---



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, 2003



OR



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



For the transition period
 to



Commission File Number 0-19509



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EQUUS II INCORPORATED

(Exact name of registrant as specified in its charter)



|Delaware                                                       |  | 76-0345915                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|2929 Allen Parkway, Suite 2500 Houston, Texas                  |  | 77019-2120                          
|(Address of principal executive offices)                       |  | (Zip Code)                          



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



---



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



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



There were 6,233,021
shares of the registrants common stock, $.001 par value, outstanding, as of November 12, 2003. The net asset value of a share at September 30, 2003 was $12.48.



---



---

EQUUS II INCORPORATED

(A Delaware Corporation)



INDEX



|          |  |                                                                                       |  | PAGE
|--------- |  | ------------------------------------------------------------------------------------- |  | ----
|PART I.   |  | FINANCIAL INFORMATION                                                                 |  |     
|          |  |                                                                                      
|Item 1.   |  | Financial Statements                                                                  |  |     
|          |  |                                                                                      
|          |  | Balance Sheets                                                                        |  |     
|          |  |                                                                                      
|          |  | - September 30, 2003 and December 31, 2002                                            |  | 1   
|          |  |                                                                                      
|          |  | Statements of Operations                                                              |  |     
|          |  |                                                                                      
|          |  | - For the three months ended September 30, 2003 and 2002                              |  | 2   
|          |  |                                                                                      
|          |  | - For the nine months ended September 30, 2003 and 2002                               |  | 3   
|          |  |                                                                                      
|          |  | Statements of Changes in Net Assets                                                   |  |     
|          |  |                                                                                      
|          |  | - For the nine months ended September 30, 2003 and 2002                               |  | 4   
|          |  |                                                                                      
|          |  | Statements of Cash Flows                                                              |  |     
|          |  |                                                                                      
|          |  | - For the nine months ended September 30, 2003 and 2002                               |  | 5   
|          |  |                                                                                      
|          |  | Selected Per Share Data and Ratios                                                    |  |     
|          |  |                                                                                      
|          |  | - For the nine months ended September 30, 2003 and 2002                               |  | 7   
|          |  |                                                                                      
|          |  | Schedule of Portfolio Securities                                                      |  |     
|          |  |                                                                                      
|          |  | - September 30, 2003                                                                  |  | 8   
|          |  |                                                                                      
|          |  | Notes to Financial Statements                                                         |  | 14  
|          |  |                                                                                      
|Item 2.   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 21  
|          |  |                                                                                      
|Item 3.   |  | Quantitative and Qualitative Disclosure about Market Risk                             |  | 26  
|          |  |                                                                                      
|Item 4.   |  | Controls and Procedures                                                               |  | 27  
|          |  |                                                                                      
|PART II.  |  | OTHER INFORMATION                                                                     |  |     
|          |  |                                                                                      
|Item 6.   |  | Exhibits and Reports on Form 8-K                                                      |  | 28  
|          | 
|SIGNATURE |  | 29                                                                                   





---

|Part I. |  | Financial Information
|------- |  | ---------------------



|Item 1. |  | Financial Statements
|------- |  | --------------------



EQUUS II INCORPORATED

BALANCE SHEETS

SEPTEMBER 30, 2003 AND DECEMBER 31, 2002

(Unaudited)



|                                                                                                   |  | 2003 |             |   | 2002 |  
|-------------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | -
|Assets                                                                                             |  |      |             |   |      |  
|Investments in portfolio securities at fair value (cost $83,185,761 and $92,611,224, respectively) |  | $    | 82,749,052  |   |      | $
|Restricted cash & temporary investments, at cost which approximates fair value                     |  |      | 64,670,715  |   |      |  
|Cash                                                                                               |  |      | 804         |   |      |  
|Temporary cash investments, at cost which approximates fair value                                  |  |      | 18,052      |   |      |  
|Accounts receivable                                                                                |  |      | 15,453      |   |      |  
|Accrued interest and dividends receivable                                                          |  |      | 3,903,489   |   |      |  
|                                                                                                   |  |      |             |   |      |  
|Total assets                                                                                       |  |      | 151,357,565 |   |      |  
|                                                                                                   |  |      |             |   |      |  
|Liabilities and net assets                                                                         |  |      |             |   |      |  
|Liabilities:                                                                                       |  |      |             |   |      |  
|Accounts payable                                                                                   |  |      | 112,968     |   |      |  
|Due to management company                                                                          |  |      | 388,998     |   |      |  
|Revolving line of credit                                                                           |  |      | 9,065,000   |   |      |  
|Payable for securities purchased                                                                   |  |      | 63,990,948  |   |      |  
|Line of credit promissory note                                                                     |  |      |            |   |      |  
|                                                                                                   |  |      |             |   |      |  
|Total liabilities                                                                                  |  |      | 73,557,914  |   |      |  
|                                                                                                   |  |      |             |   |      |  
|Commitments and contingencies                                                                      |  |      |             |   |      |  
|Net assets:                                                                                        |  |      |             |   |      |  
|Preferred stock, $.001 par value, 5,000,000 shares authorized, no shares outstanding               |  |      |            |   |      |  
|Common stock, $.001 par value, 25,000,000 shares authorized, 6,233,021 shares outstanding          |  |      | 6,233       |   |      |  
|Additional paid-in capital                                                                         |  |      | 83,331,755  |   |      |  
|Undistributed net investment income (loss)                                                         |  |      | 2,385,892   |   |      |  
|Undistributed net capital gains (losses)                                                           |  |      | (7,487,520  | ) |      |  
|Unrealized depreciation of portfolio securities, net                                               |  |      | (436,709    | ) |      |  
|                                                                                                   |  |      |             |   |      |  
|Total net assets                                                                                   |  | $    | 77,799,651  |   |      | $
|                                                                                                   |  |      |             |   |      |  
|Net assets per share                                                                               |  | $    | 12.48       |   |      | $
|                                                                                                   |  |      |             |   |      |  



The accompanying notes
are an

integral part of these financial statements.



1



---

EQUUS II INCORPORATED

STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002

(Unaudited)



|                                                        |  | 2003 |           |   | 2002 |  
|------------------------------------------------------- |  | ---- | --------- | - | ---- | -
|Investment income:                                      |  |      |           |   |      |  
|Interest income from portfolio securities               |  | $    | 800,605   |   |      | $
|Dividend income from portfolio securities               |  |      | 89,833    |   |      |  
|Interest from temporary cash investments                |  |      | 765       |   |      |  
|Other income                                            |  |      |          |   |      |  
|                                                        |  |      |           |   |      |  
|Total investment income                                 |  |      | 891,203   |   |      |  
|                                                        |  |      |           |   |      |  
|Expenses:                                               |  |      |           |   |      |  
|Management fees                                         |  |      | 388,998   |   |      |  
|Non-cash compensation expense                           |  |      | 629,171   |   |      |  
|Director fees and expenses                              |  |      | 57,893    |   |      |  
|Professional fees                                       |  |      | 52,991    |   |      |  
|Administrative fees                                     |  |      | 12,500    |   |      |  
|Mailing, printing and other expenses                    |  |      | 31,954    |   |      |  
|Interest expense                                        |  |      | 216,296   |   |      |  
|Franchise taxes                                         |  |      | 6,000     |   |      |  
|                                                        |  |      |           |   |      |  
|Total expenses                                          |  |      | 1,395,803 |   |      |  
|                                                        |  |      |           |   |      |  
|Net investment income (loss)                            |  |      | (504,600  | ) |      |  
|                                                        |  |      |           |   |      |  
|Realized gain on sales of portfolio securities, net     |  |      | 279,572   |   |      |  
|                                                        |  |      |           |   |      |  
|Unrealized depreciation of portfolio securities, net:   |  |      |           |   |      |  
|End of period                                           |  |      | (436,709  | ) |      |  
|Beginning of period                                     |  |      | (881,020  | ) |      |  
|                                                        |  |      |           |   |      |  
|Change in unrealized depreciation                       |  |      | 444,311   |   |      |  
|                                                        |  |      |           |   |      |  
|Total increase (decrease) in net assets from operations |  | $    | 219,283   |   |      | $
|                                                        |  |      |           |   |      |  



The accompanying notes
are an

integral part of these financial statements.



