the Board of Directors. The Fund incurred $323,457 and
$309,670 in fees to our directors for the nine months ended September 30, 2012 and 2011, respectively.



In June 2010, the Fund ratified and approved
the use of A+ Filings, LLC (“A+ Filings”) to file its reports with the Securities and Exchange Commission. Mr. Kenneth
I. Denos, Secretary of the Fund, holds a majority of the voting shares of A+ Filings. The Fund incurred $6,000 and $12,578 in services
rendered by A+ Filings for the nine months ended September 30, 2012 and 2011, respectively.



On December 20, 2010, our board of
directors approved a consulting agreement ("Consulting Agreement") with John A. Hardy, the Fund's Chief Executive
Officer.  The Consulting Agreement provides for base compensation to Mr. Hardy of $200,000 per annum and an annual bonus
based upon achievement of certain criteria.  The bonus is subject to an annual payout cap of $150,000, and any bonus
earned that exceeds the payout cap will be carried over into subsequent fiscal years.  If the Consulting Agreement is
terminated without cause, as defined therein, Mr. Hardy will be entitled to receive one year's base consulting fee, together
with all bonuses earned and unpaid up to the date of termination.  Mr. Hardy is not entitled to participate in any
employee-related benefits, including health, life and disability plans, of the Fund. During the nine months ended September
30, 2012, Mr. Hardy was principally responsible for the disposition of two of the Fund’s legacy portfolio investments,
the gross proceeds of which totaled $11,611,143. These dispositions were the principal trigger for an annual bonus payment to
Mr. Hardy for the fiscal year ended December 31, 2012 of $150,000. For the nine months ended September 30, 2012, the Fund
incurred compensation expense of $300,000, relating to Mr. Hardy’s Consulting Agreement, which amount includes the
bonus described above. Mr. Hardy has further waived his right to $672,585 of earned but unpaid bonus in connection with
activities of the Fund during the nine months ended September 30, 2012. As of September 30, 2011,
the Fund incurred compensation expense of $300,000 relating to Mr. Hardy’s Consulting Agreement which included the
$150,000 cash bonus for fiscal 2011 in connection with the disposal of certain investments in January 2011 where the Fund
received 10,000,000 in cash.  Mr. Hardy has further permanently waived his right to $648,137 of earned but unpaid bonus
in connection with activities of the Fund during the nine months ended September 30, 2011.



In November, 2011, Equus Energy, LLC, a wholly-owned
subsidiary of the Fund, entered into a consulting agreement with Global Energy Associates, LLC (“Global Energy”) to
provide consulting services for energy related investments. Henry W. Hankinson, Director, is a managing partner and co-founder
of Global Energy. Payments to Global Energy totaled $56,250 for the nine months ended September 30, 2012.



In respect of services provided to the
Fund by members of the Board not in connection with their roles and duties as directors, the Fund pays a rate of $250 per
hour for services rendered. In connection with services rendered by Kenneth I. Denos, Secretary and Chief Compliance Officer
of the Fund, the Fund incurred $187,563 which is included in compensation expense for the nine months ended September 30,
2012. For the nine months ended September 30, 2011, the Fund incurred $172,625 which is included in compensation expense in
the statement of operations and $117,188 which is included in deferred offering costs on the Statement of Operations as of
September 30, 2011 for services provided by Kenneth I. Denos, Secretary and Chief Compliance Officer of the Fund.



(5) Dividends



We will pay out net investment income and/or
realized capital gains, if any, on an annual basis as required under the Investment Company Act of 1940.



20





(6) Portfolio Securities



During the nine month ended September 30,
2012, we realized net capital losses of $5.2 million, including the following significant
transactions (in thousands):



|Portfolio Company                  |  | Industry                        |  | Type    |  | Transaction Type |             | Realized Loss
|---------------------------------- |  | ------------------------------- |  | ------- |  | ---------------- | ----------- | -------------
|ConGlobal Industries Holding, Inc. |  | Shipping products and services  |  | Control |  |                  | Disposition |              
|Sovereign Business Forms, Inc.     |  | Business products  and services |  | Control |  |                  | Disposition |              
|Various others                     |  |                                 |  |         |  |                  |             | Disposition  
|                                   |  |                                 |  |         |  |                  |             |              





Net unrealized depreciation on investments
decreased $0.7 million during the nine months ended September 30, 2012, to a net unrealized depreciation of $16.7 million. 
Such decrease in unrealized depreciation is largely due to the following changes:

| | (i) | Transfer of unrealized loss to realized loss of ConGlobal Industries Holding, Inc. (“ConGlobal”)
of $1.6 million upon the disposition of the investment.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) | Transfer of unrealized loss to realized loss of Sovereign Business Forms, Inc, (“Sovereign”)
of $0.6 million upon the disposition of the investment.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | (iii) | Restructuring of the Orco Germany, S.A. bonds (“Bonds”) with the capitalization
                                                                                                      of $0.3 million accrued interest resulting in a corresponding decrease in unrealized gain, along with a $0.9 million decline
                                                                                                      in the fair value of the resulting new securities of Orco Property Group S.A.
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iv) | Decrease in fair market value of Spectrum Management, Inc. (“Spectrum”)
of $0.2 million due to operating performance.
| | ---- | ---------------------------------------------------------------------------------------------------------------------

On May 7, 2012, holders of 72.5% of
all Orco Germany bondholders approved a joint restructuring of certain bond debt of Orco Germany and its parent company, Orco Property
Group S.A. Pursuant to such restructuring, approximately 84.5% of the Orco Germany bonds held by each bondholder
were converted into Obligations Convertibles en Actions (“OCA”) on May 9, 2012.



