<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

(Mark One)

 X       ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
---      OF 1934 (FEE REQUIRED)

For the fiscal period ended December 31, 2002

         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
___      EXCHANGE  ACT OF 1934 (NO FEE REQUIRED)

Commission File Number 0-19509

                              EQUUS II INCORPORATED
                           --------------------------
             (Exact name of registrant as specified in its charter)

                   Delaware                                76-0345915
       -----------------------------------         -----------------------------
         (State or other jurisdiction of                 (I.R.S. Employer
         incorporation or organization)                 Identification No.)

         2929 Allen Parkway, Suite 2500                      77019
                Houston, Texas                     -----------------------------
       ---------------------------------                  (Zip Code)


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

Securities registered pursuant to Section 12(b) of the Act:

         Title of each class                           Name of each exchange
                                                       on which registered

            Common Stock                             New York Stock Exchange
            ------------                             -----------------------

Securities registered pursuant to Section 12(g) of the Act:  None

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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information statement
incorporated by reference in Part III of this 10-K. [_]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X   No ___
                                        ---
Approximate aggregate market value of common stock held by non-affiliates of the
registrant: $37,744,882, computed on the basis of $6.89 per share, closing price
of the common stock on the New York Stock Exchange on April 4, 2003. For
purposes of calculating this amount only, all directors and executive officers
of the registrant have been treated as affiliates. There were 6,233,021 shares
of the registrant's common stock, $.001 par value, outstanding as of April 4,
2003. The net asset value of a share at December 31, 2002 was $12.35.

Documents incorporated by reference: Proxy Statement for 2003 Annual Meeting of
Stockholders is incorporated by reference in Part III.

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                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                         Page
                                                                                                         ----
PART I

<S>                                                                                                      <C>
  Item 1.      Business ..............................................................................     1
  Item 2.      Properties ............................................................................    19
  Item 3.      Legal Proceedings .....................................................................    19
  Item 4.      Submission of Matters to a Vote of Security Holders ...................................    19

PART II

  Item 5.      Market for Registrant's Common Equity and Related Stockholder Matters .................    19
  Item 6.      Selected Financial Data ...............................................................    21
  Item 7.      Management's Discussion and Analysis of Financial
                Condition and Results of Operations ..................................................    22
  Item 7A.     Quantitative and Qualitative Disclosure About Market Risk .............................    31
  Item 8.      Financial Statements and Supplementary Data ...........................................    33
  Item 9.      Changes in and Disagreements with Accountants on
                 Accounting and Financial Disclosure .................................................    61

PART III

  Item 10.     Directors and Executive Officers of the Registrant ....................................    61
  Item 11.     Executive Compensation ................................................................    61
  Item 12.     Security Ownership of Certain Beneficial Owners and Management ........................    61
  Item 13.     Certain Relationships and Related Transactions ........................................    61
  Item 14.     Controls and Procedures ...............................................................    61
  Item 15.     Exhibits, Financial Statement Schedules and Reports on Form 8-K .......................    62
</TABLE>

                                       ii

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Item 1.   Business

     Equus II Incorporated (the "Fund") is a Delaware corporation that seeks to
achieve capital appreciation principally by making investments in equity and
equity-oriented securities issued by privately-owned companies in transactions
negotiated directly with such companies ("Portfolio Companies"). The Fund seeks
to invest primarily in companies that intend to acquire other businesses,
including through leveraged buyouts. 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. Current income is not a significant factor in the selection
of investments. The Fund has elected to be treated as a business development
company under the Investment Company Act of 1940 (the "Investment Company Act").

     The Fund has eight directors. Six of such directors are disinterested
individuals (the "Independent Directors") as defined by the Investment Company
Act. The directors are responsible for providing overall guidance and
supervision of the Fund, approving the valuation of the Fund's investments and
performing various duties imposed on directors of a business development company
by the Investment Company Act. Among other things, the Independent Directors
supervise the management arrangements for the Fund, the custody arrangements
with respect to portfolio securities, the selection of independent public
accountants, fidelity bonding and any transactions with affiliates.

     The Fund has engaged Equus Capital Management Corporation, a Delaware
corporation (the "Management Company"), to provide certain investment management
and administrative services to the Fund. Subject to the supervision of the
directors, the Management Company performs, or arranges for third parties to
perform, the management, administrative, certain investment advisory and other
services necessary for the operation of the Fund. The Management Company
identifies, evaluates, structures, monitors and disposes of the Fund's
investments. The Management Company also manages the Fund's cash and short-term,
interest-bearing investments and provides the Fund, at the Management Company's
expense, with the office space, facilities, equipment and personnel (whose
salaries and benefits are paid by the Management Company) necessary to enable
the Fund to conduct its business.

     The Management Company, its officers and directors and the officers of the
Fund are collectively referred to herein as "Management". The Fund's principal
office is located at 2929 Allen Parkway, Suite 2500, Houston, Texas 77019-2120,
and the telephone number is (713) 529-0900.

     The Fund's revolving line of credit, which is used for liquidity to pay
operating expenses of the Fund and to make new or follow-on investments in
portfolio securities, expires on June 1, 2003, and is collateralized by a pledge
of the Fund's portfolio securities. The lender has asked the Fund to take steps
to pay off the revolving line of credit. Accordingly, the Fund is in discussions
with several interested parties regarding the sale of certain portfolio
securities at values that would enable the Fund to repay the line of credit. The
Fund is also pursuing arrangements to refinance the line of credit with another
lender and may approach the current lender for another extension of the due
date. Management believes it will either be able to extend the loan, repay it
from another lending source or repay it from the sale of portfolio securities.
If not, the Fund may be required to sell certain portfolio securities to
maintain liquidity, or the lender could exercise its rights pursuant to its
collateralized interest and require the Fund to sell portfolio securities. Such
sales could be at values materially less than Management's estimates of fair
value. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for further discussion related to the Fund's borrowings
and liquidity.

                                       1

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Investment Practices

     Substantially all of the net assets of the Fund are invested or committed
to be invested in securities of Portfolio Companies. Substantially all amounts
not invested in securities of Portfolio Companies are invested in short-term,
highly liquid investments consisting of interest-bearing bank accounts,
certificates of deposit or other short-term, highly liquid investments
providing, in the opinion of the Management Company, appropriate safety of
principal. At December 31, 2002, $58,000,000 of such short-term investments were
restricted and were pledged as collateral on certain bank borrowings.

     The Fund's investments in portfolio securities are usually structured in
private transactions negotiated directly with the owner or issuer of the
securities acquired.

     The Fund is concentrating its investment efforts on companies of a type and
size that, in management's view, provide opportunities for significant capital
appreciation, relative ease of acquisition and disposition, reduced competition
for investments and prudent diversification of risk.

     The enterprise value of a Portfolio Company typically ranges from
$15,000,000 to $75,000,000, at the time of the Fund's initial investment. The
Fund's initial investment in a Portfolio Company typically ranges from
$1,500,000 to $7,500,000, depending on the investment. The balance of the
purchase price of a Portfolio Company is supplied by debt financing and other
equity investors, if necessary.

     The Fund is attempting to reduce certain of the risks inherent in private
equity-oriented investments by investing in a portfolio of companies involved in
different industries. The Fund has limited its initial investment (whether in
the form of equity or debt securities, commitments to purchase securities or
debt guaranties) in any Portfolio Company to no more than 15% of the Fund's net
assets. However, if a follow-on investment is available or required, as
discussed below, the Fund's investment in a particular Portfolio Company may
exceed these initial investment limitations. Also, investments in certain
Portfolio Companies may be in excess of the Fund's initial investment
limitations due to increases in the value of such investments.

     The Fund may make investments as a sole investor, with other professional
investors or with other persons. The Fund ordinarily is not the sole investor in
a Portfolio Company. Joint equity participants may include management of the
Portfolio Company, other business development companies, small business
investment companies, other institutional or individual investors or venture
capital groups. The investment position of the Fund and its co-investors, if
any, in Portfolio Companies will typically involve a substantial, and may
constitute a controlling, interest in such companies.

     The Fund may borrow funds to make new or follow-on investments, to maintain
its pass through tax status, or to pay contingencies and expenses. See
"Borrowings" and "Loss of Conduit Tax Treatment" under "Factors that May Affect
Future Results, the Market Price of Common Stock, and the Accuracy of Forward
Looking Statements."

Investment Criteria

     Prospective investments are evaluated by Management based upon criteria
that may be modified from time to time. The criteria currently being used by
Management in determining whether to make an investment in a prospective
Portfolio Company include:

     1.   The presence or availability of competent management;

                                       2

<PAGE>

     2.   The existence of a substantial market for the products or services of
          the company characterized by favorable growth potential, or a
          substantial market position in a stable industry;

     3.   The existence of a history of profitable operations or a reasonable
          expectation that operations can be conducted at a level of
          profitability acceptable in relation to the proposed investment; and

     4.   The willingness of the company to permit the Fund and its
          co-investors, if any, to take a substantial position in the company
          and have representation on its Board of Directors, so as to enable the
          Fund to influence the selection of management and basic policies of
          the company.