2



---

EQUUS II INCORPORATED

STATEMENTS OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002

(Unaudited)



|                                                           |  | 2003 |            |   | 2002 |  
|---------------------------------------------------------- |  | ---- | ---------- | - | ---- | -
|Investment income:                                         |  |      |            |   |      |  
|Interest income from portfolio securities                  |  | $    | 2,227,811  |   |      | $
|Dividend income from portfolio securities                  |  |      | 3,883,973  |   |      |  
|Interest from temporary cash investments                   |  |      | 3,888      |   |      |  
|Other income                                               |  |      |           |   |      |  
|                                                           |  |      |            |   |      |  
|Total investment income                                    |  |      | 6,115,672  |   |      |  
|                                                           |  |      |            |   |      |  
|Expenses:                                                  |  |      |            |   |      |  
|Management fees                                            |  |      | 1,172,324  |   |      |  
|Non-cash compensation expense (benefit)                    |  |      | 835,215    |   |      |  
|Director fees and expenses                                 |  |      | 171,309    |   |      |  
|Professional fees                                          |  |      | 191,187    |   |      |  
|Administrative fees                                        |  |      | 37,500     |   |      |  
|Mailing, printing and other expenses                       |  |      | 91,926     |   |      |  
|Interest expense                                           |  |      | 739,644    |   |      |  
|Excise tax                                                 |  |      | 36,832     |   |      |  
|Franchise taxes                                            |  |      | 29,924     |   |      |  
|                                                           |  |      |            |   |      |  
|Total expenses                                             |  |      | 3,305,861  |   |      |  
|                                                           |  |      |            |   |      |  
|Net investment income                                      |  |      | 2,809,811  |   |      |  
|                                                           |  |      |            |   |      |  
|Realized gain (loss) on sales of portfolio securities, net |  |      | (7,801,775 | ) |      |  
|                                                           |  |      |            |   |      |  
|Unrealized depreciation of portfolio securities, net:      |  |      |            |   |      |  
|End of period                                              |  |      | (436,709   | ) |      |  
|Beginning of period                                        |  |      | (5,417,014 | ) |      |  
|                                                           |  |      |            |   |      |  
|Change in unrealized depreciation, net                     |  |      | 4,980,305  |   |      |  
|                                                           |  |      |            |   |      |  
|Total decrease in net assets from operations               |  | $    | (11,659    | ) |      | $
|                                                           |  |      |            |   |      |  



The accompanying notes
are an

integral part of these financial statements.



3



---

EQUUS II INCORPORATED

STATEMENTS OF CHANGES IN NET ASSETS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002

(Unaudited)



|                                                               |  | 2003 |            |   | 2002 |  
|-------------------------------------------------------------- |  | ---- | ---------- | - | ---- | -
|Operations:                                                    |  |      |            |   |      |  
|                                                               |  |     
|Net investment income                                          |  | $    | 2,809,811  |   |      | $
|Realized gain (loss) on sales of portfolio securities, net     |  |      | (7,801,775 | ) |      |  
|Change in unrealized depreciation of portfolio securities, net |  |      | 4,980,305  |   |      |  
|                                                               |  |      |            |   |      |  
|Decrease in net assets from operations                         |  |      | (11,659    | ) |      |  
|                                                               |  |      |            |   |      |  
|Capital Transactions:                                          |  |      |            |   |      |  
|                                                               |  |     
|Non-cash compensation expense (benefit)                        |  |      | 835,215    |   |      |  
|                                                               |  |      |            |   |      |  
|                                                               |  |      |            |   |      |  
|Increase (decrease) in net assets from capital transactions    |  |      | 835,215    |   |      |  
|                                                               |  |      |            |   |      |  
|Increase (decrease) in net assets                              |  |      | 823,556    |   |      |  
|                                                               |  |     
|Net assets at beginning of period                              |  |      | 76,976,095 |   |      |  
|                                                               |  |      |            |   |      |  
|Net assets at end of period                                    |  | $    | 77,799,651 |   |      | $
|                                                               |  |      |            |   |      |  



The accompanying notes
are an

integral part of these financial statements.



4



---

EQUUS II INCORPORATED

STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002

(Unaudited)



|                                                                  |  | 2003 |              |   | 2002 |  
|----------------------------------------------------------------- |  | ---- | ------------ | - | ---- | -
|Cash flows from operating activities:                             |  |      |              |   |      |  
|Interest and dividends received                                   |  | $    | 3,877,952    |   |      | $
|Cash paid to management company, directors, bank and suppliers    |  |      | (2,554,442   | ) |      |  
|                                                                  |  |      |              |   |      |  
|Net cash provided (used) by operating activities                  |  |      | 1,323,510    |   |      |  
|                                                                  |  |      |              |   |      |  
|Cash flows from investing activities:                             |  |      |              |   |      |  
|Purchase of portfolio securities                                  |  |      | (2,280,000   | ) |      |  
|Proceeds from sales of portfolio securities                       |  |      | 2,664,011    |   |      |  
|Principal payments from portfolio securities                      |  |      | 2,184,547    |   |      |  
|Sales (purchases) of restricted cash & temporary investments, net |  |      | (6,670,715   | ) |      |  
|Advances to portfolio companies                                   |  |      | (123         | ) |      |  
|                                                                  |  |      |              |   |      |  
|Net cash provided (used) by investing activities                  |  |      | (4,102,280   | ) |      |  
|                                                                  |  |      |              |   |      |  
|Cash flows from financing activities:                             |  |      |              |   |      |  
|Borrowings under brokerage margin account                         |  |      | 240,888,503  |   |      |  
|Repayments under brokerage margin account                         |  |      | (176,897,555 | ) |      |  
|Advances from bank                                                |  |      | 3,965,000    |   |      |  
|Repayments to bank                                                |  |      | (65,675,000  | ) |      |  
|                                                                  |  |      |              |   |      |  
|Net cash provided (used) by financing activities                  |  |      | 2,280,948    |   |      |  
|                                                                  |  |      |              |   |      |  
|Decrease in cash and cash equivalents                             |  |      | (497,822     | ) |      |  
|                                                                  |  |     
|Cash and cash equivalents at beginning of period                  |  |      | 516,678      |   |      |  
|                                                                  |  |      |              |   |      |  
|Cash and cash equivalents at end of period                        |  | $    | 18,856       |   |      | $
|                                                                  |  |      |              |   |      |  



The accompanying notes
are an

integral part of these financial statements.



5



---

EQUUS II INCORPORATED

STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002

(Unaudited)

(Continued)



|                                                                                                                     |  | 2003 |            |   | 2002 |  
|-------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | -
|Reconciliation of decrease in net assets from operations to net cash provided (used) by operating activities:        |  |      |            |   |      |  
|Decrease in net assets from operations                                                                               |  | $    | (11,659    | ) |      | $
|Adjustments to reconcile decrease in net assets from operations to net cash provided (used) by operating
activities: |  |      |            |   |      |  
|Realized (gain) loss on sales of portfolio securities, net                                                           |  |      | 7,801,775  |   |      |  
|Increase (decrease) in unrealized depreciation, net                                                                  |  |      | (4,980,305 | ) |      |  
|Accrued interest and dividends exchanged for portfolio securities                                                    |  |      | (944,870   | ) |      |  
|Increase in accrued interest and dividends receivable                                                                |  |      | (1,292,850 | ) |      |  
|Non-cash compensation expense (benefit)                                                                              |  |      | 835,215    |   |      |  
|Decrease in accounts payable                                                                                         |  |      | (87,914    | ) |      |  
|Increase (decrease) in due to management company                                                                     |  |      | 4,118      |   |      |  
|                                                                                                                     |  |      |            |   |      |  
|Net cash provided (used) by operating activities                                                                     |  | $    | 1,323,510  |   |      | $
|                                                                                                                     |  |      |            |   |      |  



The accompanying notes
are an

integral part of these financial statements.



6



---

EQUUS II INCORPORATED

SUPPLEMENTAL INFORMATION  SELECTED PER SHARE DATA AND RATIOS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002

(Unaudited)



|                                                                        |  | 2003 |       |    | 2002 |  
|----------------------------------------------------------------------- |  | ---- | ----- | -- | ---- | -
|Investment income                                                       |  | $    | 0.98  |    |      | $
|                                                                        |  |     
|Expenses                                                                |  |      | 0.53  |    |      |  
|                                                                        |  |      |       |    |      |  
|Net investment income                                                   |  |      | 0.45  |    |      |  
|                                                                        |  |     
|Realized gain (loss) on sale of portfolio securities, net               |  |      | (1.25 | )  |      |  
|                                                                        |  |     
|Change in unrealized depreciation of portfolio securities, net          |  |      | 0.80  |    |      |  
|                                                                        |  |      |       |    |      |  
|Decrease in net assets from operations                                  |  |      |      |    |      |  
|                                                                        |  |      |       |    |      |  
|Capital Transactions:                                                   |  |      |       |    |      |  
|                                                                        |  |     
|Non-cash compensation expense                                           |  |      | 0.13  |    |      |  
|                                                                        |  |      |       |    |      |  
|Increase in net assets from capital transactions                        |  |      | 0.13  |    |      |  
|                                                                        |  |      |       |    |      |  
|Net increase (decrease) in net assets                                   |  |      | 0.13  |    |      |  
|                                                                        |  |     
|Net assets at beginning of period                                       |  |      | 12.35 |    |      |  
|                                                                        |  |      |       |    |      |  
|Net assets at end of period                                             |  | $    | 12.48 |    |      | $
|                                                                        |  |      |       |    |      |  
|Net assets at end of period - diluted                                   |  | $    | 12.28 |    |      | $
|                                                                        |  |      |       |    |      |  
|Weighted average number of shares outstanding during year, in thousands |  |      | 6,233 |    |      |  
|                                                                        |  |     
|Market value                                                            |  | $    | 8.60  |    |      | $
|                                                                        |  |     
|Ratio of expenses to average net assets                                 |  |      | 4.27  | %  |      |  
|                                                                        |  |     
|Ratio of net investment income to average net assets                    |  |      | 3.63  | %  |      |  
|                                                                        |  |     
|Ratio of decrease in net assets from operations to average net assets   |  |      | (0.02 | )% |      |  



The accompanying notes
are an

integral part of these financial statements.