The OCA were converted into an
aggregate of 26,209,613 OPG shares which were delivered in two tranches. The first tranche, consisting of 18,361,540 OPG
shares, was delivered in May 2012, of which the Fund received 1,102,455 OPG shares. The second tranche, consisting of
7,848,073 OPG shares, was received in October 2012 of which the Fund received 471,211 OPG shares. Also in October 2012, the
remaining 15.5% of the Orco Germany bonds held by each bondholder were converted into newly-issued 6-year OPG
notes (“New OPG Notes”) with a face value of €20.0 million bearing cash and PIK interest each at 5% per
annum, which interest percentages may be reduced over time upon timely repayments of principal tranches during a four-year
period commencing in 2015. Of the total amount of New OPG Notes issued, Equus received New OPG Notes in the face amount
of €1,200,790. As of September 30, 2012, Equus held 1,102,455 OPG shares, OCA that had yet to be converted into
an additional 471,211 OPG shares, and 1,377 Orco Germany bonds,  which had yet to be converted into the New OPG Notes.



See
Subsequent Events, describing the receipt of the additional OPG shares and the New OPG Notes, as well as the sale of
1,500,000 of the Fund’s OPG Shares for cash in October 2012.



During the nine months ended September 30,
2012, we made no new or follow-on investments. However, the restructuring of the Orco Germany bonds noted above resulted in the
capitalization of $0.3 million in accrued interest.



During the nine months ended September 30,
2011, we realized net capital losses of $10.9 million, including the following significant transactions (in thousands):





|Portfolio Company                        |  | Industry                  |  | Type          |  | Transaction Type |  |   | Realized Loss
|---------------------------------------- |  | ------------------------- |  | ------------- |  | ---------------- |  | - | -------------
|Riptide Entertainment, LLC               |  | Entertainment and leisure |  | Control       |  | Disposition      |  | $ | (10,074)     
|London Bridge Entertainment Partners Ltd |  | Entertainment and leisure |  | Non-affiliate |  | Disposition      |  |   | (992)        
|RP&C International Investments LLC       |  | Healthcare                |  | Affiliate     |  | Disposition      |  |   | 138          
|Various others                           |  |                           |  |               |  |                  |  |   | (2)          
|                                         |  |                           |  |               |  |                  |  | $ | (10,930)     



During the
nine months ended September 30, 2011, we received $0.3 million from Sovereign Business Forms, Inc. in the form of
principal payments. During the nine months ended September 30, 2011, we sold our promissory notes in 1848 Capital Partners,
LLC (“1848”), Big Apple Entertainment Partners, LLC (“Big Apple”), and London Bridge Entertainment
Partners, Ltd (“London Bridge”) and certain assets of Riptide Entertainment Partners, LLC (“Riptide”)
in which we hold a 64.67% membership interest.  All of these assets were sold to Capital Markets Acquisition Partners,
LLC for a combined price of $10 million, with $9.8 million allocated to the promissory notes held by the Fund and $0.2
million to Riptide.  The Fund allocated the proceeds to the promissory



21









notes resulting in a realized loss of
approximately $0.9 million at London Bridge.  In addition, the monies provided to Riptide were sufficient to satisfy its
outstanding liabilities. We also received $0.8 million in connection with the sale and redemption of our membership interest
in RP&C International Investments LLC.



Net unrealized depreciation on investments
decreased by $10.0 million, during the nine months ended September 30, 2011, to a net unrealized depreciation of $17.3 million. 
Such decrease in depreciation resulted from the following changes:

| | (i) | Decline in fair market value of ConGlobal of $2.4 million due to the decline in operating performance.
| | --- | ------------------------------------------------------------------------------------------------------

| | (ii) | Transfer of unrealized depreciation to realized depreciation for London Bridge of $0.8 million due to the sale of the promissory note.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------

| | (iii) | Transfer of unrealized depreciation to realized depreciation for Riptide of $10.1 million due to the sale of the promissory notes and the winding up of the entity.
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iv) | Transfer of unrealized appreciation to realized appreciation for RP&C International
Investments, LLC (“RP&C”) of $0.1 million due to the maturity of the investment.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (v) | Increase in fair market value of Sovereign of $0.3 million as Sovereign has continued to reduce its debt which has resulted in a corresponding increase its equity value.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (vi) | Decrease in fair market value of Spectrum Management, Inc. (“Spectrum”)
of $0.8 million due to operating performance.
| | ---- | ---------------------------------------------------------------------------------------------------------------------

| | (vii) | Increase in the fair market value of Orco Germany S.A. bonds of $2.3 million due
to the difference in the market price of Equus shares used as consideration for the bonds on the date of acquisition offset by
changes in exchange rate.
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



During the nine months ended September 30,
2011, we made a follow-on investment of $0.3 million in Spectrum Management, LLC. On April 27, 2011, we announced that we had
entered into two separatetransactions involving the purchase of an aggregate of 11,408 bonds (“Bonds”)
issued by Orco Germany S.A., a commercial and multi-family residential real estate holding company anddeveloper based
in Berlin. The consideration provided to the selling bondholders consisted of an aggregate of 1,700,000 newly issued shares of
common stock of the Fund. We received 8,890 of the Bonds on April 27, 2011. On May 9, 2011, one of these agreements was amended
and restated to provide for an additional 45 days to deliver the remaining 2,518 of the Bonds in exchange for providing to the
Fund approximately $1.6 million in cash as security for such delivery. As the remaining bonds were not delivered by the specified
date, the cash collateral became free and clear property of the Fund on June 23, 2011.



The following table includes significant investment
activity during the nine months ended September 30, 2011 (in thousands):





|                         |  | Investment Activity |    |                     
|------------------------ |  | ------------------- | -- | --------------------
|                         |  | New Investments     |    | Existing Investments
|Portfolio Company        |  | Cash                |    | Non-Cash            
|Orco Germany S.A.        |  | $                   | 67 |                     
|Spectrum Management, LLC |  |                     | —  |                     
|                         |  | $                   | 67 |                     



(7) Subsequent Events



Management performed an evaluation of the Fund’s
activity through the date the financial statements were issued, noting the following subsequent events:



On October 8,
2012, pursuant to the terms of the conversion for the original bonds, the Fund  received471,211 OPG shares. The Fund also received 6-Year OPG notes in the principal amount of €1,200,790. The OPG notes, due February 2018, bear interest of 5% cash and 5% PIK per annum, which interest percentages may be reduced
over time upon timely repayments of principal tranches during a four-year period commencing in 2015.