Investment Operations

     The investment operations of the Fund consist principally of the following
basic activities:

     Identifying Investments. Investment opportunities are identified for the
Fund by the Management Company and its officers and directors. Investment
proposals may, however, come to the Fund from other sources, which may include
unsolicited proposals from the public and referrals from banks, lawyers,
accountants and members of the financial community. Subject to the approval of
the Board of Directors, the Fund may pay such persons (including affiliates of
Management other than directors, officers and employees of the Management
Company) finder's fees to the extent permissible under applicable law and
consistent with industry practice.

     Evaluating Investment Opportunities. Prior to committing funds to an
investment opportunity, due diligence is conducted to assess the prospects and
risks of the potential investment. See "Investment Criteria" above.

     Structuring Investments. Portfolio Company investments typically are
negotiated directly with the prospective Portfolio Company or its affiliates.
The Management Company structures the terms of a proposed investment, including
the purchase price, the type of security to be purchased and the future
involvement of the Fund and affiliates in the Portfolio Company's business
(including representation on its Board of Directors). The Management Company
seeks to structure the terms of the investment so as to provide for the capital
needs of the Portfolio Company and at the same time maximize the Fund's
opportunities for capital appreciation in its investment.

     Providing Management Assistance and Monitoring of Investments. Successful
private equity investments typically require active monitoring of, and
significant participation in, major business decisions of Portfolio Companies.
In most cases, officers of the Fund serve as members of the boards of directors
of Portfolio Companies. Such management assistance is required of a business
development company under the Investment Company Act and is intended to enable
the Fund to provide guidance and management assistance with respect to such
matters as capital structure, budgets, profit goals, diversification strategy,
financing requirements, management additions or replacements and development of
a public or private market for the securities of the Portfolio Company. In
connection with their service as directors of Portfolio Companies, officers and
directors of Management may receive and retain directors' fees or reimbursement
for expenses incurred, and may participate in incentive stock option plans for
non-employee directors, if any. When necessary, the Management Company, on
behalf of the Fund, may also assign staff professionals with financial or
management expertise to assist Portfolio Company management on specific
problems.

                                       3

<PAGE>

Current Portfolio Companies

     The following is a description of the Fund's investments in its 21
Portfolio Companies and two venture capital funds at December 31, 2002.

     Alenco Window Holdings II, LLC

     Alenco Window Holdings II, LLC ("AWH2"), Bryan, Texas, was formed in
January 2002, to invest working capital into Alenco Holding Corporation
("Alenco"), a company formed to purchase certain assets of Reliant Building
Products, Inc. pursuant to a plan of reorganization confirmed in bankruptcy
court. Alenco manufactures aluminum and vinyl windows for single and
multi-family residential purposes. At December 31, 2002, the Fund's investment
in AWH2, valued at $2,900,000 with a cost of $227, consisted of an approximate
24% membership interest.

     American Trenchless Technology, LLC / Glendale LLC

     American Trenchless Technology, LLC ("ATT"), Houston, Texas, was formed to
acquire H & I Boring and Tunneling, a Houston based regional provider of
underground infrastructure services, utilizing boring, tunneling and directional
drilling technologies. ATT services the water, sewer, electrical and
telecommunications industries. ATT maintains a website at
www.americantrenchless.com. At December 31, 2002, the Fund's investment in ATT
was valued at zero with a cost of $1,324,694 and consisted of 1,934,532 shares
of common stock and 100,000 shares of preferred stock. The Fund's investment in
ATT represents an approximate 36.6% fully-diluted membership interest. In
conjunction with a restructuring of ATT's bank indebtedness in October 2002, the
Fund invested $300,000 to acquire 50% of the membership interest in Glendale,
LLC ("Glendale"), which was formed to acquire a $600,000 participation in the
secured bank loan to ATT. The Fund's ownership interest in Glendale is valued at
its cost of $300,000.

     The Bradshaw Group

     The Bradshaw Group ("TBG"), Dallas, Texas, provides innovative printing
solutions primarily for customers in need of high-speed mass printings. TBG
maintains a web site at www.bradshawgroup.com. At December 31, 2002, the Fund's
investment in TBG was valued at zero with a cost of $1,794,546. The Fund's
investment consisted of 1,335,000 shares of preferred stock, a warrant to buy
2,229,450 shares of common stock at $0.01 through May 2008, a 15% promissory
note in the amount of $459,545 and a prime + 2% promissory note in the amount of
$398,383, representing an approximate 17.8% fully-diluted equity interest. Gary
L. Forbes, a Vice President of the Fund, serves on TBG's Board of Directors.

     Champion Window Holdings, Inc.

     Champion Window Holdings, Inc. ("Champion"), Houston, Texas, manufactures
and sells aluminum windows for single and multi-family residential purposes,
primarily in Houston, San Antonio and Austin, Texas. Champion maintains a web
site at www.championwindow.net. At December 31, 2002, the Fund's investment in
Champion, valued at $17,000,000 with a cost of $1,400,000, consisted of
1,400,000 shares of common stock. The Fund's investment in Champion represents
an approximate 32% fully-diluted equity interest. Nolan Lehmann, President of
the Fund, and Tracy H. Cohen, a Vice President of the Fund, serve as directors
of Champion.

                                       4

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     CMC Investments, LLC

     CMC Investments, LLC, ("CMC"), Houston, Texas, holds an investment in
Cooper Manufacturing Company, which manufactures drilling rigs for the oil and
gas industry. At December 31, 2002, the Fund's investment in CMC was valued at
$925,000 with a cost of $1,038,611. The investment in CMC was received by the
Fund upon the liquidation of Tulsa Industries, Inc., a former investment. The
Fund's investment consists of a 21% membership interest in CMC and 8,863 shares
of Weatherford International common stock.

     Container Acquisition, Inc. / CCI-ANI Finance, LLC

     Container Acquisition, Inc. ("Container"), Houston, Texas, is a logistics
and maintenance services company serving owners of international shipping
containers. Container maintains a web site at www.containercare.com. At December
31, 2002, the Fund's investment in Container, valued at $3,970,000 with a cost
of $10,773,800, consisted of 1,370,000 shares of common stock, 78,318 shares of
preferred stock and a warrant, exercisable under certain conditions, to buy
370,588 shares of common stock at $0.01 per share through February 2007. The
Fund's investment in Container represents an approximate 65% fully-diluted
equity interest. Sam P. Douglass, Chairman and CEO of the Fund and Mr. Lehmann
serve on Container's Board of Directors. In conjunction with a restructuring of
Container's bank indebtedness in April 2002, the Fund invested $1,571,000 to
acquire an 84.9% membership interest in CCI-ANI Finance, LLC ("CCI-ANI") which
was formed to purchase a subordinated note from the former owner of Container.
The note had a principal balance of $2,000,000 plus $233,333 in accrued interest
when it was acquired at a discounted price of $1,850,000. At December 31, 2002
the Fund's ownership interest in CCI-ANI is valued at $1,970,000, with a cost of
$1,571,000.

     Doane PetCare Enterprises, Inc.

     Doane PetCare Enterprises, Inc. ("Doane"), Nashville, Tennessee, is the
largest producer of private-label dry pet food in the United States. In 1995,
the Fund invested in Summit/DPC Partners, L.P. ("Summit"), which was formed to
invest in Doane. Summit was liquidated in April 2001 and the Fund received
common stock, a note receivable and warrants in Doane. At December 31, 2002, the
Fund's investment in Doane was valued at $6,787,803 with a cost of $5,724,446.
The Fund's investment consists of 1,943,598 shares of common stock and
$1,787,802 in a 15% promissory note with a face value of $1,805,556. The Fund's
investment in Doane represents an approximate 5% fully-diluted equity interest.

     The Drilltec Corporation

     The Drilltec Corporation ("Drilltec"), Houston, Texas, provides thread
protectors and packaging for premium tubular goods, drill pipe and line pipe,
utilized primarily in the oil and gas industry. Drilltec maintains a web site at
www.drilltec.com. At December 31, 2002, the Fund's investment in Drilltec,
valued at zero with a cost of $1,000,000, consisted of a prime + 9.75%
promissory note in the amount of $1,000,000. The Fund recognized a loss of
$7,645,000 on its investment in the preferred stock and common stock of Drilltec
in October 2000. The Fund's investment in Drilltec represents an approximate 62%
fully-diluted equity interest. Mr. Forbes serves on Drilltec's Board of
Directors.

                                       5

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     ENGlobal Corporation (AMEX: ENG)
      (formerly Industrial Data Systems Corporation and Petrocon Engineering
      Inc.)

     ENGlobal Corporation ("ENG"), Houston, Texas, provides engineering
consulting, control systems, field inspections and plant maintenance services,
primarily to the energy industry. ENG maintains a website at www.englobal.com.
On December 21, 2001, Petrocon Engineering Inc. ("Petrocon") was merged into ENG
in exchange for ENG common stock. At December 31, 2002, the Fund's investment in
ENG was valued at $6,598,650, with a cost of $6,084,461. The Fund's investment
consists of a 9.5% promissory note in the amount of $2,780,000, 1,225,758 shares
of common stock and 2,588,000 shares of convertible preferred stock. The Fund's
investment in ENG represents an approximate 10% fully diluted equity interest at
December 31, 2002.