7



---

EQUUS II INCORPORATED

SCHEDULE OF PORTFOLIO SECURITIES

SEPTEMBER 30, 2003

(Unaudited)



|Portfolio Company                                                                    |  | Date of Initial Investment |  | Cost |           | Fair Value
|------------------------------------------------------------------------------------ |  | -------------------------- |  | ---- | --------- | ----------
|Alenco Holding Corporation                                                           |  | January 2002               |  |      |           |           
|(formerly Alenco Window Holdings II, LLC)                                            |  |                            |  |      |           |           
|Manufacturer & distributor of alumimnum and vinyl windows                            |  |                            |  |      |           |           
|- 22,657 shares of common stock                                                      |  |                            |  | $    | 227       |           
|                                                                                     |  |                            | 
|American Trenchless Technology, Inc.                                                 |  | February 2001              |  |      |           |           
|Boring, tunneling and directional drilling                                           |  |                            |  |      |           |           
|- 4,160 shares of common stock                                                       |  |                            |  |      | 1,324,694 |           
|- 50% membership interest in Glendale, LLC                                           |  |                            |  |      | 300,000   |           
|                                                                                     |  |                            | 
|The Bradshaw Group                                                                   |  | May 2000                   |  |      |           |           
|Sells and services midrange and high-speed printing equipment                        |  |                            |  |      |           |           
|- Prime + 2% promissory note with a face amount of $398,383(2)                       |  |                            |  |      |          |           
|- 15% promissory note(2)                                                             |  |                            |  |      | 459,545   |           
|- 1,335,000 shares of preferred stock                                                |  |                            |  |      | 1,335,000 |           
|- Warrant to buy 2,229,450 shares of common stock for $0.01 through May 2008         |  |                            |  |      | 1         |           
|                                                                                     |  |                            | 
|Champion Window Holdings, Inc.                                                       |  | March 1999                 |  |      |           |           
|Manufacturer & distributor of residential windows                                    |  |                            |  |      |           |           
|- 1,400,000 shares of common stock(1)                                                |  |                            |  |      | 1,400,000 |           
|- Warrant to purchase 10,000 shares of common stock stock at $7.18 through July 2008 |  |                            |  |      |          |           
|                                                                                     |  |                            | 
|CMC Investments, LLC                                                                 |  | December 2001              |  |      |           |           
|Manufacturer of oil and gas drilling rigs                                            |  |                            |  |      |           |           
|- 21% membership interest                                                            |  |                            |  |      | 525,000   |           



The accompanying notes
are an

integral part of these financial statements.



8



---

EQUUS II INCORPORATED

SCHEDULE OF PORTFOLIO SECURITIES

SEPTEMBER 30, 2003

Unaudited)

(Continued)



|Portfolio Company                                                                                     |  | Date of Initial Investment |  | Cost |           | Fair Value
|----------------------------------------------------------------------------------------------------- |  | -------------------------- |  | ---- | --------- | ----------
|Container Acquisition, Inc.                                                                           |  | February 1997              |  |      |           |           
|Shipping container repair & storage                                                                   |  |                            |  |      |           |           
|- 7% promissory note(1)                                                                               |  |                            |  | $    | 1,250,000 |           
|- 78,318 shares of preferred stock                                                                    |  |                            |  |      | 7,831,800 |           
|- Conditional warrant to buy up to 370,588 shares of common stock at $0.01 through February 2007      |  |                            |  |      | 1,000     |           
|- 1,370,000 shares of common stock                                                                    |  |                            |  |      | 1,370,000 |           
|- 85% membership interest in CCI-ANI Finance, LLC                                                     |  |                            |  |      | 1,571,000 |           
|                                                                                                      |  |                            | 
|Doane PetCare Enterprises, Inc.                                                                       |  | October 1995               |  |      |           |           
|Manufacturer of private label pet food                                                                |  |                            |  |      |           |           
|- 1,943,598 shares of common stock                                                                    |  |                            |  |      | 3,936,643 |           
|                                                                                                      |  |                            | 
|The Drilltec Corporation                                                                              |  | August 1998                |  |      |           |           
|Provides protection & packaging for pipe & tubing                                                     |  |                            |  |      |           |           
|- Prime + 9.75% promissory note(2)                                                                    |  |                            |  |      | 1,000,000 |           
|                                                                                                      |  |                            | 
|ENGlobal, Inc. (AMEX: ENG)                                                                            |  | December 2001              |  |      |           |           
|(formerly Industrial Data Systems Corporation)                                                        |  |                            |  |      |           |           
|Engineering and consulting services                                                                   |  |                            |  |      |           |           
|- 9.5% promissory note(1)                                                                             |  |                            |  |      | 2,450,000 |           
|- 2,371,251 shares of common stock                                                                    |  |                            |  |      | 3,449,192 |           
|- Conditional option to acquire 200,000 shares of common stock (conditional upon a change of control) |  |                            |  |      |          |           
|                                                                                                      |  |                            | 
|Equicom, Inc.                                                                                         |  | July 1997                  |  |      |           |           
|Radio stations                                                                                        |  |                            |  |      |           |           
|- 10% promissory notes                                                                                |  |                            |  |      | 3,606,730 |           
|- 657,611 shares of preferred stock                                                                   |  |                            |  |      | 6,576,110 |           
|- 452,000 shares of common stock                                                                      |  |                            |  |      | 141,250   |           
|                                                                                                      |  |                            | 
|Equipment Support Services, Inc.                                                                      |  | December 1999              |  |      |           |           
|Equipment rental                                                                                      |  |                            |  |      |           |           
|- 8% promissory note(2)                                                                               |  |                            |  |      | 1,138,000 |           
|- 35,000 shares of preferred stock                                                                    |  |                            |  |      | 1,929,000 |           
|- 35,000 shares of common stock                                                                       |  |                            |  |      | 101,500   |           



The accompanying notes
are an

integral part of these financial statements.



9



---

EQUUS II INCORPORATED

SCHEDULE OF PORTFOLIO SECURITIES

SEPTEMBER 30, 2003

(Unaudited)

(Continued)



|Portfolio Company                                                                      |  | Date of Initial Investment |  | Cost |           | Fair Value
|-------------------------------------------------------------------------------------- |  | -------------------------- |  | ---- | --------- | ----------
|                                                                                       |  |                            | 
|Jones Industrial Services, Inc.                                                        |  | July 1998                  |  |      |           |           
|(formerly United Industrial Services, Inc.)                                            |  |                            |  |      |           |           
|Field service for petrochemical & power generation industries                          |  |                            |  |      |           |           
|- 35,000 shares of preferred stock                                                     |  |                            |  | $    | 3,500,000 |           
|- Warrant to buy 63,637 shares of common stock at $0.01 through June 2008              |  |                            |  |      | 100       |           
|                                                                                       |  |                            | 
|NCI Building Systems, Inc. (NYSE: NCS)                                                 |  | April 1989                 |  |      |           |           
|Design & manufacture metal buildings                                                   |  |                            |  |      |           |           
|- 200,000 shares of common stock                                                       |  |                            |  |      | 159,784   |           
|                                                                                       |  |                            | 
|PalletOne, Inc.                                                                        |  | October 2001               |  |      |           |           
|Wooden pallet manufacturer                                                             |  |                            |  |      |           |           
|- 3,465,000 shares of preferred stock(1)(3)                                            |  |                            |  |      | 3,465,000 |           
|- 350,000 shares of common stock                                                       |  |                            |  |      | 350,000   |           
|                                                                                       |  |                            | 
|Reliant Window Holdings, LLC                                                           |  | February 2001              |  |      |           |           
|Manufacturer & distributor of aluminum & vinyl windows                                 |  |                            |  |      |           |           
|- 36.86% membership interest                                                           |  |                            |  |      | 3,686     |           
|                                                                                       |  |                            | 
|Sovereign Business Forms, Inc.                                                         |  | August 1996                |  |      |           |           
|Business forms manufacturer                                                            |  |                            |  |      |           |           
|- 15% promissory notes(1)(3)                                                           |  |                            |  |      | 4,226,224 |           
|- 20,452 shares of preferred stock(1)(3)                                               |  |                            |  |      | 2,045,200 |           
|- Warrant to buy 551,894 shares of common stock at $1 per share through August 2006    |  |                            |  |      |          |           
|- Warrant to buy 25,070 shares of common stock at $1.25 per share through October 2007 |  |                            |  |      |          |           
|- Warrant to buy 273,450 shares of common stock at $1 per share through October 2009   |  |                            |  |      |          |           
|                                                                                       |  |                            | 
|Spectrum Management, LLC                                                               |  | December 1999              |  |      |           |           
|Business & personal property protection                                                |  |                            |  |      |           |           
|- 285,000 units of Class A equity interest                                             |  |                            |  |      | 2,850,000 |           
|- 16% subordinated promissory note(1)                                                  |  |                            |  |      | 1,303,698 |           



The accompanying notes
are an

integral part of these financial statements.