22











On October 15, 2012, the Fundannounced
that it sold 1,500,000 of its 1,573,666 shares of OPG and received net cash proceeds of
€3.8 million, or $4.9 million, based on the settlement date’s EUR-USD intra-day exchange rate of 1.293.



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

Overview



Equus Total Return, Inc. (“we,”
“us,” “our,” “Equus” the “Company” and 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. Our shares trade on the New York Stock Exchange under the symbol EQS. On August
11, 2006, our shareholders approved the change of the Fund’s investment strategy to a total return investment objective.
This new strategy seeks to provide the highest total return, consisting of capital appreciation and current income. In connection
with this strategic investment change, the shareholders also approved the change of name from Equus II Incorporated to Equus Total
Return, Inc.



We attempt to maximize the return to stockholders
in the form of current investment income and long-term capital gains by investing in the debt and equity securities of companies
with a total enterprise value of between $15.0 million and $75.0 million, although we may engage in transactions with smaller
or larger investee companies from time to time. We seek to invest primarily in companies pursuing growth either through acquisition
or organically, leveraged buyouts, management buyouts and recapitalizations of existing businesses or special situations. Our
income-producing investments consist principally of debt securities including subordinate debt, debt convertible into common or
preferred stock, or debt combined with warrants and common and preferred stock. Debt and preferred
equity financing may also be used to create long-term capital appreciation through the exercise and sale of warrants received
in connection with the financing.We seek 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.Given market conditions over the past several years and the performance of our portfolio, our management and board of directors
believe it prudent to continue to review alternatives to refine and further clarify the current strategies.



We elected to be treated as a business development
company under the Investment Company Act of 1940 (“1940 Act”). We currently qualify as a regulated investment company
(“RIC”) for federal income tax purposes and, therefore, are not required to pay corporate income taxes on any income
or gains that we distribute to our stockholders. We have certain wholly owned taxable subsidiaries (“Taxable Subsidiaries”)
each of which holds one or more portfolio investments listed on our Schedules of Investments. The purpose of these Taxable Subsidiaries
is to permit us to hold portfolio companies organized as limited liability companies, or LLCs, (or other forms of pass-through
entities) and still satisfy the RIC tax requirement that at least 90% of our gross revenue for income tax purposes must consist
of investment income. Absent the Taxable Subsidiaries, a portion of the gross income of any LLC (or other pass-through entity)
portfolio investment would flow through directly to us for the 90% test. To the extent that such income did not consist of investment
income, it could jeopardize our ability to qualify as a RIC and, therefore, cause us to incur significant federal income taxes.
The income of the LLCs (or other pass-through entities) owned by Taxable Subsidiaries is taxed to the Taxable Subsidiaries and
does not flow through to us, thereby helping us preserve our RIC status and resultant tax advantages. We do not consolidate the
Taxable Subsidiaries for income tax purposes and they may generate income tax expense because of the Taxable Subsidiaries’
ownership of the portfolio companies. We reflect any such income tax expense on our Statements of Operations.



Significant Developments



The Board and Management believe that market
conditions and the performance of the legacy portfolio have dictated the need to pursue a different direction for the Fund and
its shareholders. The following are the significant developments that occurred during the nine months ended September 30, 2012:



| | (i) | On May 30, 2012, the Fund announced that in exchange for $5.25 million
in cash, it had sold to ConGlobal Industries Holding, Inc. (“ConGlobal”), the Fund’s 34.2% equity interest in
ConGlobal, together with the Fund’s promissory note issued by ConGlobal and all interest as accrued. As a result of
a number of factors, including a decline in EBITDA from historical highs, together with the recent loss of two of ConGlobal’s
key customer accounts in theNorthwest, ConGlobal had advised Equus that it would be difficult to repay the note held by Equus, due in December 2012, in the principal amount of $6.0 million plus accrued interest of approximately $1.9 million.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
Equus note was subordinate to the position of ConGlobal’s senior lender and thus, ConGlobal was not required to pay the
Fund until the senior lender had been fully paid. In addition, the Fund had held this position for over 15 years. Principally,
as a result of these factors, Equus wished to monitize this position, and did not wish to grant further extensions to the maturity
of the note, as it had done in the past. The Fund worked with ConGlobal to achieve a compromise which resulted in the closing
of the transaction.

23









| | 
| | 



| | (ii) | On June 21, 2012, the Fund announced that it had sold to Sovereign
Business Forms, Inc. (“Sovereign”), the Fund’s 55% fully-diluted equity interest in Sovereign, together with
the Fund’s promissory note issued by Sovereign and all interest as accrued in exchange for $6.36 million in cash. Having
held its interest in Sovereign for approximately 16 years, Equus sought to monetize its investment. In May 2011 an investment banking
firm was retained to canvas potential strategic buyers, determine market interest and explore a possible sale of the company. No
formal offers in a valuation range acceptable to the Fund were received. Subsequently, Sovereign’s Management, with the cooperation
of the Fund, refinanced operations to obtain the capital to buy out the position held by Equus.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iii) | On May 7, 2012, holders of 72.5% of all Orco
                                                                                                                       Germany bondholders approved a joint restructuring of certain bond debt of Orco Germany and its parent company, Orco
                                                                                                                       Property
                                                                                                                       Group S.A. (“OPG”). Pursuant to such restructuring, approximately 84.5% of the Orco Germany bonds held by each
                                                                                                                       bondholder were converted into Obligations Convertibles en Actions(“OCA”) on May 9, 2012. The OCA were
                                                                                                                       converted into an aggregate of 26,209,613 OPG shares which were delivered in two tranches. The first tranche, consisting of
                                                                                                                       18,361,540 OPG shares, was delivered in May 2012, of which the Fund received 1,102,455 OPG shares. The second tranche,
                                                                                                                       consisting of 7,848,073 OPG shares, was received in October 2012 of which the Fund received 471,211 OPG shares. Also in
                                                                                                                       October 2012, the remaining 15.5% of the Orco Germany bonds held by each bondholder were converted into newly-issued
                                                                                                                       6-year OPG notes (“New OPG Notes”) with a face value of €20.0 million bearing cash and PIK interest each at
                                                                                                                       5% per annum, which interest percentages may be reduced over time upon timely repayments of principal tranches during a
                                                                                                                       four-year period commencing in 2015. Of the total amount of New OPG Notes issued, Equus received New OPG Notes in the face
                                                                                                                       amount of €1,200,790. As of September 30, 2012, Equus held 1,102,455 OPG shares, OCA that had yet to be converted into
                                                                                                                       an additional 471,211 OPG shares, and 1,377 Orco Germany bonds which had yet to be converted into the New OPG Notes. See
                                                                                                                       Subsequent Events, describing the receipt of the additional OPG shares and the New OPG Notes, as well as the sale of
                                                                                                                       1,500,000
                                                                                                                       of
                                                                                                                       the
                                                                                                                       Fund’s
                                                                                                                       OPG
                                                                                                                       Shares
                                                                                                                       for
                                                                                                                       cash in
                                                                                                                       October 2012.
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