     Equicom, Inc. (formerly Texrock Radio, Inc.)

     Equicom, Inc. ("Equicom"), Bryan, Texas, was formed to acquire radio
stations in small to medium-sized cities in Texas. At December 31, 2002, Equicom
owned and operated 18 radio stations. At December 31, 2002, the Fund's
investment in Equicom, valued at $3,166,730 with a cost of $9,834,090, consisted
of 452,000 shares of common stock, 657,611 shares of preferred stock and
$3,116,730 in 10% promissory notes. The Fund's investment in Equicom represents
an approximate 56% fully-diluted equity interest at December 31, 2002. The Fund
has guaranteed up to $758,520 related to an obligation to a financial
institution on Equicom's behalf. Ms. Cohen serves on Equicom's Board of
Directors.

     Equipment Support Services, Inc.

     Equipment Support Services, Inc. ("ESS"), Houston, Texas, was formed to buy
various companies in the equipment rental business including Carruth-Doggett
Industries, Inc. and CDI Rental Services, Inc., in which the Fund had an
investment. At December 31, 2002 the Fund's investment in ESS, valued at zero
with a cost of $3,168,500, consisted of 35,000 shares of common stock, 35,000
shares of preferred stock and $1,138,000 in an 8% promissory note. The Fund's
investment in ESS represents an approximate 3% fully diluted equity interest at
December 31, 2002.

     FS Strategies, Inc.

     FS Strategies, Inc. ("FSS"), Houston, Texas, was formed to acquire Talent
Tree Acquisition Corporation ("Talent Tree", formerly Initial Staffing Services)
and Talent Tree Employer Services, Inc. (formerly EESIS, Inc ("TTES"). Talent
Tree and TTES maintain web sites at www.talenttree.com and www.talentreehr.com,
respectively. Talent Tree operates a network of branch offices providing
temporary staffing and permanent placement services in 32 states. TTES is a
web-based human resources solution provider based in Houston. At December 31,
2002, the Fund's investment in FSS was valued at zero with a cost of $9,258,667.
The Fund's investment consists of 110,000 shares of common stock and 1,667
shares of preferred stock. The Fund's investment in FSS represents an
approximate 23% fully-diluted equity interest. Mr. Lehmann serves on the Board
of Directors of FSS.

     GCS RE, Inc.

     GCS RE, Inc. ("GCS"), College Station, Texas, was formed to be a general
partner of a real estate partnership, which owned a warehouse that is leased to
a former subsidiary of a previously owned portfolio company. During 2002, the
Fund contributed its investment in A.C. Liquidating Corporation, a former
portfolio company, to GCS. At December 31, 2002, the Fund's investment in GCS
consisted of

                                       6

<PAGE>

1,000 shares of common stock that was valued at $600,000, with a cost basis of
$320,924. The Fund owns 100% of the stock of GCS. Mr. Douglass and Mr. Lehmann
serve on the Board of Directors of GCS.

     Jones Industrial Services, Inc. (formerly United Industrial Services, Inc.)

     Jones Industrial Services, Inc. ("JIS"), Houston, Texas, was formed to
acquire businesses providing field services for the petrochemical and power
generation industries. At December 31, 2002, the Fund's investment in JIS was
valued at $2,500,000 with an original cost of $3,500,100 and consisted of 35,000
shares of preferred stock and warrants to buy up to 63,637 shares of common
stock at $0.01 per share through June 2008. The Fund's investment in JIS
represents an approximate 37.4% fully-diluted equity interest. Mr. Forbes serves
on JIS's Board of Directors.

     Milam Enterprises, LLC

     Milam Enterprises, LLC ("Milam"), Houston, Texas, was formed to hold
certain assets of Travis International, Inc. ("Travis") not included in the sale
of Travis' business operations. The Fund contributed all of its shares in Travis
to Milam for a membership interest. At December 31, 2002, the Fund's investment
in Milam consisted of a 9% membership interest valued at $100,000 with a cost of
$1,911.

     NCI Building Systems, Inc. (NYSE: NCS)

     NCI Building Systems, Inc. ("NCS"), Houston, Texas, manufactures and
markets metal building systems, components and roll up doors from operating
facilities located throughout the United States and Mexico. NCS maintains a web
site at www.ncilp.com. The December 31, 2002 closing price of NCS's common stock
on the New York Stock Exchange was $21.82 per share. At December 31, 2002, the
Fund's investment in NCS consisted of 200,000 shares of common stock valued at
$4,364,000 with a cost of $159,784, which represents an approximate 1%
fully-diluted equity interest in NCS. Mr. Forbes serves as a director of NCS.

     PalletOne, Inc.

     PalletOne, Inc. ("PalletOne"), Bartow, Florida, was formed to acquire and
operate twelve wooden pallet manufacturing facilities in eight states. PalletOne
maintains a website at www.palletone.com. At December 31, 2002, the Fund's
investment in PalletOne, valued at $3,500,000 with a cost basis of $3,815,000,
consisted of 350,000 shares of common stock and 3,465,000 shares of preferred
stock, representing an approximate 21% fully-diluted equity interest. Mr.
Lehmann and Mr. Forbes serve as directors of PalletOne.

     Reliant Window Holdings, LLC

     Reliant Window Holdings, LLC ("RWH"), Houston, Texas, was formed to acquire
87.5% of Alenco Window Holdings, LLC ("AWH"). AWH acquired the senior secured
debt of a bankrupt entity, which it exchanged for notes receivable from and an
equity interest in Alenco Holding Corporation ("Alenco"), a company formed to
purchase certain assets of Reliant Building Products, Inc. pursuant to a plan of
reorganization confirmed in bankruptcy court. Alenco manufactures aluminum and
vinyl windows for single and multi-family residential purposes. Alenco maintains
a website at www.alencowindows.com. At December 31, 2002, the Fund's investment
in RWH, valued at $4,200,000

                                       7

<PAGE>

with a cost of $372,256, consisted of a 36.86% membership interest. AWH owns
approximately 36.1% of the fully-diluted equity interest of Alenco. The Fund has
committed to invest up to an additional $5,158,000 in RWH under certain
circumstances. Of this $5,158,000, $3,719,000 is a letter of credit that the
Fund has in place to secure potential obligations of RWH's operating subsidiary
to its insurance carrier. This letter of credit expires on April 1, 2003, and
the operating company has made arrangements to replace the Fund's letter of
credit at such time. The remaining commitment includes a guarantee by the Fund
of up to $1,439,000 of an obligation that RWH has to a financial institution.
Management does not expect the Fund to have to pay anything in relation to this
guarantee. Mr. Lehmann and Ms. Cohen serve as members of the board of managers
of RWH.

     Sovereign Business Forms, Inc.

     Sovereign Business Forms, Inc. ("Sovereign"), Houston, Texas, is a
manufacturer of wholesale business forms, with operations in six states. At
December 31, 2002, the Fund's investment in Sovereign, valued at its cost of
$5,658,835, consisted of 19,131 shares of preferred stock, $3,745,735 in 15%
promissory notes and warrants to buy up to 551,894, 25,070 and 273,450 shares of
common stock at $1, $1.25 and $1 per share through August 2006, October 2007 and
October 2009, respectively. The Fund's investment represents a 31% fully-diluted
equity interest in Sovereign. Mr. Forbes serves on Sovereign's Board of
Directors.

     Spectrum Management, LLC

     Spectrum Management, LLC ("Spectrum"), Dallas, Texas, was formed to acquire
a business which provides security devices to financial institutions. At
December 31, 2002, the Fund's investment in Spectrum, valued at its original
cost of $4,153,698, consisted of 285,000 units of Class A equity interest and a
16% subordinated promissory note in the amount of $1,303,698. The Fund's
investment in Spectrum represents an approximate 79% fully-diluted equity
interest. Mr. Forbes and Ms. Cohen serve on the Board of Directors of Spectrum.

     Sternhill Partners I, L.P.

     Sternhill Partners I, L.P. ("Sternhill"), Houston, Texas, is a venture
capital fund which was formed to invest in seed and early stage information,
communication and entertainment technology companies. Sternhill maintains a web
site at www.sternhillpartners.com. At December 31, 2002, the Fund's investment
in Sternhill was valued at $700,000 with a cost of $1,801,604. The Fund has
committed to invest up to an additional $720,000 in Sternhill. The Fund's
investment consisted of a 3% limited partnership interest.

     Strategic Holdings, Inc. and related entity

     Strategic Holdings, Inc. ("SHI"), Houston, Texas, was formed to acquire
Strategic Materials, Inc., formerly known as Allwaste Recycling, Inc., the glass
recycling division of Allwaste, Inc. SHI receives and processes used glass,
which is then sold to the container, fiberglass and bead industries as a raw
material source. At December 31, 2002, the Fund's investment in SHI was valued
at $13,540,014 with an original cost of $13,659,013. The Fund's investment in
SHI consists of 3,089,751 shares of common stock, 3,822,157 shares of Series B
preferred stock, $6,750,000 in a 15% promissory note and warrants to buy
225,000, 100,000 and 2,219,237 shares of SHI common stock at $0.4643, $1.50 and
$0.01 per share through August 2005, August 2005 and November 2005,
respectively. In addition, the Fund has accrued $500,000 in interest receivable
on the promissory note. Mr. Lehmann serves as a

                                       8

<PAGE>

director of SHI.