10



---

EQUUS II INCORPORATED

SCHEDULE OF PORTFOLIO SECURITIES

SEPTEMBER 30, 2003

(Unaudited)

(Continued)



|Portfolio Company                                                                          |  | Date of Initial Investment |  | Cost |            | Fair Value
|------------------------------------------------------------------------------------------ |  | -------------------------- |  | ---- | ---------- | ----------
|                                                                                           |  |                            | 
|Sternhill Partners I, LP                                                                   |  | March 2000                 |  |      |            |           
|Venture capital fund                                                                       |  |                            |  |      |            |           
|- 3% limited partnership interest                                                          |  |                            |  | $    | 2,041,604  |           
|                                                                                           |  |                            | 
|Strategic Holdings, Inc.                                                                   |  | September 1995             |  |      |            |           
|Processor of recycled glass                                                                |  |                            |  |      |            |           
|- 15% promissory note                                                                      |  |                            |  |      | 6,750,000  |           
|- 3,822,157 shares of Series B preferred stock                                             |  |                            |  |      | 3,820,624  |           
|- Warrant to buy 225,000 shares of common stock at $0.4643 per share through August 2005   |  |                            |  |      |           |           
|- Warrant to buy 100,000 shares of common stock at $1.50 per share through August 2005     |  |                            |  |      |           |           
|- Warrant to buy 2,219,237 shares of common stock at $0.01 per share through November 2005 |  |                            |  |      |           |           
|- 3,089,751 shares of common stock                                                         |  |                            |  |      | 3,088,389  |           
|- 15% promissory note of SMIP, Inc.                                                        |  |                            |  |      | 175,000    |           
|- 1,000 shares of SMIP, Inc. common stock                                                  |  |                            |  |      | 150,000    |           
|                                                                                           |  |                            | 
|Turfgrass America, Inc.                                                                    |  | May 1999                   |  |      |            |           
|Grows, sells & installs warm season turfgrasses                                            |  |                            |  |      |            |           
|- 12% subordinated promissory note                                                         |  |                            |  |      | 288,580    |           
|- 12% subordinated promissory note                                                         |  |                            |  |      | 502,035    |           
|- 12% subordinated promissory note with a face amount of $4,000,000(3)                     |  |                            |  |      | 3,900,507  |           
|- 1,507,226 shares of convertible preferred stock                                          |  |                            |  |      | 768,638    |           
|- Warrants to buy 250,412 shares of common stock at $0.51 per share through April 2010     |  |                            |  |      |           |           
|- 211,184 shares of common stock                                                           |  |                            |  |      | 600,000    |           
|                                                                                           |  |                            | 
|Vanguard VII, L.P.                                                                         |  | June 2000                  |  |      |            |           
|Venture capital fund                                                                       |  |                            |  |      |            |           
|- 1.3% limited partnership interest                                                        |  |                            |  |      | 1,500,000  |           
|                                                                                           |  |                            |  |      |            |           
|Total                                                                                      |  |                            |  | $    | 83,185,761 |           
|                                                                                           |  |                            |  |      |            |           



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



|(2) | As of September 30, 2003, the Fund has reduced the fair value of these notes to zero and has
discontinued recognizing any additional interest income on these notes due to conditions specific to the respective Portfolio Companies. However, the Portfolio Companies are still liable for such notes and related interest, and they may be collected
in the future.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



The accompanying notes are an

integral part of these financial statements.



11



---

EQUUS II INCORPORATED

SCHEDULE OF PORTFOLIO SECURITIES

SEPTEMBER 30, 2003

(Unaudited)

(Continued)



Substantially all of the Funds portfolio securities are restricted from public sale without prior registration under
the Securities Act of 1933. The Fund negotiates certain aspects of the method and timing of the disposition of the Funds investment in each portfolio company, including registration rights and related costs.



In connection with the investments in American Trenchless Technology, Inc.,
Champion Window Holdings, Inc., Container Acquisition, Inc., The Drilltec Corporation, Jones Industrial Services, Inc., Sovereign Business Forms, Inc., Strategic Holdings, Inc. and Turfgrass America, Inc., rights have been obtained to demand the
registration of such securities under the Securities Act of 1933, providing certain conditions are met. The Fund does not expect to incur significant costs, including costs of any such registration, in connection with the future disposition of its
portfolio securities.



As defined in the Investment Company Act
of 1940, at September 30, 2003, the Fund was considered to have a controlling interest in Champion Window Holdings, Inc., Container Acquisition, Inc., The Drilltec Corporation, Equicom, Inc., PalletOne, Inc., Reliant Window Holdings, LLC, Sovereign
Business Forms, Inc., Spectrum Management LLC, and Strategic Holdings, Inc. The fair value of the Funds investment in ENGlobal, Inc. includes a discount of $1,552,547 from the closing market price to reflect the estimated effect of
restrictions on the sale of such securities at September 30, 2003.



Income was earned in the amount of $4,993,897 and $1,725,576 for the nine months ended September 30, 2003 and 2002, respectively, on portfolio securities of companies in which the Fund has a controlling interest. Income was earned in the
amount of $873,267 and $1,062,749 for the nine months ended September 30, 2003 and 2002, respectively, on portfolio securities of companies that are affiliates of the Fund but are not controlled by the Fund.



As defined in the Investment Company Act of 1940, all of the Funds
investments are in eligible portfolio companies except Sternhill Partners I, L.P. and Vanguard VII, L.P. The Fund provides significant managerial assistance to all of the portfolio companies in which it has invested, except Doane PetCare
Enterprises, Inc. (Doane), Equipment Support Services, Inc., Sternhill Partners I, L.P., and Vanguard VII, L.P. The Fund provides significant managerial assistance to portfolio companies that comprise 96% of the total value of the
investments in portfolio companies at September 30, 2003.



The
accompanying notes are an

integral part of these financial statements.



12



---

EQUUS II INCORPORATED

SCHEDULE OF PORTFOLIO SECURITIES

JUNE 30, 2003

(Unaudited)

(Continued)



The investments in portfolio securities held by the Fund are not geographically diversified. All of the Funds
portfolio companies (except for Doane, PalletOne, Inc. and certain investments in the venture capital funds) are headquartered in Texas, although several have significant operations in other states.



The Funds investments in portfolio securities consist of the following
types of securities at September 30, 2003:



|Type of Securities                    |  | Cost |            | Fair Value |   | Percentageof Fair Value | 
|------------------------------------- |  | ---- | ---------- | ---------- | - | ----------------------- | 
|Common Stock                          |  | $    | 16,071,679 |            | $ | 34,796,106              | 
|Secured and Subordinated Debt         |  |      | 27,050,319 |            |   | 22,254,922              | 
|Limited Liability Company Investments |  |      | 5,249,686  |            |   | 10,065,000              | 
|Preferred Stock                       |  |      | 31,271,372 |            |   | 11,600,624              | 
|Options and Warrants                  |  |      | 1,101      |            |   | 2,632,400               | 
|Limited Partnership Investments       |  |      | 3,541,604  |            |   | 1,400,000               | 
|                                      |  |      |            |            |   |                         | 
|Total                                 |  | $    | 83,185,761 |            | $ | 82,749,052              | 
|                                      |  |      |            |            |   |                         | 



The following is a
summary by industry of the Funds investments as of September 30, 2003:



|Industry                            |  | Fair Value |            | Percentage |      
|----------------------------------- |  | ---------- | ---------- | ---------- | -----
|Business Products and Services      |  | $          | 11,234,922 |            | 13.6 
|Commercial Building Products        |  |            | 3,980,000  |            | 4.8  
|Consumer Goods                      |  |            | 2,000,000  |            | 2.4  
|Engineering and Consulting Services |  |            | 7,545,306  |            | 9.1  
|Industrial Products and Services    |  |            | 19,120,624 |            | 23.1 
|Media                               |  |            | 2,700,000  |            | 3.3  
|Residential Building Products       |  |            | 26,253,200 |            | 31.7 
|Shipping Products and Services      |  |            | 5,050,000  |            | 6.1  
|Turfgrass and Landscape Products    |  |            | 3,400,000  |            | 4.1  
|Venture Funds and Other             |  |            | 1,465,000  |            | 1.8  
|                                    |  |            |            |            |      
|Total                               |  | $          | 82,749,052 |            | 100.0
|                                    |  |            |            |            |      



The accompanying notes
are an

integral part of these financial statements.