As a result of the above mentioned developments,
the Fund’s cash and cash equivalents increased from $16.8 million as of December 31, 2011 to $26.2 million as of September
30, 2012. The following is a summary of the cash the Fund has per share (in thousands, except per share amounts):



|                          |  | As of
    the Quarter Ended |                    
|------------------------- |  | --------------------------- | -------------------
|                          |  |                             | September 30, 
2012
|Net assets                |  | $                           | 31,664             
|Shares outstanding        |  |                             | 10,562             
|Net assets per share      |  | $                           | 3.00               
|Cash and cash equivalents |  | $                           | 26,246             
|Cash per share            |  | $                           | 2.48               





Critical Accounting Policies



Our financial statements are based on the selection
and application of significant accounting policies, which require management to make significant estimates and assumptions. We
believe that the following are some of the more critical judgment areas in the application of our accounting policies that currently
affect our financial condition and results of operations.



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 generally valued at their quoted market price at the close of business on
the valuation date.



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 would be 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 estimated values arrived at by the Fund may differ materially from amounts actually received upon the disposition of portfolio
securities.



24







During the first twelve months after an investment
is made, the original investment amount is utilized to determine the fair value unless significant developments have occurred
during this twelve month period which would indicate a material effect on the portfolio company (such as results of operations
or changes in general market conditions). After the twelve month period, or if material events have occurred within the twelve
month period, Fund management considers a two step process when appraising investments of privately held companies. The first
step involves determining the enterprise value of the portfolio company. During this step, Fund management considers three different
valuation approaches: a market approach, an income approach, and an asset approach. The particular facts and circumstances of
each portfolio company determine which approach, or combination of approaches, will be utilized. The second step when appraising
equity investments of privately held companies involves allocating value to the various debt and equity securities of the company.
Fund management allocates value to these securities based on their relative priorities. For equity securities such as warrants,
the Fund may also incorporate alternative methodologies including the Black-Scholes Option Pricing Model.



Market approach – The market approach
typically employed by Fund management calculates the enterprise value of a company as a multiple of earnings before interest,
taxes, depreciation and amortization (“EBITDA”) generated by the company for the trailing twelve month period. 
Adjustments to the company’s EBITDA, including those for non-recurring items, may be considered. Multiples are estimated
based on current market conditions and past experience in the private company marketplace and are subjective in nature. The Fund
will apply liquidity and other discounts it deems appropriate to equity valuations where applicable. 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.



Income approach – The income approach
typically utilized by Fund management calculates the enterprise value of a company utilizing a discounted cash flow model incorporating
projected future cash flows of the company.  Projected future cash flows consider the historical performance of the company
as well as current and projected market participant performance. Discount rates are estimated based on current market conditions
and past experience in the private company marketplace and are subjective in nature. The Fund will apply liquidity and other discounts
it deems appropriate to equity valuations where applicable.



Asset approach – The Fund considers
the asset approach to determine the fair value of significantly deteriorated investments demonstrating circumstances indicative
of a liquidation analysis. This situation may arise when a portfolio company: 1) cannot generate adequate cash flow to meet the
principal and interest payments on its indebtedness; 2) is not successful in refinancing its debt upon maturity; 3) Fund management
believes the credit quality of a loan has deteriorated due to changes in the business and underlying asset or market conditions
which may result in the company’s inability to meet future obligations; or 4) the portfolio company’s reorganization
or bankruptcy. Consideration is also given as to whether a liquidation event would be orderly or forced.



The Fund bases adjustments upon such factors
as the 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 Fund may base a portfolio company’s fair value upon the company’s estimated liquidation
value. Fair valuations are necessarily subjective, and management’s estimate of fair value may differ materially from amounts
actually received upon the disposition of its portfolio securities. Also, any failure by a portfolio company to achieve its business
plan or obtain and maintain its financing arrangements could result in increased volatility and result in a significant and rapid
change in its value.



Fund management considers that the Fund’s
general intent is to hold its loans to maturity when appraising its privately held debt investments. As such, Fund management believes
that the fair value will not exceed the cost of the investment. However, in addition to the previously described analysis involving
allocation of value to the debt instrument, the Fund performs a yield analysis to determine if a debt security has been impaired.



Certificates of deposit purchased by the Fund
generally will be valued at their face value, plus interest accrued to the date of valuation.



The Audit Committee of the Board of Directors
may engage independent, third-party valuation firms to conduct independent appraisals and review management’s preliminary
valuations of each privately-held investment in order to make their own independent assessment. Any third-party valuation data
would be considered as one of many factors in a fair value determination. The Audit Committee then would recommend the fair values
for all privately-held securities based on all relevant factors to the Board of Directors for final approval.



Because of the inherent uncertainty of
the valuation of portfolio securities which do not have readily ascertainable market values, amounting to $5.3 million and
$19.2 million as of September 30, 2012 and December 31, 2011, respectively, our fair value determinations may materially
differ from the values that would have been used had a ready market existed for the securities. One of the Fund’s
portfolio investments, consisting of 1,102,455 ordinary shares of OPG, is publicly listed on the NYSE Euronext Paris Exchange
as of



25









September 30, 2012. See Subsequent Events
describing the receipt of additional OPG shares, a newly-issued 6-year note from OPG in the face amount of €1,200,790, and
the sale of 1,500,000 of the Fund’s OPG Shares for cash in October 2012.