     SMIP, Inc. ("SMIP"), Houston, Texas, was formed to be the general partner
of a limited partnership which owns an 18% fully-diluted interest in SHI.
Management personnel of Strategic Materials, Inc. are the limited partners of
the partnership. At December 31, 2002, the Fund's investment in SMIP was valued
at $188,423, with a cost of $325,000. The Fund's investment in SMIP consists of
1,000 shares of common stock and $175,000 in a 15% promissory note. SMIP is
wholly-owned by the Fund. Mr. Lehmann serves as a director of SMIP.

     The Fund's investments in SHI and SMIP represent an approximate 80%
fully-diluted equity interest in SHI.

     Turfgrass America, Inc.

     Turfgrass America, Inc. ("Turfgrass"), Granbury, Texas, was formed for the
purpose of acquiring several companies which grow and market warm season
turfgrass, including Millberger Turf Farms and Thomas Bros. Grass. Turfgrass is
one of the largest warm season turfgrass companies in the United States.
Turfgrass maintains a web site at www.turfgrassamerica.com. At December 31,
2002, the Fund's investment in Turfgrass was valued at $5,341,057 with a cost of
$5,941,057. The Fund's investment consisted of 211,184 shares of common stock,
1,507,226 shares of convertible preferred stock, $3,781,804 invested in a 12%
subordinated promissory note with a face value of $4,000,000, two 12% promissory
notes totaling $790,615, and warrants to buy 250,412 shares of Turfgrass common
stock for $0.51 through April 2010, representing an approximate 16%
fully-diluted equity interest in Turfgrass.

     Vanguard VII, L.P.

     Vanguard VII, L.P. ("Vanguard"), Houston, Texas, is a venture capital fund
which was formed to invest in seed and early stage communications and life
science technology companies. Vanguard maintains a web site at
www.vanguardventures.com. At December 31, 2002, the investment in Vanguard was
valued at $700,000 with a cost of $1,200,000. The Fund has committed to invest
up to an additional $1,800,000 in Vanguard. The Fund's investment consists of a
1.3% limited partnership interest.

Temporary Investments

     Pending investment in Portfolio Companies, the Fund invests its available
funds in interest-bearing bank accounts, money market mutual funds, U.S.
Treasury securities and/or certificates of deposit with maturities of less than
one year (collectively, "Temporary Investments"). Temporary Investments may also
include commercial paper (rated or unrated) and other short-term securities.
Temporary Investments constituting cash, cash items, securities issued or
guaranteed by the U.S. Treasury or U.S. Government agencies and high quality
debt securities (commercial paper rated in the two highest rating categories by
Moody's Investor Services, Inc. or Standard & Poor's Corporation, or if not
rated, issued by a company having an outstanding debt issue so rated, with
maturities of less than one year at the time of investment) will qualify for
determining whether the Fund has 70% of its total assets invested in Managed
Companies (as hereafter defined) or in qualified Temporary Investments for
purposes of the business development company provisions of the Investment
Company Act. At December 31, 2002, $58,000,000 of temporary investments were
restricted and were pledged as collateral on certain bank borrowings. See
"Regulation" below.

                                       9

<PAGE>

Follow-on Investments

     Following its initial investment in a Portfolio Company, the Fund may be
requested to make follow-on investments in the company. Follow-on investments
may be made to take advantage of warrants or other preferential rights granted
to the Fund or otherwise to increase the Fund's position in a successful or
promising Portfolio Company. The Fund may also be called upon to provide
additional equity or loans needed by a Portfolio Company to fully implement its
business plans, to develop a new line of business or to recover from unexpected
business problems. The Fund may make follow-on investments in Portfolio
Companies from funds on hand or may borrow all or a portion of the funds
required to make such follow-on investments. If the Fund is unable to maintain
its revolving line of credit and does not have sufficient funds to make
follow-on investments, the Portfolio Company in need of the investment may be
negatively impacted and/or the Fund's equity interest in the Portfolio Company
may be reduced.

     The Fund has committed, under certain circumstances, to make follow-on
investments in certain Portfolio Companies. See further discussion of this in
the "Liquidity and Capital Resources" section in the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" section.

Disposition of Investments

     The method and timing of the disposition of the Fund's portfolio
investments is critical to the realization of capital appreciation and to the
minimization of any capital losses. The Fund expects to dispose of its portfolio
securities through a variety of transactions, including sales of portfolio
securities in underwritten public offerings, public sales of such securities and
negotiated private sales of such securities to the Portfolio Company itself or
to other investors. In addition, the Fund may distribute its portfolio
securities in-kind to its shareholders. In structuring investments, the Fund
endeavors to reach such agreements or understandings with a prospective
Portfolio Company as may be appropriate with respect to the method and timing of
the disposition of the Fund's investment and, if appropriate, seeks to obtain
registration rights at the expense of the Portfolio Company. The Fund bears the
costs of disposing of investments to the extent not paid by the Portfolio
Company. The Fund currently plans to dispose of certain portfolio securities to
reduce or pay off its line of credit, and to increase the Fund's liquidity. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" regarding the Fund's borrowings and liquidity.

Operating Expenses

     The Management Company, at its expense, provides the Fund with office
space, facilities, equipment and personnel (whose salaries and benefits are paid
by the Management Company) necessary for the conduct of the Fund's business and
pays all costs related to proposed acquisitions of portfolio securities that are
not completed, unless such proposed acquisitions have been previously approved
by the Board of Directors of the Fund.

     The Fund is responsible for paying certain expenses relating to its
operations, including: management fees to the Management Company; fees and
expenses of the Independent Directors; finder's fees; direct costs of proposed
investments in Portfolio Companies, whether or not completed, if such proposed
investments have been approved for acquisition by the Board of Directors of the
Fund; depositary fees of unaffiliated depositaries; fees of unaffiliated
transfer agents, registrars and disbursing agents; the administrative fee to the
Management Company; portfolio transaction expenses; interest; legal and
accounting expenses; costs of printing and mailing proxy materials and reports
to shareholders;

                                       10

<PAGE>

New York Stock Exchange fees; custodian fees; litigation costs; costs of
disposing of investments including brokerage fees and commissions; and other
unusual or nonrecurring expenses and other expenses properly payable by the
Fund. The Fund also has the ability to pay bonuses to its officers, but none
have been paid to date. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" regarding the Fund's liquidity.

Valuation

         On a quarterly basis, the Management Company performs a valuation of
the investments in portfolio securities of the Fund, subject to the approval of
the Board of Directors of the Fund. Valuations of portfolio securities are done
in accordance with accounting principles generally accepted in the United States
and the financial reporting policies of the SEC. The applicable methods
prescribed by such principles and policies are described below.

         The fair value of investments for which no market exists (including
most investments made by the Fund) 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. There is a range of values that are reasonable for such
investments at any particular time. 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.

         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. 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. Also, failure by a
Portfolio Company to achieve its business plan or obtain and maintain its
financing arrangements could result in a significant and rapid change in its
value.

         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.

         Fund investments for which market quotations are readily available and
which are freely transferable are valued at the closing price on the date of
valuation. For securities which are in a class of public securities but are
restricted from free trading (such as Rule 144 stock), valuation is set by
discounting the closing price to reflect the estimated effects of the
illiquidity caused by such restrictions. The fair values of debt securities,
which are generally held to maturity, are determined on the basis of the terms
of the debt securities and the financial condition of the issuer. Certificates
of deposit purchased by the Fund generally will be valued at their face value,
plus interest accrued to the date of valuation.

         The Board of Directors reviews the valuation policies on a quarterly
basis to determine their appropriateness and may also hire independent firms to
review the Management Company's methodology of valuation or to conduct an
independent valuation.

                                       11

<PAGE>

         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.

Custodian

         The Fund acts as the custodian of its securities to the extent
permitted under the Investment Company Act and is subject to the restrictions
imposed on self-custodians by the Investment Company Act and the rules and
regulations thereunder. The Fund has entered into an agreement with Bank of
America, N.A. with respect to the safekeeping of such securities. The principal
business office of the custodian is 700 Louisiana Street, 6/th/ Floor, Houston,
Texas 77002.

Transfer and Disbursing Agent

         The Fund employs American Stock Transfer & Trust Company as its
transfer agent to record transfers of the shares, maintain proxy records and to
process distributions. The principal business office of such company is 59
Maiden Lane, New York, NY, 10007.