13



---

EQUUS II INCORPORATED

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2003 AND 2002

(Unaudited)



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



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



The Fund seeks to achieve
capital appreciation by making investments in equity and equity-oriented securities issued by privately-owned companies in transactions negotiated directly with such companies. The Fund seeks to invest primarily in companies which intend to grow
either by acquiring other businesses, including leveraged buyouts, or internally. The Fund may also invest in recapitalizations of existing businesses or special situations from time to time. The Funds investments in Portfolio Companies
consist principally of equity securities such as common and preferred stock, but also include other equity-oriented securities such as debt convertible into common or preferred stock or debt combined with warrants, options or other rights to acquire
common or preferred stock. The Fund elected to be treated as a business development company under the Investment Company Act of 1940. For tax purposes, the Fund has elected to be treated as a regulated investment company (RIC). The Fund
has entered into a management agreement with Equus Capital Management Corporation, a Delaware corporation (the Management Company).



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



Liquidity and Revolving Line of Credit  The Fund has a $10,000,000 revolving line of credit with Bank of America, N.A. that expires on
November 30, 2003. The Fund uses its revolving line of credit for liquidity to pay operating expenses of the Fund and for new and follow-on investments in portfolio securities. The Fund had $9,065,000 outstanding under this line of credit at
September 30, 2003, which is collateralized by the Funds investments in portfolio securities. As of November 12, 2003, the Funds availability under the revolving line of credit is approximately $240,000.



The line of credit, as amended, provides that any proceeds received from the
sale of portfolio securities or from repayments by Portfolio Companies of the principal amount of loans must be used to pay down the line of credit. As such payments are made, the Funds availability under the facility is reduced by a
corresponding amount. The lender has asked the Fund to take steps to pay off the line of credit. Accordingly, the Fund has been in discussions with interested parties regarding the sale of certain portfolio securities. Due to the Funds limited
cash resources currently available, the Fund may be required to obtain borrowings from other parties and refinance its existing line of credit in order to maintain liquidity. Subsequent to September 30, 2003, the Fund entered into a contract,
subject to certain conditions, to sell its investment in Strategic Holdings, Inc (SHI). The proceeds from this sale, if consummated, should enable the Fund to pay its line of credit in full. The lender indicated it will extend the line
of credit to January 31, 2004, release certain collateral and permit additional secured borrowings from other parties during such period, but no definitive agreement has been executed. The Fund is also pursuing arrangements to refinance the line of
credit with other lenders. There can be no assurance that the Fund can sell securities sufficient to pay off the line of credit, extend the existing line of credit, obtain additional third party financing, or obtain a replacement facility. Should
the Fund be unable to do so, the



14



---

Fund may be required to sell portfolio securities at values that could be materially less than the Management Companys estimates of fair value.



The Fund has declared a dividend of its net taxable investment
income for 2003, estimated to be approximately $4.5 million, payable on January 16, 2004. The dividend will be paid by issuing shares of common stock, unless shareholders of the Fund request payment in cash, by specific election. Based on historical
elections, the Fund would expect approximately 40% of the Funds shareholders to elect to receive their dividend in cash. If the Fund is unable to complete the sale of SHI and obtain an extension of the line of credit or obtain additional
financing, it may not have the funds to pay the cash portion of the dividend.



Under certain circumstances, the Fund may be called on to make follow-on investments in certain Portfolio Companies. The Fund has guaranteed obligations to financial institutions on behalf of Equicom, Inc.
(Equicom) in the amount of $268,520. The Fund has made loans to Equicom from time to time to enable the company to service its debt, but the Management Company does not expect the Fund to advance more than $225,000 in the last quarter of
2003 for such purpose. In addition, the Fund has committed to invest up to an additional $2 million in Container Acquisition, Inc., in connection with a proposed refinancing of the company. Also, the Fund committed to invest up to $5,550,000 in the
two venture capital funds in its portfolio. At September 30, 2003, $3,570,000 of such amount had been funded. The Management Company does not expect the Fund to advance more than $450,000 of its remaining commitments to the venture capital funds in
the last quarter of 2003. However, if the Fund does not have sufficient funds to make follow-on investments, the Portfolio Company in need of the investment may be negatively impacted. Also, the Funds equity interest in and its estimated fair
value of the Portfolio Company could be reduced.



The interest
rate on the line of credit is currently prime + 4%. At September 30, 2003, the interest rate was 8.00%. The Fund also pays interest at the rate of 1⁄4% per annum on the unused portion of the line of credit. The average daily balances outstanding
on the Funds line of credit during the nine months ended September 30, 2003 and 2002 was $10,994,432 and $10,451,773, respectively. During the nine months ended September 30, 2003 and 2002, the amount of interest paid in cash was $732,214 and
$398,875, respectively. The line of credit restricts the Funds ability to incur additional indebtedness, pay dividends, merge with another entity, dispose of assets outside the ordinary course of business and engage in certain transactions
with affiliates.



RIC Borrowings, Restricted Cash and
Temporary Investments  The Fund had a $100,000,000 line of credit promissory note with Bank of America N.A. through January 1, 2003, with interest payable at 1/2% over the rate earned on its money market account. Because of the nature and
size of its portfolio investments, the Fund periodically borrowed money under this line of credit promissory note to make qualifying investments to maintain its tax status as a regulated investment company (RIC) under the Internal
Revenue Code. The Fund had $58,000,000 outstanding on such note at December 31, 2002, which was collateralized by restricted temporary cash investments of $58,000,000. Pursuant to the terms of the note, the Fund was required to repay the outstanding
borrowings within five business days of the initial borrowing date. The Fund repaid the outstanding quarter end borrowings within this time period. The Funds line of credit promissory note expired on January 1, 2003.



During September 2003, the Fund borrowed $63,990,948 to make qualifying
investments to maintain its RIC status by utilizing an established margin account with a securities brokerage firm. The Fund collateralized such borrowings with restricted cash and temporary investments in U.S. Treasury bills of $64,670,715 and
other portfolio securities of $3,980,000. The U.S. Treasury bills were sold, and the total amount borrowed was repaid on October 1, 2003. The Management Company believes the Fund will be able to use this financing arrangement to maintain its RIC
status. However, there is no assurance that such arrangement will be available to the Fund in the future. If the Fund is unable to borrow funds in



15



---

the future to make qualifying investments, the Fund may no longer qualify as a RIC. Failure to continue to qualify as a RIC could be material to the
Funds shareholders in that the Fund would be subject to corporate income tax on its net investment income and net realized gains, and any distributions to shareholders would be subject to income tax as ordinary dividends.



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



Valuation of Investments  Portfolio investments are carried at fair value with the net change in unrealized appreciation or depreciation
included in the determination of net assets. Valuations of portfolio securities are performed in accordance with accounting principles generally accepted in the United States and the financial reporting policies of the 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 valued at their quoted market price
at the close of business on the valuation date, less a discount to reflect the estimated effects of restrictions on the sale of such securities (Valuation Discount), if applicable.



Privately-held portfolio securities  The fair value of
investments for which no market exists (including 95% of the investments of the Fund at September 30, 2003) is determined on the basis of procedures established in good faith by the Board of Directors of the Fund. As a general principle, the current
fair value of an investment is the amount the Fund might reasonably expect to receive for it upon its current sale, in an orderly manner. Appraisal valuations are necessarily subjective and the Management Companys estimate of
values may differ materially from amounts actually received upon the disposition of portfolio securities.



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



Most of the Funds common equity investments are appraised at a multiple of historical free cash flow generated by the
Portfolio Company in its most recent fiscal year, less outstanding funded indebtedness and other senior securities such as preferred stock. Projections of current year free cash flow may be utilized and adjustments for non-recurring items are
considered. Multiples utilized are estimated based on the Management Companys experience in the private company marketplace, and are necessarily subjective in nature. Most of the Portfolio Companies utilize a high degree of leverage. The
banking environment currently has resulted in pressure on several of these Portfolio Companies to reduce the amount of leverage in order to maintain such financing. From time to time, Portfolio Companies are in default of certain covenants in their
loan agreements. When the Management Company has a reasonable belief that the Portfolio Company will be able to restructure the loan agreements to adjust for any defaults, the Portfolio Companys securities continue to be valued assuming that
the company is a going concern. In the event a Portfolio Company cannot generate adequate cash flow to meet the principal and interest payments on such indebtedness or is not successful in refinancing the debt upon its maturity, the Funds
investment could be reduced or eliminated through foreclosure on the Portfolio Companys assets or the Portfolio Companys reorganization or bankruptcy.