On a daily basis, we adjust our net asset value
for the changes in the value of our publicly held securities, if applicable, and material changes in the value of private securities,
generally determined on a quarterly basis or as announced in a press release, 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.



Federal Income Taxes



We intend to comply with the requirements
of the Internal Revenue Code necessary for us to qualify as a RIC. So long as we comply with these requirements, we generally
will not be subject to corporate-level federal income taxes on otherwise taxable income (including net realized capital gains)
distributed to stockholders. Therefore, we did not record a provision for federal income taxes in our financial statements. As
of December 31, 2011, we had a capital loss carry forward of $26.5 million which may be used to offset future capital gains.
We may borrow money from time to time to maintain our status as a RIC under the Internal Revenue Code. See Note 2 for further
discussion of the Fund’s RIC borrowings.



Interest Income Recognition



We record interest income, adjusted for amortization
of premium and accretion of discount, on an accrual basis to the extent that we expect to collect such amounts. We stop accruing
interest on investments when we determine that interest is no longer collectible. We may also impair the accrued interest when
we determine that all or a portion of the current accrual is uncollectible. If we receive any cash after determining that interest
is no longer collectible, we treat such cash as payment on the principal balance until the entire principal balance has been repaid,
before we recognize any additional interest income. We accrete or amortize discounts and premiums on securities purchased over the life of the respective
security using the effective yield method. The amortized cost of investments represents the original cost adjusted for the accretion
of discount and/or amortization of premium on debt securities.



Payment in Kind Interest



We have loans in our portfolio that may pay
PIK interest. We add PIK interest, if any, computed at the contractual rate specified in each loan agreement, to the principal
balance of the loan and record it as interest income. To maintain the Fund’s status as a RIC, we must pay out to our stockholders
this non-cash source of income in the form of dividends even if we have not yet collected any cash in respect of such investments.



Current Market Conditions



Overall economic conditions in the United States
have improved, albeit marginally.  However, the economic recovery has been hampered by slower growth and persistent high unemployment
levels.  Further, the banking industry continues to experience additional bank failures as regulators continue to impose strict
capital requirements.  Additionally, future economic expansion and business investment is threatened by perceptions of higher
taxes and healthcare costs, as well as the high levels of government deficit spending.



Market conditions for business transactions
including mergers and acquisitions and private equity investments improved throughout 2010 and 2011 to their highest levels since
2008. Despite a slowdown in M&A activity during the first quarter of 2012, the second and third quarters of 2012 saw an uptick
in business combinations, as corporations have been deleveraging and are holding significant amounts of cash and many have begun
to focus on acquisitions as part of future growth plans.  Private equity firms have access to historically large amounts
of committed capital as private equity activity has been lower than anticipated for nearly three years and fund raising remains
significantly lower now than prior to the economic downturn.



Consistent with
other companies in the financial services sector, our performance has been adversely affected. Between December 31,
2009 and September 30, 2012 our net asset value declined from $5.74 per share to $3.00 per share.  This further impacted
the closing price of our common stock, as it declined approximately 21.9% during 2010 and further declined 10.4% during 2011.
As of September 30, 2012, our common stock is trading at a 27.0% discount to our net asset value.



Since 2010, we have executed certain initiatives
to enhance liquidity, achieve a lower operational cost structure, provide more assistance to portfolio companies and realize certain
of our portfolio investments. Specifically, we changed the composition of our Board of Directors and Management, terminated certain
of our follow-on investments, internalized the management of the Fund, suspended our managed distribution policy, modified our
investment strategy to pursue shorter term liquidation opportunities, pursued non-cash investment opportunities, and sold certain
of our underperforming investment holdings.  We believe these actions continue

26







to be necessary
to protect capital and liquidity during this turbulent economic period in order to preserve and enhance shareholder value. We
also expect that, because of management internalization, certain expenses of the Fund will not increase commensurate with an increase
in the size of the Fund and, therefore, we can achieve efficiencies in our cost structure if we are able to grow the Fund.



Liquidity and Capital Resources



We generate cash primarily from maturities,
sales of securities and borrowings, as well as capital gains realized upon the sale of portfolio investments. We use cash primarily
to make additional investments, either in new companies or as follow-on investments in the existing portfolio companies and to
pay the dividends to our stockholders.



Because of the nature and size of the portfolio
investments, we may periodically borrow funds to make qualifying investments to maintain its tax status as a RIC. During the nine
months ended September 30, 2012 and 2011, 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 the Fund is unable to borrow funds to make
qualifying investments, it may no longer qualify as a RIC. The Fund would then be subject to corporate income tax on its net investment
income and realized capital gains, and distributions to stockholders would be subject to income tax as ordinary dividends.



The Fund has the ability to borrow funds and
issue forms of senior securities representing indebtedness or stock, such as preferred stock, subject to certain restrictions.
Net 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.



The Fund reserves the right to retain net long-term
capital gains in excess of net short-term capital losses for reinvestment or to pay contingencies and expenses. Such retained amounts,
if any, will be taxable to the Fund as long-term capital gains and stockholders will be able to claim their proportionate share
of the federal income taxes paid 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.



We are evaluating the impact of current market
conditions on our portfolio company valuations and their ability to provide current income. We have followed valuation techniques
in a consistent manner; however, we are cognizant of current market conditions that might affect future valuations of portfolio
securities. We believe that our operating cash flow and cash on hand will be sufficient to meet operating requirements and to finance
routine capital expenditures through the next twelve months.



Results of Operations

Investment Income and Expense



Net investment loss declined to $2.0 million
for the nine months ended September 30, 2012 from $2.8 million for the nine months ended September 30, 2011, as the decline in
total expenses was offset by a similar decline in total income.



Total investment income was $0.3 million and $0.7 million for the nine months ended September 30, 2012 and 2011, respectively. The $0.4
million decrease was primarily due to the decline in income producing investments and the impairment of accrued interest
receivable of Spectrum Management, LLC.



Compensation expense was $0.7 million and $1.1
million for the nine months ended September 30, 2012 and 2011, respectively. The $0.4 million decrease was largely due to the salary
and accrued bonus for the Fund’s former Chief Investment Officer during the nine months ended September 30, 2011.