Factors that May Affect Future Results, the Market Price of Common Stock, and
the Accuracy of Forward-Looking Statements

         In the normal course of its business, the Fund, in an effort to keep
its stockholders and the public informed about the Fund's operations and
portfolio of investments, may from time-to-time issue certain statements, either
in writing or orally, that contain or may contain forward-looking information.
Generally, these statements relate to business plans or strategies of the Fund
or Portfolio Companies in which it invests, projected or anticipated benefits or
consequences of such plans or strategies, projected or anticipated benefits of
new or follow-on investments made by or to be made by the Fund, or projections
involving anticipated purchases or sales of securities or other aspects of the
Fund's operating results. Forward-looking statements are not guarantees of
future performance and are subject to risks and uncertainties that could cause
actual results to differ materially. As noted elsewhere in this report, the
Fund's operations and portfolio of investments are subject to a number of
uncertainties, risks, and other influences, many of which are outside the
control of the Fund, and any one of which, or a combination of which, could
materially affect the results of the Fund's operations or net asset value, the
market price of its common stock, and whether forward-looking statements made by
the Fund ultimately prove to be accurate.

         The following discussion outlines certain factors that in the future
could affect the Fund's results for 2003 and beyond and cause them to differ
materially from those that may be set forth in any forward-looking statement
made by or on behalf of the Fund:

         Long-Term Objective. The Fund is intended for investors seeking
long-term capital growth. The Fund is not meant to provide a vehicle for those
who wish to play short-term swings in the stock market. The portfolio securities
acquired by the Fund generally require four to seven years or longer to reach
maturity and generally are illiquid. An investment in shares of the Fund should
not be considered a complete investment program. Each prospective purchaser
should take into account his investment objectives as well as his other
investments when considering the purchase of shares of the Fund.

         Non-Diversified Status; Number of Investments. The Fund is classified
as a "non-diversified"

                                       12

<PAGE>

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 intend to 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 21 Portfolio Companies and two venture capital funds. The value
of one investment exceeds 20% of the value of the Fund's net assets and the
value of another exceeds 15%. The value of the Fund's investments in three
entities which are involved in the manufacture of residential windows exceeds
31% of the Fund's net asset value at December 31, 2002.

         Leveraged Portfolio Investments. While leveraged buyout investments and
investments in highly leveraged companies offer the opportunity for significant
capital gains and current income, such investments involve a high degree of
business and financial risk and can result in substantial losses. Many of the
Fund's Portfolio Companies have incurred substantial indebtedness in relation to
their overall capital base. Such indebtedness generally has a term that will
require that the balance of the loan be refinanced when it matures. 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. A substantial portion of the indebtedness incurred
by Portfolio Companies may bear interest at rates that will fluctuate in
accordance with a stated interest rate index or the prime lending rate. The cash
flow of a Portfolio Company may not be sufficient to meet increases in interest
payments on its indebtedness. Accordingly, the profitability of the Fund's
Portfolio Companies, as well as appreciation, if any, of the investments in such
companies, will depend in a significant part upon prevailing interest rates.

         In addition, a number of financial institutions that have historically
been active in lending in the small and mid-cap markets on an asset-based or
cash-flow basis have withdrawn from the market and declined to extend existing
loans past their current maturity dates. Since most of the Fund's Portfolio
Companies borrow in this market, a number of Portfolio Companies are currently
faced with the necessity of refinancing their existing credit facilities in a
market where there are currently few other financing alternatives. If a
Portfolio Company cannot refinance its credit facility on a timely basis, it may
be required to sell assets to repay debt or seek protection under applicable
reorganization or bankruptcy laws. In either event the value of the Fund's
investment in such Portfolio Company may be materially affected.

         Lack of Liquidity of Portfolio Investments. The portfolio investments
of the Fund consist principally of securities that are subject to restrictions
on sale because they were acquired from the issuer in "private placement"
transactions or because the Fund is deemed to be an affiliate of the issuer.
Generally, the Fund will not be able to sell these securities publicly without
the expense and time required to register the securities under the Securities
Act of 1933 and applicable state securities law unless an exemption from such
registration requirements is available. In addition, contractual or practical
limitations may restrict the Fund's ability to liquidate its securities in
Portfolio Companies since in many cases the securities of such companies will be
privately held and the Fund may own a relatively large

                                       13

<PAGE>

percentage of the issuer's outstanding securities. Sales may also be limited by
securities market conditions, which may be unfavorable for sales of securities
of particular issuers. The above limitations on liquidity of the Fund's
securities could preclude or delay any disposition of such securities or reduce
the amount of proceeds that might otherwise be realized.

         Need for Follow-on Investments in Portfolio Companies. After its
initial investment in a Portfolio Company, the Fund may be called upon from time
to time to provide additional funds to such company or have the opportunity to
increase its investment in a successful situation, e.g., the exercise of a
warrant to purchase common stock. There is no assurance that the Fund will make,
or have sufficient funds to make, follow-on investments. Any decision by the
Fund not to make a follow-on investment or any inability on its part to make
such an investment may have a negative impact on a Portfolio Company in need of
such an investment or may result in a missed opportunity for the Fund to
increase its participation in a successful operation and may dilute the Fund's
equity interest in or reduce the expected yield on its investment.

         Competition for Investments. The Fund encounters competition from other
persons or entities with similar investment objectives. These competitors
include private equity partnerships, other business development companies,
investment partnerships and corporations, small business investment companies,
large industrial and financial companies investing directly or through
affiliates, foreign investors of various types and individuals. Many of these
competitors have greater financial resources and more personnel than the Fund
and may be subject to different and frequently less stringent regulation.

         Borrowings. The Fund may borrow funds to make new or follow-on
investments, to maintain its pass-through tax status as a regulated investment
company under Subchapter M of the Internal Revenue Code or to pay contingencies
and expenses. The Fund is permitted under the Investment Company Act to borrow
funds if, immediately after the borrowing, it will have an asset coverage of at
least 200%. That is, the Fund may borrow funds in an amount up to 50% of the
value of its assets (including investments made with borrowed funds). The amount
and nature of any Fund borrowings will depend upon a number of factors over
which the Fund has no control, including general economic conditions, conditions
in the financial markets and the impact of the financing on the tax treatment of
the stockholders. The use of leverage, even on a short-term basis, could have
the effect of magnifying increases or decreases in the Fund's net asset value.
While the "spread" between the current yield on the Fund's investments and the
cost of any loan would augment the stockholders' return from the Fund, if the
spread narrows (because of an increase in the cost of debt or insufficient
income on the Fund's investments), distributions to the stockholders would be
adversely affected. If the spread were reversed, the Fund might be unable to
meet its obligations to its lenders, which might then seek to cause the Fund to
liquidate some or all of its investments. There can be no assurance that the
Fund would realize full value for its investments or recoup all of its capital
if its portfolio investments were required to be liquidated in other than an
orderly manner.

         Many financial institutions today are unwilling to lend against a
portfolio of illiquid, private securities. The decline in the number of
institutions in the Fund's credit market and the make-up of the Fund's portfolio
has made it more difficult for the Fund to borrow at the level and on the terms
that it desires. The Fund's borrowings have historically consisted of a
revolving line of credit, the proceeds of which have been utilized to provide
liquidity to the Fund for expenses and contingencies and to make new or
follow-on investments, and a line of credit promissory note, the proceeds of
which are utilized quarterly to enable the Fund to achieve adequate
diversification to maintain its pass-through tax status as a regulated
investment company.

                                       14

<PAGE>

         The costs of borrowing money may exceed the income from the portfolio
securities purchased by the Fund with the borrowed money. The Fund will suffer a
decline in net asset value if the investment performance of the additional
securities purchased with borrowed money fails to cover their cost to the Fund
(including any interest paid on the money borrowed). A decline in net asset
value could affect the ability of the Fund to make distributions on its common
stock. Failure by the Fund to distribute a sufficient portion of its net
investment income and net realized capital gains could result in a loss of
pass-through tax status or subject the Fund to a 4% excise tax. See "Loss of
Conduit Tax Treatment." If the asset coverage for debt securities issued by the
Fund declines to less than 200% (as a result of market fluctuations or
otherwise), the Fund may be required to sell a portion of its investments when
it may be disadvantageous to do so.

         See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 2 in the "Notes to the Financial Statements" for
further discussion of the current status of the Fund's borrowings and liquidity.

         Loss of Conduit Tax Treatment. The Fund may cease to qualify for
conduit tax treatment if it is unable to comply with the diversification and
gross income requirements of Subchapter M of the Internal Revenue Code.
Subchapter M requires that at the end of each quarter (i) at least 50% of the
value of the Fund's assets must consist of cash, government securities and other
securities of any one issuer that do not represent more than 5% of the value of
the Fund's total assets and 10% of the outstanding voting securities of such
issuer, and (ii) no more than 25% of the value of the Fund's assets may be
invested in the securities of any one issuer (other than United States
government securities), or of two or more issuers that are controlled by the
Fund and are engaged in the same or similar or related trades or businesses.
Additionally, at least 90% of the Fund's gross income must be derived from
interest, dividends, gains from sale of portfolio securities and other
qualifying sources. As discussed in "Borrowings", the Fund has historically
borrowed funds necessary to make qualifying investments to satisfy the foregoing
diversification requirements. If the Fund fails to satisfy such diversification
requirements and ceases to qualify for conduit tax treatment, the Fund will be
subject to income tax on its income and gains and stockholders will be subject
to income tax on distributions. The Fund may also cease to qualify for conduit
tax treatment, or be subject to a 4% excise tax, if it fails to distribute a
sufficient portion of its net investment income and net realized capital gains.
The Fund did not qualify as a regulated investment company ("RIC") for 2001;
however, in 2001 the Fund had no taxable income or gains that would have thus
been subject to federal income tax. Under applicable regulations, so long as the
Fund meets the Subchapter M requirements set out above for 2002, the Fund can
elect again to be taxed as a RIC in 2002. Management believes that the Fund has
met the Subchapter M requirements to be taxed as a RIC for 2002 and the Fund
intends to be taxed as such for 2002.