16



---

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



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



Because of the inherent uncertainty of the valuation of
portfolio securities which do not have readily ascertainable market values, amounting to $78,769,052 (including $5,095,306 in publicly-traded securities, net of a $1,552,547 Valuation Discount) and $82,653,260 (including $1,230,650 in
publicly-traded securities, net of a $228,003 Valuation Discount) at September 30, 2003 and December 31, 2002, respectively, the Funds estimate of fair value may materially differ from the value that would have been used had a ready market
existed for the securities. Appraised values do not reflect brokers fees or other normal selling costs which might become payable on disposition of such investments.



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



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



Cash Flows  For purposes of the Statements of Cash Flows, the Fund considers all highly liquid temporary cash investments purchased with an
original maturity of three months or less to be cash equivalents.



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



Reclassifications Certain reclassifications have been made to the prior years amounts to conform to current year presentation.



17



---

Stock-Based Compensation The Fund accounts for stock-based compensation using the intrinsic
value method in accordance with the provisions of APB No. 25. Had the Fund accounted for the options using the fair value method under SFAS 123, the decrease in net assets from operations for the nine months ended September 30, 2003 and 2002,
respectively, would have been:



|                                                                                                       |  | 2003 |         |   | 2002 |  
|------------------------------------------------------------------------------------------------------ |  | ---- | ------- | - | ---- | -
|Decrease in net assets from operations, as reported                                                    |  | $    | (11,659 | ) |      | $
|Stock-based employee compensation expense (benefit) included in decrease in net assets from operations |  |      | 835,215 |   |      |  
|Stock-based employee compensation expense determined using fair value method                           |  |      | (53,909 | ) |      |  
|                                                                                                       |  |      |         |   |      |  
|Pro forma increase (decrease) in net assets from operations                                            |  | $    | 769,647 |   |      | $
|                                                                                                       |  |      |         |   |      |  



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



The Fund has entered into a management agreement with the Management Company. Pursuant to such agreement, the Management Company performs certain
services, including certain management and administrative services necessary for the operation of the Fund. The Management Company receives a management fee at an annual rate of 2% of the net assets of the Fund, paid quarterly in arrears. The
Management Company also receives compensation for providing certain investor communication services, of which $37,500 is included in the accompanying Statements of Operations for each of the nine months ended September 30, 2003 and 2002. The
management fees paid by the Fund represent the Management Companys primary source of revenue and support. The Management Company is controlled by a privately-owned corporation.



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



The Management Agreement will continue in effect until June
30, 2004, and from year-toyear thereafter provided such continuance is approved at least annually by (i) a vote of a majority of the outstanding shares of the Fund or (ii) a majority of the directors who are not interested persons
of the Fund, at a meeting called for the purpose of voting on such approval. The Management Agreement may be terminated at any time, without the payment of any penalty, by a vote of the Board of Directors of the Fund or the holders of a majority of
the Funds shares on 60 days written notice to the Management Company, and would automatically terminate in the event of its assignment (as defined in the Investment Company Act).



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



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



18



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The Fund was not required to make any distributions for 2002 under income tax regulations. As of December
31, 2002, the Fund had a capital loss carryforward of $2,218,000, which may be used to offset future taxable capital gains. If not utilized, the loss carryforward will expire in 2006.



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



The Fund declared no dividends during the nine months ended September 30, 2003 and 2002. In November 2003, the Fund declared a dividend equivalent to its
net taxable investment income for 2003, estimated to be approximately $4.5 million, or $0.72 per share. The dividend is payable to the shareholders of record on November 30, 2003. The dividend will be paid by the issuance of additional shares of
common stock, unless shareholders request payment in cash, by specific election. Based on historical elections, the Fund would expect approximately 40% of the Funds shareholders to elect to receive their dividend in cash. Payment of the
dividend is expected to occur in January 2004.



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



During the nine months ended September 30, 2003, the Fund made follow-on investments of $3,224,870 in eight companies, including $944,870 in accrued
interest and dividends in the form of additional portfolio securities and accretion of original issue discount on promissory notes. In addition, the Fund realized a net capital loss of $7,801,775 during the nine months ended September 30, 2003.



During the nine months ended September 30, 2002, the Fund
invested $483,749 in one new company and made follow-on investments of $6,367,389 in eleven companies, including $1,485,165 in accrued interest and dividends in the form of additional portfolio securities and accretion of original issue discount on
promissory notes. In addition, the Fund realized a net capital gain of $399,301 during the nine months ended September 30, 2002.



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



Shareholders have approved the Equus II Incorporated 1997 Stock Incentive Plan (Stock Incentive Plan), which authorizes the Fund to issue
options to the directors and officers of the Fund in an aggregate amount of up to 20% of the outstanding shares of common stock of the Fund. The Stock Incentive Plan provides that each director who is not an officer of the Fund is, on the first
business day following each annual meeting, granted an incentive stock option to purchase 2,200 shares of the Funds common stock. Options are issued to the officers of the Fund at the discretion of the compensation committee in accordance with
the Stock Incentive Plan. The options have a ten year life and vest 50% six months after the grant date and 162/3% on the first, second and third anniversaries of the date of the grant.



Under the Stock Incentive Plan, options to purchase 1,105,500 and 1,086,800 shares of the Funds common stock with a weighted average exercise price
of $8.41 and $8.42 per share were outstanding at September 30, 2003 and 2002, respectively. Of these options, 752,938 and 571,988 shares, with a weighted average exercise price per share of $8.75 and $9.07 were exercisable at September 30, 2003 and
2002, respectively. Of the outstanding options at September 30, 2003, 1,059,300 have exercise prices ranging from $7.43 to $14.15 and the remaining options have exercise prices ranging from $21.82 to $24.95. These options expire in May 2007 through
May 2013.



On August 8, 2003, options to purchase 5,500 shares
of the Funds common stock at a price of $8.63 per share were issued to a new director, upon his election to the board of directors of the Fund. On May 12, 2003, options to acquire a total of 13,200 shares at $7.43 per share were issued to the
non-officer directors. On November 14, 2001, options to acquire a total of 990,000 shares at $7.69 per share were issued to officers of the Fund. The officer options include dividend equivalent rights. Generally accepted



19



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accounting principles require that the options be accounted for using variable plan accounting. The Fund is currently discussing with the Securities and
Exchange Commission certain matters regarding the Funds Stock Incentive Plan including, whether a business development company is authorized to issue options that include dividend equivalent rights. Since November 2001, no cash dividends have
been declared by the Fund. Consequently, no amounts have accumulated to the benefit of the option holders related to the dividend equivalent rights. Variable plan accounting resulted in non-cash compensation expense (benefit) of $835,215 and
$(14,434) during the nine months ended September 30, 2003 and 2002, respectively.



If all outstanding options for which the market price exceeds the exercise price at September 30, 2003 had been exercised, the Funds net asset value would have been reduced by $0.20 per share, assuming the Fund
had used the proceeds from the exercise of such options to repurchase shares at the market price pursuant to the treasury stock method. As of December 31, 2002, all outstanding options were out of the money and would not have had a
dilutive effect on net assets per share if exercised, assuming the Fund had used the proceeds from the exercise of such options to repurchase shares at the market price pursuant to the treasury stock method.



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



On October 1, 2003, the Fund sold the U.S. Treasury bills for $63,989,932 and repaid the margin loan.



On October 10, 2003, the Fund advanced $75,000 to Equicom, Inc. pursuant to a
10% promissory note, thereby reducing the commitment to provide funding to Equicom by a like amount.



On October 14, 2003, the Fund committed to invest up to an additional $2,000,000 in Container Acquisition, Inc. (Container) under certain
circumstances. On October 21, 2003, $500,000 of such commitment was advanced to Container.



Subsequent to September 30, 2003, the Fund entered into a contract, subject to certain conditions, to sell its investment in Strategic Holdings, Inc. Proceeds from such sale are expected to approximate the value
reflected for such investment in the accompanying financial statements.



20



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



Significant Accounting Policies



Valuation of Investments  Portfolio investments are carried at
fair value with the net change in unrealized appreciation or depreciation included in the determination of net assets. Valuations of portfolio securities are performed in accordance with accounting principles generally accepted in the United States
and the financial reporting policies of the 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 valued
at their quoted market price at the close of business on the valuation date, less a discount to reflect the estimated effects of restrictions on the sale of such securities (Valuation Discount), if applicable.