Settlement expense was $0.3 million for the
nine months ended September 30, 2011 in connection with the settlement of a lease agreement dispute with American General Insurance
Company.



Offering costs were $0.4 million for the nine
months ended September 30, 2011 due to the write-off of deferred offering costs.





27







Realized Gains and Losses on Sales of Portfolio
Securities



During the nine months ended September 30,
2012, we realized net capital losses of $5.2 million including the following transactions (in thousands):





|Portfolio Company                  |  | Industry                        |  | Type    |  | Transaction Type |             | Realized Loss
|---------------------------------- |  | ------------------------------- |  | ------- |  | ---------------- | ----------- | -------------
|ConGlobal Industries Holding, Inc. |  | Shipping products and services  |  | Control |  |                  | Disposition |              
|Sovereign Business Forms, Inc.     |  | Business products  and services |  | Control |  |                  | Disposition |              
|Various others                     |  |                                 |  |         |  |                  |             | Disposition  
|                                   |  |                                 |  |         |  |                  |             |              





During the nine months ended September 30,
2011, we realized net capital losses of $10.9 million, including the following transactions (in thousands):





|Portfolio Company                        |  | Industry                  |  | Type          |  | Transaction Type |  |   | Realized Loss
|---------------------------------------- |  | ------------------------- |  | ------------- |  | ---------------- |  | - | -------------
|Riptide Entertainment, LLC               |  | Entertainment and leisure |  | Control       |  | Disposition      |  | $ | (10,074)     
|London Bridge Entertainment Partners Ltd |  | Entertainment and leisure |  | Non-affiliate |  | Disposition      |  |   | (992)        
|RP&C International Investments LLC       |  | Healthcare                |  | Affiliate     |  | Disposition      |  |   | 138          
|Various others                           |  |                           |  |               |  |                  |  |   | (2)          
|                                         |  |                           |  |               |  |                  |  | $ | (10,930)     





Changes in Unrealized Appreciation/Depreciation of Portfolio
Securities



Net unrealized depreciation on investments
decreased $0.7 million during the nine months ended September 30, 2012, to a net unrealized depreciation of $16.7 million. 
Such decrease in unrealized depreciation is largely due to the following changes:

| | (i) | Transfer of unrealized loss to realized loss of ConGlobal of $1.6 million upon the disposition of the investment.
| | --- | -----------------------------------------------------------------------------------------------------------------

| | (ii) | Transfer of unrealized loss to realized loss of Sovereign of $0.6 million upon the disposition of the investment.
| | ---- | -----------------------------------------------------------------------------------------------------------------



| | (iii) | Restructuring
of the Orco Germany, S.A. bonds (“Bonds”) with the capitalization of $0.3 million accrued interest resulting in a
corresponding decrease in unrealized gain, along with a $0.9 million decline in the fair value of the resulting new securities,
OPG.
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iv) | Decrease in fair market value of Spectrum of $0.2 million due to operating
                                                                                                     performance.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Net unrealized depreciation on investments
decreased by $10.0 million, during the nine months ended September 30, 2011, to a net unrealized depreciation of $17.3 million. 
Such decrease in depreciation resulted from the following changes:

| | (i) | Decline in fair market value of ConGlobal of $2.4 million due to the decline in operating performance.
| | --- | ------------------------------------------------------------------------------------------------------

| | (ii) | Transfer of unrealized depreciation to realized depreciation for London Bridge of $0.8 million due to the sale of the promissory note.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------

| | (iii) | Transfer of unrealized depreciation to realized depreciation for Riptide of $10.1 million due to the sale of the promissory notes and the winding up of the entity.
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iv) | Transfer of unrealized appreciation to realized appreciation for RP&C of $0.1 million due to the maturity of the investment.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------

| | (v) | Increase in fair market value of Sovereign of $0.3 million as Sovereign has continued to reduce its debt which has resulted in a corresponding increase its equity value.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (vi) | Decrease in fair market value of Spectrum of $0.8 million due to operating
                                                                                                     performance.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (vii) | Increase in the fair market value of Orco Germany S.A. bonds of $2.3 million
                                                                                                                                                                                                                                                                                due to the difference in the market price of Equus shares used as consideration for the bonds on the date of acquisition
                                                                                                                                                                                                                                                                                offset by change in exchange rate.
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Dividends



We will pay out net investment income and/or
realized capital gains, if any, on an annual basis as required under the Investment Company Act of 1940.



28







Portfolio Investments



During the nine months ended September 30,
2012, we received $6.4 million from the disposal of the Fund’s 55% fully-diluted equity interest in Sovereign
Business Forms, Inc., together with the Fund’s promissory note and all interest as accrued
interest.



During the nine months ended September 30,
2012, we received $5.3 million from the disposal of the Fund’s 34.2% fully equity interest in ConGlobal
Industries Holding, Inc., together with the Fund’s promissory note and all interest as accrued
interest.



On May 7, 2012, holders of 72.5% of all
Orco Germany bondholders approved a joint restructuring of certain bond debt of Orco Germany and its parent company, Orco
Property Group S.A. Pursuant to such restructuring, approximately 84.5% of the Orco Germany bonds held by each bondholder
were converted into OCA on May 9, 2012. The OCA are expected to be converted into an aggregate of 26,209,613 OPG shares to be
delivered in two tranches. The first tranche, consisting of 18,361,540 OPG shares, was delivered in May 2012, of which the
Fund received 1,102,455 OPG shares. The second tranche, consisting of 7,848,073 OPG shares, was received in October 2012.
Also in October, the remaining 15.5% of the Orco Germany bonds held by each bondholder was converted into newly-issued 6-year
OPG notes (“New OPG Notes”) with a face value of €20.0 million bearing cash and PIK interest each at 5% per
annum, which interest percentages may be reduced over time upon timely repayments of principal tranches during a four-year
period commencing in 2015. Of the total amount of New OPG Notes issued, Equus received New OPG Notes in the face amount of
€1,200,790. As of September 30, 2012, Equus held 1,102,455 OPG shares, OCA that had yet to be converted into an
additional 471,211 OPG shares, and 1,377 Orco Germany bonds,  which had yet to be converted into the New OPG Notes.