         Market Value and Net Asset Value. The shares of the Fund's common stock
are listed on the NYSE. Investors desiring liquidity may trade their shares of
common stock on the NYSE at current market value, which historically has been
below the net asset value. Shares of closed-end investment companies frequently
trade at a discount from net asset value. This characteristic of shares of a
closed-end fund is a risk separate and distinct from the risk that the Fund's
net asset value will decrease. The risk of purchasing shares of a closed-end
fund that might trade at a discount is more pronounced for investors who wish to
sell their shares in a relatively short period of time because for those
investors, realization of a gain or loss on their investments is likely to be
more dependent upon the existence of a premium or discount than upon portfolio
performance. The Fund's shares have traded at a discount to net asset value
since they began trading. For information concerning the trading history of the
Fund's shares see "Market for Registrant's Common Equity and Related Stockholder
Matters."

                                       15

<PAGE>

         Valuation of Investments. The Fund's net asset value is based on the
value assigned to its portfolio investments. Investments in companies whose
securities are publicly traded are valued at their quoted market price, less a
discount to reflect the estimated effects of restrictions on the sale of such
securities, if applicable. The Fund adjusts its net asset value for changes in
the value of its publicly held securities on a daily basis. The value of the
Fund's investments in securities for which market quotations are not available
is determined as of the end of each calendar quarter, unless there is a
significant event requiring a change in valuation in the interim. Cost is used
to approximate fair value of such investments until significant developments
affecting an investment provide a basis for use of an appraisal valuation.
Thereafter, such portfolio investments are carried at appraised values as
determined quarterly. 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 fair value that
would have been used had a ready market existed for the securities. Appraisal
valuations are based on a Portfolio Company's historical performance and certain
assumptions concerning the company's future performance, the financial markets,
and general economic conditions. A Portfolio Company's failure to achieve its
business plan, changes in financial and other markets, or changes in general
economic conditions could result in significant and rapid changes in the value
of a Portfolio Company. At December 31, 2002, approximately 95% of the Fund's
fair value of portfolio securities were invested in securities for which market
quotations were not readily available. See "Valuation".

         Possible Volatility of Stock Price. The market price of the Fund's
common stock could be subject to significant fluctuations in response to
variations in the net asset value of the Fund, its quarterly operating results,
and other factors. The market price of the common stock may be significantly
affected by such factors as the announcement of new or follow-on investments in
portfolio companies, the sale or proposed sale of a portfolio investment, the
results of operations or fluctuations in the market prices or appraised value of
one or more of the Fund's Portfolio Companies, changes in earnings estimates by
market analysts, speculation in the press or analyst community and general
market conditions or market conditions specific to particular industries. From
time to time in recent years, the securities markets have experienced
significant price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of particular companies. These
broad fluctuations may adversely affect the market price of the common stock. In
addition, the Fund is subject to the risk of the securities markets in which the
portfolio securities of the Fund are traded. Securities markets are cyclical and
the prices of the securities traded in such markets rise and fall at various
times. These cyclical periods may extend over significant periods of time.

Regulation

         The Investment Advisers Act generally prohibits investment advisers
from entering into investment advisory contracts with an investment company that
provides for compensation to the investment adviser on the basis of a share of
capital gains or capital appreciation of the portfolio investments or any
portion of the funds of the investment company or pursuant to a stock option
plan. The Investment Advisers Act, however, does permit the payment of
compensation based on capital gains or the issuance of incentive stock options
to management in an investment advisory contract between an investment adviser
and a business development company. The Fund has elected to be treated as a
business development company under the Investment Company Act. Accordingly, it
has provided for incentive compensation to the officers of the Fund based on an
incentive stock option plan established in 1997.

         The Fund may not withdraw its election to be treated as a business
development company without first obtaining the approval of a majority in
interest of its shareholders. The following brief

                                       16

<PAGE>

description of the Investment Company Act is qualified in its entirety by
reference to the full text of the Investment Company Act and the rules
thereunder.

         A business development company must be operated for the purpose of
investing in the securities of certain present and former "eligible portfolio
companies" or certain bankrupt or insolvent companies and must make available
significant managerial assistance to portfolio companies. An eligible portfolio
company generally is a company that (1) is organized under the laws of, and has
its principal place of business in, any state or states, (2) is not an
investment company and (3)(a) does not have a class of securities registered on
an exchange or included in the Federal Reserve Board's over-the-counter margin
list, (b) is actively controlled by the business development company acting
either alone or as part of a group acting together and an affiliate of the
business development company is a member of the portfolio company's board of
directors or (c) meets such other criteria as may be established by the SEC.
Control is presumed to exist where the business development company owns more
than 25% of the outstanding voting securities of a portfolio company.

         "Making available significant managerial assistance" is defined under
the Investment Company Act to mean (a) any arrangement whereby a business
development company, through its directors, officers or employees, offers to
provide and, if accepted, does provide significant guidance and counsel
concerning the management, operations or business objectives or policies of a
portfolio company or (b) the exercise of a controlling influence over the
management or policies of a portfolio company by the business development
company acting individually or as part of a group of which the business
development company is a member acting together which controls such company
("Managed Company"). A business development company may satisfy the requirements
of clause (a) with respect to a portfolio company by purchasing securities of
such a company as part of a group of investors acting together if one person in
such group provides the type of assistance described in such clause. However,
the business development company will not satisfy the general requirement of
making available significant managerial assistance if it only provides such
assistance indirectly through an investor group. A business development company
need only extend significant managerial assistance with respect to portfolio
companies which are treated as Qualifying Assets (as defined below) for the
purpose of satisfying the 70% test discussed below.

         The Investment Company Act prohibits or restricts the Fund from
investing in certain types of companies, such as brokerage firms, insurance
companies, investment banking firms and investment companies. Moreover, the
Investment Company Act limits the type of assets that the Fund may acquire to
"Qualifying Assets" and certain assets necessary for its operations (such as
office furniture, equipment and facilities) if, at the time of the acquisition,
less than 70% of the value of the Fund's total assets consists of qualifying
assets. Qualifying Assets include (1) securities of companies that were eligible
portfolio companies at the time that the Fund acquired their securities; (2)
securities of companies that are actively controlled by the Fund; (3) securities
of bankrupt or insolvent companies that are not otherwise eligible portfolio
companies; (4) securities acquired as follow-on investments in companies that
were eligible portfolio companies at the time of the Fund's initial acquisition
of their securities but are no longer eligible portfolio companies, provided
that the Fund has maintained a substantial portion of its initial investment in
such companies; (5) securities received in exchange for or distributed on or
with respect to any of the foregoing; and (6) cash items, government securities
and high-quality, short-term debt. The Investment Company Act also places
restrictions on the nature of the transactions in which, and the persons from
whom, securities can be purchased in order for such securities to be considered
Qualifying Assets. As a general matter, Qualifying Assets may only be purchased
from the issuer or an affiliate in a transaction not constituting a public
offering. The Fund may not purchase any security on margin, except such
short-term credits as are necessary for the clearance of portfolio transactions,
or

                                       17

<PAGE>

engage in short sales of securities.

         The Fund is permitted by the Investment Company Act, under specified
conditions, to issue multiple classes of senior debt and a single class of
preferred stock senior to the common stock if its asset coverage, as defined in
the Investment Company Act, is at least 200% after the issuance of the debt or
the senior stockholders' interests. In addition, provisions must be made to
prohibit any distribution to common shareholders or the repurchase of any shares
unless the asset coverage ratio is at least 200% at the time of the distribution
or repurchase.

         The Fund generally may sell its securities at a price that is below the
prevailing net asset value per share only upon the approval of the policy by
shareholders holding a majority of the shares issued by the Fund, including a
majority of shares held by nonaffiliated shareholders. The Fund may, in
accordance with certain conditions established by the SEC, sell shares below net
asset value in connection with the distribution of rights to all of its
stockholders. The Fund may also issue shares at less than net asset value in
payment of dividends to existing shareholders.

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

         The investments and business of the Fund are managed by the Management
Company, pursuant to a Management Agreement (the "Management Agreement")
initially approved by the stockholders of the Fund at a special meeting on April
9, 1997. The Management Agreement provides that the Management Company shall
provide, or arrange for suitable third parties to provide, any and all
management and administrative services reasonably necessary for the operation of
the Fund and the conduct of its business. In return for its service and the
expenses which the Management Company assumes under the Management Agreement,
the Fund pays the Management Company, on a quarterly basis, a management fee
equal to 0.5% of the net assets of the Fund on the last day of each calendar
quarter (2% per annum).

         The Management Agreement will continue in effect until June 30, 2003,
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).