Privately-held portfolio securities  The fair value of
investments for which no market exists (95% of the investments held by the Fund at September 30, 2003) is determined on the basis of procedures established in good faith by the Board of Directors of the Fund. As a general principle, the current
fair value of an investment would be the amount the Fund might reasonably expect to receive for it upon its current sale, in an orderly manner. Appraisal valuations are necessarily subjective and the Management Companys estimate of
values may differ materially from amounts actually received upon the disposition of portfolio securities.



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



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



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



21



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



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



Because of the inherent uncertainty of the valuation of
portfolio securities which do not have readily ascertainable market values, the Funds estimate of fair value may materially differ from the value that would have been used had a ready market existed for the securities.



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



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



Liquidity and Capital Resources



At September 30, 2003, the Fund had $82,749,052 of its assets invested in portfolio securities of 18 companies and two venture capital funds.



The Fund has a $10,000,000 revolving line of credit with Bank of America,
N.A. that expires on November 30, 2003. The Fund uses its revolving line of credit for liquidity to pay operating expenses of the Fund and for new and follow-on investments in portfolio securities. The Fund had $9,065,000 outstanding under this line
of credit at September 30, 2003, which is collateralized by the Funds investments in portfolio securities. As of November 12, 2003, the Funds availability under the revolving line of credit is approximately $240,000.



The line of credit, as amended, provides that any proceeds received from the
sale of portfolio securities or from repayments by portfolio companies of the principal amount of loans must be used to pay down the line of credit. The line of credit also restricts the Funds ability to incur additional indebtedness, pay
dividends, merge with another entity, dispose of assets outside the ordinary course of business and engage in certain transactions with affiliates.



The lender has asked the Fund to take steps to pay off the line of credit. Accordingly, the Fund has been in discussions with interested parties regarding
the sale of certain portfolio securities. Due to the Funds limited cash resources currently available, the Fund may be required to obtain borrowings from other parties and refinance its existing line of credit in order to maintain liquidity.
Subsequent to September 30, 2003, the Fund entered into a contract, subject to certain conditions, to sell its investment in Strategic Holdings, Inc (SHI). The proceeds from this sale, if consummated, should enable the Fund to pay its
line of credit in full. The lender indicated it will extend the line of credit to January 31, 2004, release certain collateral and permit additional secured borrowings from other parties during such period,



22



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but no definitive agreement has been executed. The Fund is also pursuing arrangements to refinance the line of credit with another lender. There can be no
assurance that the Fund can sell securities sufficient to pay off the line of credit, extend the existing line of credit, obtain additional third party financing or obtain a replacement facility. Should the Fund be unable to do so, the Fund may be
required to sell portfolio securities at values that could be materially less than Managements estimates of fair value.



The Fund has declared a dividend of its net taxable investment income for 2003, estimated to be approximately $4.5 million, payable on January 16, 2004.
The dividend will be paid by issuing shares of common stock, unless shareholders of the Fund request payment in cash, by specific election. Based on historical elections, the Fund would expect approximately 40% of the shareholders to elect to
receive their dividend in cash. If the Fund is unable to complete the sale of SHI and obtain an extension of the line of credit or obtain additional financing, it may not have the funds to pay the cash portion of the dividend.



Under certain circumstances, the Fund may be called on to make follow-on
investments in certain Portfolio Companies. The Fund has guaranteed obligations to financial institutions on behalf of Equicom, Inc. (Equicom) in the amount of $268,520. The Fund has made loans to Equicom from time to time to enable the
company to service its debt, but the Management Company does not expect the Fund to advance more than $225,000 in the last quarter of 2003 for such purpose. In addition, the Fund has committed to invest up to an additional $2 million in Container
Acquisition, Inc., in connection with a proposed refinancing of the company. Also, the Fund committed to invest up to $5,550,000 in the two venture capital funds in its portfolio. At September 30, 2003, $3,570,000 of such amount had been funded. The
Management Company does not expect the Fund to advance more than $450,000 of its remaining commitments to the venture capital funds in the last quarter of 2003. If the Fund does not have sufficient funds to make follow-on investments, the Portfolio
Company in need of the investment may be negatively impacted. Also, the Funds equity interest in and its estimated fair value of the Portfolio Company could be reduced.



Net cash provided (used) by operating activities was $1,323,510 and $(1,100,542) for the nine months ended September 30,
2003 and 2002, respectively. Approximately $22.3 million in estimated value of the Funds investments are in the form of notes receivable from Portfolio Companies. At September 30, 2003, two of these notes, with an estimated fair value of
$6,835,609 provide that interest is paid in kind or that the original issue discount is accreted over the life of the notes, by adding such amount to the principal of the notes.



Because of the nature and size of its portfolio investments, the Fund periodically borrowed money under a line of credit
promissory note to make qualifying investments to maintain its tax status under the Internal Revenue Code as a regulated investment company (RIC). The Funds line of credit promissory note expired on January 1, 2003. Management
believes the Fund will be able to borrow sufficient funds to maintain its RIC status in the future by utilizing an established margin account with a securities brokerage firm, supplemented by collateralized loans from banks, if necessary. However,
there are no assurances that such arrangement will be available to the Fund in the future. If the Fund is unable to borrow funds to make qualifying investments, the Fund 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 shareholders would be subject to income tax as ordinary dividends. Failure to continue to qualify as a RIC could be material to the Funds shareholders.



At September 30, 2003, the Fund had $63,990,948 of its total
assets of $151,357,565 invested in U.S. Treasury bills. These securities were held by a securities brokerage firm in an established margin account that is utilized to enable the Fund to achieve adequate diversification to maintain its pass-through
tax status as a regulated investment company, and were pledged along with cash and securities to secure the payment of the margin account balance. The U.S. Treasury bills were sold and such amount was repaid to the brokerage firm on October 1, 2003.



23



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



The Fund reserves the right to retain net long-term capital
gains in excess of net short-term capital losses for reinvestment or to pay contingencies and expenses. Such retained amounts, if any, will be taxable to the Fund as long-term capital gains and shareholders will be able to claim their proportionate
share of the federal income taxes paid by the Fund on such gains as a credit against their own federal income tax liabilities. Shareholders will also be entitled to increase the adjusted tax basis of their Fund shares by the difference between their
undistributed capital gains and their tax credit.



Results of Operations



Investment Income and Expense



Net investment income after all expenses amounted to $2,809,811 and $893,686
for the nine months ended September 30, 2003 and 2002, respectively. Income from portfolio securities was $6,111,784 for the nine months ended September 30, 2003 and $2,652,139 for the comparable period in 2002. The increase in 2003 is primarily
attributable to a $3,500,000 cash dividend received from Champion Window Holdings, Inc. in 2003. Professional fees increased to $191,187 in 2003 from $143,204 in 2002. This increase is due to additional fees related to the 2002 audit. Interest
expense increased to $739,644 in 2003 from $384,608 in 2002 due to an increase in the interest rate on the loan for 2003 and additional fees paid to renew the line of credit. The current interest rate for 2003 is prime + 4% per annum, which was
8.00% at September 30, 2003. This interest rate is approximately four percentage points higher than the rate paid in 2002. In addition, the average daily balances outstanding on the lines of credit increased to $10,994,432 during the nine months
ended September 30, 2003 from $10,506,112 during the comparable period in 2002.



The Management Company receives management fee compensation at an annual rate of 2% of the net assets of the Fund paid quarterly in arrears. Such fees amounted to $1,172,324 and $1,147,271 during the nine months ended
September 30, 2003 and 2002, respectively.



On November 14,
2001, options to acquire a total of 990,000 shares of common stock at $7.69 per share (market price on date of grant) were issued to officers of the Fund. These options include dividend equivalent rights. Generally accepted accounting principles
require that the options be accounted for using variable plan accounting. The Fund is currently discussing with the Securities and Exchange Commission certain matters regarding the Funds Stock Incentive Plan including, whether a business
development company is authorized to issue options that include dividend equivalent rights. Since November 2001, no cash dividends have been declared by the Fund. Consequently, no amounts have accumulated to the benefit of the option holders related
to the dividend equivalent rights. However, variable plan accounting resulted in recorded non-cash compensation expense (benefit) of $835,215 and $(14,434) during the nine months ended September 30, 2003 and 2002, respectively.



Realized Gains and Losses on Sales of Portfolio Securities



During the nine months ended September 30, 2003, the Fund realized net
capital losses of $7,801,775 from the sale of securities of seven Portfolio Companies. The Fund received $197,986 for its remaining investment in Milam Enterprises, LLC, realizing a capital gain of $196,075. The Fund received $2,406,398 from Doane
PetCare Enterprises, Inc. for payment in full of its 15% promissory note,



24



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realizing a capital gain of $551,850 relating to the unamortized original issue discount. In addition, the Fund received $500,000 for its investment in FS
Strategies, Inc., realizing a capital loss of $8,758,667. Also, the Fund sold 8,863 shares of Weatherford International common stock for $353,409, realizing a capital loss of $160,202. In addition, the Fund received $3,452 from ENGlobal Corporation
in payment for 3,596 shares of common stock, realizing a capital gain of $1,350. On September 30, 2003, the Fund received $690,000 from the liquidation of GCS RE, Inc., realizing a capital gain of $369,076. Also, the Fund realized a net short term
capital loss of $1,258 from the purchase and sale of U.S. Treasury Bills during 2003.