During the nine month ended September 30, 2012,
we made no new or follow-on investments. However, the restructuring of the Orco Germany bonds noted above resulted in the capitalization
of $0.3 million in accrued interest.



During the nine
months ended September 30, 2011, we received $0.3 million from Sovereign Business Forms, Inc. in the form of principal payments.
During the nine months ended September 30, 2011, we sold our promissory notes in 1848 Capital Partners, LLC (“1848”),
Big Apple Entertainment Partners, LLC (“Big Apple”), and London Bridge Entertainment Partners, Ltd (“London Bridge”)
and certain assets of Riptide Entertainment Partners, LLC (“Riptide”) in which we hold a 64.67% membership interest. 
All of these assets were sold to Capital Markets Acquisition Partners,
LLC for a combined price of $10 million, with $9.8 million allocated to the promissory notes held by the Fund and $0.2 million
to Riptide.  The Fund allocated the proceeds to the promissory notes resulting in a realized loss of approximately $0.9 million
at London Bridge.  In addition, the monies provided to Riptide were sufficient to satisfy its outstanding liabilities, resulting
in a value of $0. We also received $0.8 million in connection with the sale and redemption of our membership interest in
RP&C International Investments LLC.



During the nine months ended September 30,
2011, we made a follow-on investment of $0.3 million in Spectrum Management, LLC. On April 27, 2011, we announced that we had entered
into two separatetransactions involving the purchase of an aggregate of 11,408 bonds (“Bonds”)
issued by Orco Germany S.A., a commercial and multi-family residential real estate holding company and developer based in Berlin.
The consideration provided to the selling bondholders consisted of an aggregate of 1,700,000 newly issued shares of common stock
of the Fund. We received 8,890 of the Bonds on April 27, 2011. On May 9, 2011, one of these agreements was amended and restated
to provide for an additional 45 days to deliver the remaining 2,518 of the Bonds in exchange for providing to the Fund approximately
$1.6 million in cash as security for such delivery. As the remaining bonds were not delivered by the specified date, the cash collateral
became free and clear property of the Fund on June 23, 2011.



The following table includes significant investment
activity during the nine months ended September 30, 2011 (in thousands):





|                         |  | Investment Activity |    |                     
|------------------------ |  | ------------------- | -- | --------------------
|                         |  | New Investments     |    | Existing Investments
|Portfolio Company        |  | Cash                |    | Non-Cash            
|Orco Germany S.A.        |  | $                   | 67 |                     
|Spectrum Management, LLC |  |                     | —  |                     
|                         |  | $                   | 67 |                     



29













Subsequent Events



Management performed an evaluation of the Fund’s
activity through the date the financial statements were issued, noting the following subsequent event:



On October 8,
2012, pursuant to the terms of the conversion for the original bonds, the Fund  received471,211 OPG shares. The Fund also received 6-Year OPG notes in the principal amount of €1.2
million. The OPG notes, due February 2018, bear interest of 5% cash and 5% PIK per annum, which interest percentages may be reduced
over time upon timely repayments of principal tranches during a four-year period commencing in 2015.



On October 15, 2012, the Fundannounced
that it sold 1,500,000 of its 1,573,666 shares of OPG and received net cash proceeds of €3.8 million, or $4.9 million, based
on the settlement date’s EUR-USD intra-day exchange rate of 1.293.



Item  3.	Quantitative and Qualitative Disclosure
about Market Risk



We are 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. The Fund has invested in a company outside of the United States which has given rise to exposure to foreign
currency value fluctuations. 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 affect interest income. In addition, changes in market interest rates are not typically a significant factor in the
determination of fair value of these debt securities, since the securities are generally held to maturity. We determine their fair
values based on the terms of the relevant debt security and the financial condition of the issuer.



A portion of our investment portfolio consists
of debt and equity investments in private companies. Modest changes in public market equity prices generally do not significantly
impact the estimated fair value of these investments. However, volatility in stock markets, particularly as such fluctuations may
affect Orco Property Group and other European issuers, may affect the quoted price for such stock and may therefore impact their
estimated fair value. In addition, 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.



We are classified as a “non-diversified”
investment company under the Investment Company Act, which means we are not limited in the proportion of our assets that may be
invested in the securities of a single user. The value of one segment called Real Estate includes one portfolio company and was 15.2% of the net asset value and 90.2%
of our investments in portfolio company securities (at fair value) as of September 30, 2012. 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
the 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 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 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, 2012. Based on their evaluation, the Fund’s Chief Executive Officer
and Chief Financial Officer concluded that the Fund’s disclosure controls and procedures were effective at a reasonable
assurance level. There has been no change in the Fund’s internal control over financial reporting during the quarter ended
September 30, 2012, that has materially affected, or is reasonably likely to materially affect, the Fund’s internal control
over financial reporting.



Part II. Other Information

Item  1.	Legal
Proceedings



On April 26, 2010, the Securities and
Exchange Commission (“SEC”) subpoenaed records of the Fund in connection with certain trades in the Fund’s shares
by SPQR Capital LLP, SAE Capital Ltd., Versatile Systems Inc., Mobiquity Investments Limited, and anyone associated with those
entities. The Fund has fully cooperated with the SEC’s request.

30









In January 2006, Equus
sold its 31.5% ownership interest in Champion Window, Inc. (“Champion”), a portfolio company of the Fund, to Atrium
Companies Inc. (“Atrium”) pursuant to a Stock Purchase Agreement (“SPA”) dated December 22, 2005. The SPA
contained certain limited rights of indemnification for Atrium in connection with its purchase of such ownership interest.



Atrium filed suit in the
District Court of Harris County, Texas against two former officers of Atrium’s subsidiary, Champion, alleging, amongst other
matters, that the former officers breached their fiduciary duties to Champion by hiring undocumented workers. This action was commenced
primarily as a result of an investigation by the U.S. Immigration and Customs Enforcement agency (“ICE”) into Atrium’s
hiring practices. On March 12, 2012, to protect its interests, Equus filed a Petition in Intervention in the State Court Action
seeking a declaration from the Court that Equus did not owe any obligation to indemnify Atrium or Champion for any penalties, costs
or fees associated with the investigation by ICE.