         Shareholders have approved the Equus II Incorporated 1997 Stock
Incentive Plan ("Stock Incentive Plan"), which authorizes the Fund to issue
options to the officers of the Fund, all of which are employed by the Management
Company, in an aggregate amount of up to 20% of the outstanding shares of common
stock of the Fund. Options are issued to the officers of the Fund at the
discretion of the compensation committee in accordance with the Stock Incentive
Plan.

         Many of the transactions involving the Fund and its affiliates (as well
as affiliates of such

                                       18

<PAGE>

affiliates) require the prior approval of a majority of the Independent
Directors and a majority of the Independent Directors having no financial
interest in the transactions. However, certain transactions involving closely
affiliated persons of the Fund, including the Management Company, require the
prior approval of the SEC. In general (a) any person who owns, controls or holds
with power to vote more than 5% of the outstanding shares, (b) any director or
executive officer and (c) any person who directly or indirectly controls, is
controlled by or is under common control with such person, must obtain the prior
approval of a majority of the Independent Directors and, in some situations, the
prior approval of the SEC, before engaging in certain transactions involving the
Fund or any company controlled by the Fund. In accordance with the Investment
Company Act, a majority of the directors must be persons who are not "interested
persons" as defined in such act. Except for certain transactions which must be
approved by the Independent Directors, the Investment Company Act generally does
not restrict transactions between the Fund and its Portfolio Companies.

Item 2.           Properties.

         The Fund does not have an interest in any physical properties.

Item 3.           Legal Proceedings.

         The Fund, its affiliates and certain of the Portfolio Companies are
involved in asserted claims and have the possibility for unasserted claims which
may ultimately affect the net asset value of the Fund or the fair value of the
Fund's portfolio investments.

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

         No matters were submitted to a vote of security holders during the
fourth quarter of 2002.

Item 5.           Market for Registrant's Common Equity and Related Stockholder
                  Matters.

         The Fund's shares of common stock are listed on the New York Stock
Exchange under the symbol "EQS". The Fund had approximately 6,441 shareholders
at December 31, 2002, 1,237 of which were registered holders. Registered holders
do not include those shareholders whose stock has been issued in street name.
The net asset value per share of the Fund's common stock at December 31, 2002,
was $12.35.

         The following table reflects the high and low sales prices per share of
the Fund's common stock on the New York Stock Exchange for the two years ended
December 31, 2002, by quarter.

          Quarter
           Ended                        High              Low
           -----                        ----              ---
        March 31, 2001                 $ 8.555          $ 7.909
        June 30, 2001                  $ 8.591          $ 7.900
        September 30, 2001             $ 8.500          $ 7.473
        December 31, 2001              $ 7.830          $ 7.280
        March 31, 2002                 $ 7.930          $ 7.600
        June 30, 2002                  $ 7.830          $ 7.400
        September 30, 2002             $ 7.460          $ 6.440
        December 31, 2002              $ 6.840          $ 6.470

         As a regulated investment company under Subchapter M of the Internal
Revenue Code, the Fund

                                       19

<PAGE>

is required to distribute to its shareholders, in a timely manner, at least 90%
of its taxable net investment income each year. If the Fund distributes, in a
timely manner, 98% of its taxable net capital gains and 98% of its taxable net
investment income each year (as well as any portion of the respective 2%
balances not distributed in the previous year), it will not be subject to the 4%
non-deductible federal excise tax on certain undistributed income of regulated
investment companies. Under the Investment Company Act, the Fund is not
permitted to pay dividends to shareholders unless it meets certain asset
coverage requirements.

         Historically, net investment income and net realized gains from the
sale of portfolio investments have been distributed at least annually. However,
the Fund did not have any net taxable ordinary income or capital gains for the
calendar year 2002 or 2001. Accordingly, the Board of Directors did not declare
a dividend in 2002. The Board of Directors declared a 10% stock dividend in
2001, and the Fund issued 566,638 shares on December 17, 2001. All shares and
per share amounts have been retroactively adjusted to reflect the 10% stock
dividend. There are restrictions on the Fund's ability to pay dividends under
its credit facility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" regarding the Fund's liquidity and capital
resources.

         The Fund is investing in companies that it believes have a high
potential for capital appreciation, and the Fund intends to realize the majority
of its profits upon the sale of its investments in Portfolio Companies.
Consequently, most of the companies in which the Fund invests do not have
established policies of paying annual dividends.

         A portion of the investments in portfolio securities held by the Fund
is comprised of interest-bearing subordinated debt securities or dividend-paying
preferred stock. The Fund distributes taxable net investment income earned on
these investments from time to time, to the extent not retained for follow-on
investments, expenses and contingencies. If taxable net investment income is
retained, the Fund will be subject to federal income and excise taxes.

         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. Stockholders will
also be entitled to increase the adjusted tax basis of their Fund shares by the
difference between their undistributed capital gains and their tax credit.

                                       20

<PAGE>

Item 6. Selected Financial Data.

         Following is a summary of selected financial data and per share data of
the Fund for the five years ended December 31, 2002. Amounts are in thousands
except per share data. All shares and per share amounts have been retroactively
adjusted to reflect the 10% stock dividend declared and paid in 2001.

<TABLE>
<CAPTION>
                                                2002          2001      2000          1999         1998
                                                ----          ----      ----          ----         ----
<S>                                          <C>          <C>         <C>           <C>         <C>
Total investment income                      $   2,987    $   2,714   $  5,117      $  5,157    $   3,774

Net investment income (loss)                 $     145    $   1,155   $    549      $ (2,177)   $  (2,179)

Realized gain (loss) on dispositions
   of portfolio securities, net              $     802    $  (7,196)  $ (6,161)     $ 40,353    $  (3,564)

Increase (decrease) in unrealized
    appreciation of  portfolio
    securities, net                          $    (924)   $  (3,674)  $    282      $(45,412)   $ (21,581)

Total increase (decrease) in net assets
   from operations                           $      24    $  (9,716)  $ (5,329)     $ (7,237)   $ (27,324)

Dividends declared                           $       -    $       -   $  3,844      $ 23,815    $   3,139

Total assets at end of year                  $ 148,337    $ 150,819   $176,018      $175,022    $ 215,603

Net assets at end of year                    $  76,976    $  76,967   $ 90,925      $101,419    $ 116,155

Net cash used by operating activities        $  (2,009)   $  (1,506)  $ (2,191)     $ (3,303)   $  (4,298)

Shares outstanding at end of year                6,233        6,233      6,493         6,719        5,449

Average shares outstanding during year           6,233        6,363      6,457         5,445        5,312

Per Share Data:
                                                2002          2001         2000          1999         1998
                                                ----          ----         ----          ----         ----
Net investment income (loss)                 $    0.02    $    0.18   $   0.08      $  (0.40)   $   (0.41)

Realized gain (loss) on dispositions of
   portfolio securities, net                 $    0.13    $   (1.13)  $  (0.95)     $   7.41    $   (0.67)

Increase (decrease) in unrealized
   appreciation of portfolio securities,
   net                                       $   (0.15)   $   (0.57)  $   0.05      $  (8.34)   $   (4.06)

Dividends declared                           $       -    $       -   $   0.55      $   3.86    $    0.59

Net asset value (including unrealized
   appreciation), end of year                $   12.35    $   12.35   $  14.00      $  15.10    $   21.32
</TABLE>

     The financial statements for 1998 through 2001 were audited by Arthur
Andersen LLP, which has ceased operations. A copy of the auditor's report
previously issued by Arthur Andersen LLP on our financial statements as of
December 31, 2001 and 2000 and for each of the three years in the period ended
December 31, 2001 is included elsewhere in the Form 10-K. Arthur Andersen LLP
did not reissue its report.

                                       21

<PAGE>

Item 7.       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 December 31,
2002) is determined on the basis of procedures established in good faith by the
Board of Directors of the Fund. As a general principle, the current "fair value"
of an investment would be the amount the Fund might reasonably expect to receive
for it upon its current sale, in an orderly manner. Appraisal valuations are
necessarily subjective and the Management Company's estimate of values may
differ materially from amounts actually received upon the disposition of
portfolio securities.

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

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

         The Fund may also use, when available, third-party transactions in a
Portfolio Company's

                                       22

<PAGE>

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 significantly 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 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. As of December 31, 2002, the Fund has a capital loss
carryforward of $2,218,000, which may be used to offset future taxable capital
gains. The Fund borrows money from time to time to maintain its tax status under
the Internal Revenue Code as a regulated investment company ("RIC"). See
"Borrowings" and "Loss of Conduit Tax Treatment" for further discussions of the
Fund's borrowings.

Liquidity and Capital Resources

         At December 31, 2002, the Fund had $87,194,210 of its assets invested
in portfolio securities of 21 companies and two venture capital funds. The Fund
had a $22,500,000 revolving line of credit with Bank of America, N.A. that
expired on December 31, 2002. The line of credit was subsequently extended until
June 1, 2003, and amended to provide for maximum borrowings of $18,000,000. 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 $12,775,000 outstanding under this line of credit at December 31, 2002,
which is collateralized by the Fund's investments in portfolio securities. In
addition, the Fund had irrevocable letters of credit in the amount of $3,719,000
outstanding at year end, which reduces the amount of additional borrowings
available under the line of credit. The letters of credit expired subsequent to
year-end. As of April 1, 2003, the Fund's availability under the revolving line
of credit is approximately $1,590,000.