During the nine months ended September 30, 2002, the Fund realized net capital gains of $399,301 from the sale of securities of three Portfolio Companies. The Fund sold 60,595 shares of its investment in Weatherford
International for $2,844,558, realizing a capital loss of $666,922. In addition, the Fund sold its investment in Travis International, Inc. for $921,577, realizing a capital gain of $918,091. Also, the Fund received proceeds from Jones Industrial
Holdings, Inc. for the redemption of 18,667 warrants, realizing a capital gain of $148,132.



Unrealized Appreciation and Depreciation of Portfolio Securities



Net unrealized depreciation on investments decreased by $4,980,305 during the nine months ended September 30, 2003 from $5,417,014 to $436,709. Such
change resulted from increases in the estimated fair value of eight of the Funds Portfolio Companies aggregating $7,395,883, decreases in the estimated fair value of eleven of the Funds Portfolio Companies aggregating $11,547,082 and the
transfer of $9,131,504 in net unrealized depreciation to net capital loss from the sale or disposition of investments in four of the Funds Portfolio Companies.



Net unrealized depreciation on investments increased by $3,809,439 during the nine months ended September 30, 2002 from
$4,492,995 to $8,302,433. Such increase resulted from increases in the estimated fair value of eleven of the Funds Portfolio Companies aggregating $10,011,215, decreases in the estimated fair value of thirteen of the Funds Portfolio
Companies aggregating $13,407,271 and the transfer of $413,383 in unrealized appreciation to net capital gain from the sale or disposition of investments in three of the Funds Portfolio Companies.



Dividends



The Fund declared no dividends during the nine months ended September 30, 2003 and 2002. In November 2003, the Fund declared
a dividend equivalent to its net taxable investment income for 2003, estimated to be approximately $4.5 million, or $0.72 per share. The dividend is payable to the shareholders of record on November 30, 2003. The dividend will be paid by the
issuance of additional shares of common stock, unless shareholders request payment in cash, by specific election. Based on historical elections, the Fund would expect approximately 40% of the Funds shareholders to elect to receive their
dividend in cash. Payment of the dividend is expected to occur in January 2004.



Portfolio Investments



During the nine months
ended September 30, 2003, the Fund made follow-on investments of $3,224,870 in eight portfolio companies, including $944,870 in accrued interest and dividends received in the form of additional portfolio securities and accretion of original issue
discount on a promissory note.



For the nine months ended
September 30, 2003, the Fund received an additional 1,321 and 146,833 shares of preferred stock of Sovereign Business Forms, Inc. (Sovereign) and ENGlobal Corporation (ENG) in dividends, respectively. In addition, Sovereign
elected to convert $480,488 of accrued interest into the balance of the 15% promissory notes due to the Fund.



25



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During the nine months ended September 30, 2003, ENG made principal payments of $330,000 on its 9.5%
promissory note, reducing the note balance to $2,450,000.



On
February 28, 2003, the Fund received $2,406,398 from Doane PetCare Enterprises, Inc. for payment in full of its 15% promissory note, realizing a capital gain of $551,850.



On March 3, 2003, the Fund invested an additional $300,000 in Vanguard VII, L.P. pursuant to a $3,000,000 commitment made in
June 2000. $1,500,000 of such commitment has been funded through September 30, 2003.



During the nine months ended September 30, 2003, the Fund advanced $490,000 to Equicom, Inc. pursuant to a 10% promissory note, thereby reducing the guarantee commitment to Equicoms lender by a like amount.



On June 4, 2003, the Fund invested an additional $240,000 in
Sternhill Partners I, L.P. pursuant to a $2,550,000 commitment made in March 2000. $2,070,000 of such commitment has been funded through September 30, 2003.



On July 2, 2003, the Fund received a cash dividend of $3,500,000 from its investment in Champion Window Holdings, Inc.



On June 19, 2003 and July 14, 2003, the Fund invested $400,000 and $850,000,
respectively in Container Acquisition, Inc. in exchange for a 7% promissory note.



On August 19, 2003, ENG exercised its right to convert all of its outstanding Series A preferred stock into common stock. As a result, the Funds investment of $2,734,833 in Series A preferred stock was converted
into 1,149,089 shares of common stock.



During the nine months
ended September 30, 2003, original issue discount of $118,703 was accreted on the 12% promissory note from Turfgrass America, Inc., bringing the note balance to $3,900,507. The original issue discount is being accreted over the life of the note.



Subsequent Events



On October 1, 2003, the Fund sold U.S. Treasury bills for $63,989,932 and
repaid the margin loan.



On October 10, 2003, the Fund advanced
$75,000 to Equicom, Inc. pursuant to a 10% promissory note, thereby reducing the commitment to provide funding to Equicom by a like amount.



On October 14, 2003, the Fund committed to invest up to an additional $2,000,000 in Container Acquisition, Inc. (Container) under certain
circumstances. On October 21, 2003, $500,000 of such commitment was advanced to Container.



Subsequent to September 30, 2003, the Fund entered into a contract, subject to certain conditions, to sell its investment in Strategic Holdings, Inc. Proceeds from such sale are expected to approximate the value
reflected for such investment in the accompanying financial statements.



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



The Fund is subject to financial market risks, including changes in interest rates with respect to its investments in debt securities and its outstanding
debt payable, as well as changes in marketable equity



26



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security prices. The Fund does not use derivative financial instruments to mitigate any of these risks. The return on the Funds investments is
generally not affected by foreign currency fluctuations.



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



The Funds liabilities include debts payable to a financial institution. The revolving credit facilities are priced at floating rates of interest, based on LIBOR or the prime rate plus additional charges. As a result of the floating
rate, a change in interest rates could result in either an increase or decrease in the Funds interest expense.



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



The Fund is classified as a non-diversified investment company under the Investment Company Act, which means the Fund is not limited in the
proportion of its assets that may be invested in the securities of a single issuer. Generally, the Fund does not initially invest more than 15% of the value of its net assets in a single Portfolio Company. However, follow-on investments, a
disproportionate increase in the value of one Portfolio Company or the sale of investments may result in greater than 15% of the Funds net assets being invested in a single Portfolio Company. While these restrictions limit the exposure of the
capital of the Fund in any single investment, to the extent the Fund takes large positions in the securities of a small number of issuers, the Fund will be exposed to a greater risk of loss and the Funds net asset value and the market price of
its common stock may fluctuate as a result of changes in the financial condition, or results of operations of, the stock price of, or in the markets assessment of any single Portfolio Company to a greater extent than would be the case if it
were a diversified company holding numerous investments. The Fund currently has investments in 18 Portfolio Companies and two venture capital funds. The value of one investment exceeds 22% of the value of the Funds net assets and
the value of another exceeds 21%. The value of the Funds investments in three entities which are involved in the manufacture of residential windows exceeds 33% of the Funds net asset value at September 30, 2003.



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



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



The Funds Chairman and Chief Executive Officer and President and
Principal Financial and Accounting Officer have evaluated the effectiveness of the Funds disclosure controls and procedures as of the end of the quarter covered by report. Based on their evaluation, the Funds Chairman and Chief



27



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Executive Officer and President and Principal Financial and Accounting Officer concluded that the Funds disclosure controls and procedures were
effective in ensuring that information relating to the Fund was made known to them by others within the Fund in a timely manner, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared, and that no changes are
required at this time.



There have been no significant changes
in the Funds internal controls during the quarter that have materially affected or is reasonably likely to affect the Funds internal controls over financial reporting.



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



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



31.

Quarterly Certification Required by Rules 13a-14 and 15-d-14 under the Securities Exchange Act of 1934(1)      Certification by the Chief Executive Officer(2)      Certification by the President and Principal Financial and Accounting
Officer32.

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer and the President and Principal Financial and Accounting
Officer99.1

Press Release dated November 5, 200399.2

Press Release dated November 5, 200399.3

Press Release dated November 13, 2003




| | (b) | Reports on Form 8-K filed subsequent to quarter ended September 30, 2003
| | --- | ------------------------------------------------------------------------



No reports on Form 8-K were filed by the Fund during the period for which this report is filed.



28



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SIGNATURE



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



|Date: November 14, 2003 |  |  |  | EQUUS II INCORPORATED                     
|----------------------- |  |  |  | ------------------------------------------
|                        |  | 
|                        |  |  |  | /s/    Nolan Lehmann                      
|                        |  |  | 
|                        |  |  |  | Nolan Lehmann                             
|                        |  |  |  | President                                 
|                        |  |  |  | Principal Financial and Accounting Officer



29