On March 16, 2012, Atrium
and Champion filed a claim with the American Arbitration Association in Dallas, Texas, against Equus and a number of the other
sellers under the SPA.



In the Arbitration Action,
Atrium and Champion seek damages arising from Equus’ and the other sellers’ indemnity obligations set forth in the
SPA. Atrium claims it is entitled to indemnification under the SPA for costs it has incurred in responding to an ongoing investigation
by ICE. Atrium entered into a Non-Prosecution Agreement with ICE. It appears that one condition of the Non-Prosecution Agreement
required Atrium to pay ICE $2,000,000. Atrium and Champion asserted two counts of breach of contract against Equus, both arising
out of the alleged obligation to indemnify Atrium and Champion pursuant to certain provisions of the SPA. Atrium and Champion
also asserted claims for fraudulent inducement against two former officers and directors of Champion. Through the arbitration,
Atrium and Champion seek to recover an unspecified amount in the form of alleged “losses, damages, assessments, penalties,
interest, reasonable attorneys’ and accountants’ fees, settlement costs, and other costs and expenses arising directly
or indirectly out of or incident to,” the alleged breach of the indemnity provisions in the SPA. As a consequence of their
fraudulent inducement claim against the two former officers and directors, Atrium and Champion alternatively seek equitable rescission
of the SPA and exemplary damages from the two former officers and directors.



Atrium and Champion have
yet to specify the amount of damages they seek from Equus or the other sellers pursuant to the alleged indemnity obligations under
the SPA. Atrium and Champion have disclosed the payment of $2 million to ICE to resolve the investigation and avoid prosecution
for their hiring practices.



Equus intends to vigorously
contest the claims and denies that it owes any indemnity obligations to Atrium or Champion and further denies that it is in any
way liable to Atrium or Champion. To the extent Atrium and Champion are able to establish a right to an indemnity, Equus will contest
the amount of the claimed indemnity, inasmuch as we believe (among other defenses) that the indemnity obligation can only exist,
if at all, with respect to damages arising as a direct and proximate result of employees who were hired prior to the closing date of the 2006 sale of Champion and remained
in continuous employment after the 2006 sale, and not to any employee who may have been hired in the six years after the sale.



While the Fund believes
the Atrium claim is without merit and the Fund intends to vigorously dispute the claim, there is a reasonable possibility of an
adverse ruling which may require the Fund to indemnify Atrium. If Equus is required to indemnify Atrium and Champion, we estimate
that such indemnity obligation could vary from $2.0 - $3.0 million. Pursuant to the SPA, the indemnification obligation of Equus
and the other sellers is several and not joint, and any such indemnity, however uncertain, would likely be reduced proportionately
to the Fund’s percentage ownership in Champion at the time of sale, which was 31.5% of Champion’s shares outstanding.



On August 12, 2012, Paula Douglass filed a
lawsuit against the Fund and members of the Board of Directors in the District Court of Harris County, Texas. Ms. Douglass’
complaint alleges various causes of action, including minority shareholder oppression, dilution, and breach of fiduciary duty,
and seeks unspecified damages and attorney’s fees. The Fund considers the lawsuit as being without merit and intends to defend
the matter vigorously.



From time to time, the
Fund is also a party to certain legal proceedings incidental to the normal course of our business including the enforcement of
our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot at this time be predicted
with certainty, the Fund does not expect that these proceedings will have a material effect upon the Fund’s financial condition
or results of operations.



Item 1A.	Risk
Factors



There have been no material changes in the
Fund’s risk factors from the disclosure set forth in the Annual Report on Form 10-K for the year ended December 31,
2011.

31









Readers should carefully consider these risks
and all other information contained in the annual report on Form 10-K, including the Fund’s financial statements and the
related notes thereto. The risks and uncertainties described below are not the only ones facing the Fund. Additional risks and
uncertainties not presently known to the Fund, or not presently deemed material by the Fund, may also impair its operations and
performance.



32





Item  6.	Exhibits

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

| | (a) | Restated Certificate of Incorporation of the Fund, as amended. [Incorporated by reference to Exhibit 3(a) to Registrant’s
Annual Report on Form 10-K for the year ended December 31, 2007]
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Certificate of Merger dated June 30, 1993, between the Fund and Equus Investments Incorporated [Incorporated by reference
to Exhibit 3(c) to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007]
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | Amended and Restated Bylaws of the Fund. [Incorporated by reference to Exhibit 3(b) to Registrant’s Current Report on
Form 8-K filed on December 16, 2010.]
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10. | Material Contracts.
| | --- | -------------------

| | (c) | Safekeeping Agreement between the Fund and Amegy Bank dated August 16, 2008. [Incorporated by reference to Exhibit 10(c)
to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008.]
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (d) | Form of Indemnification Agreement between the Fund and its directors and certain officers. [Incorporated by reference to Exhibit
10(d) to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2011.]
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (e) | Form of Release Agreement between the Fund and certain of its officers and former officers. [Incorporated by reference to Exhibit
10(h) to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004.]
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (f) | Code of Ethics of the Fund (Rule 17j-1) [Incorporated by reference to Exhibit 10(f) to Registrant’s Annual Report on
Form 10-K for the year ended December 31, 2009.]
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 1. | Certification by Chief Executive Officer
| | -- | ----------------------------------------

| | 2. | Certification by Chief Financial Officer
| | -- | ----------------------------------------

| | 32. | Section 1350 Certifications
| | --- | ---------------------------

| | 1. | Certification by Chief Executive Officer
| | -- | ----------------------------------------

| | 2. | Certification by Chief Financial Officer
| | -- | ----------------------------------------



33









|                        |  |                         
|----------------------- |  | ------------------------
|                        |  | EQUUS TOTAL RETURN, INC.
|                        |  |                         
|Date: November 14, 2012 |  | /s/ John A. Hardy       
|                        |  | John A. Hardy           
|                        |  | Chief Executive Officer 



34