         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 will be
reduced by a corresponding amount. 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 is

                                       23

<PAGE>

currently in discussions with several interested parties regarding the sale of
certain portfolio securities at values that could enable the Fund to repay the
line of credit. The Fund is also pursuing arrangements to refinance the line of
credit with another lender and may approach the current lender for another
extension of the due date. 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 or obtain a replacement facility by June 1, 2003. Should the Fund be
unable to repay the line of credit, extend it or refinance it with another
lender, portfolio securities may be required to be sold and such sales may be at
values that are materially less than Management's estimates of fair value.

         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 Reliant Window Holdings, LLC
("RWH") and Equicom, Inc. ("Equicom") in the respective amounts of $1,439,000
and $759,000. RWH is currently servicing its obligations to the financial
institution, and Management does not expect the Fund to have to pay anything in
relation to this guarantee. The Fund has made loans to Equicom from time to time
to enable the company to service its debt, but Management does not expect the
Fund to advance more than $150,000 in 2003 for such purpose. In addition, the
Fund has committed to invest up to $5,550,000 in the two venture capital funds
in its portfolio. At December 31, 2002, $3,030,000 of such amount had been
funded, and an additional $300,000 was funded on March 3, 2003. Management does
not expect the Fund to advance more than $900,000 of its remaining commitments
to the venture capital funds in 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 used by operating activities was $2,009,341, $1,505,851 and
$2,191,287 for the three years ended December 31, 2002, 2001 and 2000,
respectively. Management expects net cash needed for operating activities to
remain at comparable levels during 2003. Management believes that borrowings
available under the revolving line of credit, net investment income and proceeds
from sales of portfolio securities will be sufficient for the liquidity needs of
the Fund. Approximately $24.2 million in estimated value of the Fund's
investments are in the form of notes receivable from Portfolio Companies. At
December 31, 2002, three of these notes, with an estimated fair value of
$9,315,342, 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 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 stockholders would be subject to income tax on
distributions. Failure to continue to qualify as a RIC could be material to the
Fund's shareholders.

         At December 31, 2002, the Fund had $58,516,236 of its total assets of
$148,336,857 invested in temporary cash investments consisting of money market
securities. This amount includes restricted temporary cash investments of
$58,000,000 purchased from borrowings pursuant to a note payable to a bank. The
Fund utilized such investments at December 31, 2002 to achieve adequate
diversification to

                                       24

<PAGE>

maintain its pass-through tax status as a regulated investment company. The note
payable to the bank is collateralized by these restricted temporary cash
investments, which were used to repay the bank on January 2, 2003.

         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 investment income and net realized gains from the
sales of portfolio investments are intended to be distributed at least annually,
to the extent such amounts are not reserved for payment of expenses and
contingencies or to make follow-on or new investments. Pursuant to the
restrictions in 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 stockholders 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. Stockholders will
also be entitled to increase the adjusted tax basis of their Fund shares by the
difference between their undistributed capital gains and their tax credit.

Results of Operations

Investment Income and Expense

         Net investment income after all expenses amounted to $145,483,
$1,154,695 and $549,448 for the years ended December 31, 2002, 2001 and 2000,
respectively. With respect to investment income, income from portfolio
securities was $2,725,541 in 2002, $2,600,030 in 2001 and $4,629,928 in 2000.
The decrease in 2002 and 2001 compared to 2000 is attributable primarily to
interest no longer being accrued and accrued interest written off on notes
receivable from certain portfolio companies in 2002 and 2001, plus the receipt
in 2000 of previously unaccrued interest from one Portfolio Company. Interest
from temporary cash investments was $21,170 in 2002, $58,655 in 2001 and
$141,427 in 2000. The decrease in 2002 and 2001 as compared to 2000 was a result
of lower investable balances and interest rates throughout the years.

         With respect to investment expense, interest expense was $573,997 in
2002 as compared to $437,197 in 2001 and $1,508,788 in 2000. The average daily
balances outstanding on the lines of credit were $12,325,119 in 2002 and
$8,572,877 in 2001 as compared to $18,950,064 in 2000. Interest expense
increased during 2002 due to the increase in the average daily balance
outstanding on the lines of credit; however this increase is partially offset by
a reduction of interest rates in 2002. Upon cancellation of the notes receivable
from officers in September 2001, there was a credit to non-cash compensation
expense of $1,536,856. The amount of non-cash compensation benefit was recorded
as an adjustment to additional paid in capital, and therefore had no effect on
the Fund's total net assets.

         Professional fees were $250,704 in 2002 as compared to $452,414 during
2001 and $167,784 during 2000. The increase in 2001 as compared to 2002 and 2000
is due primarily to legal fees incurred in 2001 related to (i) a potential
purchase of a Portfolio Company that did not occur and (ii) the sale of the
Fund's investment in Stephen L. LaFrance Holdings, Inc.

         Mailing, printing and other expenses were $119,747 in 2002 as compared
to $179,531 during 2001 and $172,339 during 2000. The decrease in 2002 as
compared to 2001 and 2000 is due primarily to a reduction in the printing costs
of the 2002 annual report.

                                       25

<PAGE>

         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 $1,532,152, $1,618,784 and $1,911,275 during 2002, 2001 and
2000, respectively.

         During 1999, the officers of the Fund exercised options to purchase
719,794 shares of common stock of the Fund. The exercise price was paid in the
form of promissory notes from the officers to the Fund. During 2001, the
officers of the Fund surrendered their shares in payment of their notes. Under
variable plan accounting applicable to these transactions, compensation expense
was adjusted to reflect the change in benefit that the officers would have
received assuming that their notes were settled with their pledged common stock
at the end of each reporting period, based on the net asset value of the Fund.
Non-cash compensation expense (benefit) under this arrangement was $(1,536,856)
and $388,663 for the years ended December 31, 2001 and 2000, respectively, and
was recorded as an adjustment to additional paid in capital.

         On November 14, 2001, options to acquire a total of 990,000 shares 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 as a result of the terms of the dividend equivalent rights. Such
accounting resulted in additional non-cash compensation (benefit) of $(14,434)
for the year ended December 31, 2002. See Note 8 in the "Notes to the Financial
Statements" for a table that reflects stock option activity for the three years
ended December 31, 2002.

Realized Gains and Losses on Dispositions of Portfolio Securities

         During the year ended December 31, 2002, the Fund realized a net
capital gain of $802,235 from the sale or disposition of securities of Portfolio
Companies as follows:

    .    sold 60,595 shares of common stock of Weatherford International for
         $2,844,558, realizing a capital loss of $666,922;

    .    sold a portion of its investment in Travis International, Inc. for
         $921,577 in cash plus an interest in Milam Enterprises, LLC, realizing
         a capital gain of $918,091;

    .    received proceeds from Jones Industrial Holdings, Inc. for the
         redemption of 18,667 warrants, realizing a capital gain of $148,131;
         and

    .    received proceeds from its investment in Milam Enterprises LLC,
         realizing a capital gain of $402,935.

         During the year ended December 31, 2001, the Fund realized a net
capital loss of $7,196,407 from the sale or write-off of securities of Portfolio
Companies as follows:

    .    sold its investment in Stephen L. LaFrance Holdings, Inc. for
         $10,000,000, realizing a capital gain of $7,501,548;

    .    the remaining shares of Paracelsus Healthcare Corporation were
         written-off, realizing a capital loss of $4,299,449;

    .    the remaining investment in Hot & Cool Holdings, Inc. was written-off,
         realizing a capital loss of $5,775,000;

    .    the remaining investment in CRC Holdings, Corp. was written off,
         realizing a capital loss of $1,192,114;

                                       26

<PAGE>

    .    the sale of an investment in Sternhill Partners, L.P. resulted in a
         realized capital gain of $7,055;

    .    sold 11,024 shares of Raytel Medical Corporation for $66,527, realizing
         a capital loss of $264,203;

    .    received 69,458 shares of Weatherford International common stock
         pursuant to a plan of liquidation of Tulsa Industries, Inc. and in
         payment of a note receivable, realizing a capital loss of $2,663,678;
         and

    .    received ENGlobal, Inc. (formerly Industrial Data Systems Corporation
         ("IDS")) common stock as a result of the merger of IDS and Petrocon
         Engineering Inc., realizing a capital loss of $510,566.

         During the year ended December 31, 2000, the Fund realized a net
capital loss of $6,160,547 from the sale or write-off of securities of Portfolio
Companies as follows:

    .    sold 900,000 shares of Allied Waste Industries, Inc. for $11,656,249,
         realizing a capital gain of $8,534,684;

    .    sold 1,703,200 shares of Drypers Corporation for $83,294, realizing a
         capital loss of $7,270,556;

    .    sold 173,868 shares of Paracelsus Healthcare Corporation for $4,460,
         realizing a capital loss of $974,839;

    .    sold 255,103 shares of LG&E Energy Corporation for $6,193,867,
         realizing a capital gain of $1,911,944;

    .    a receivable from Restaurant Development Group was written-off,
         realizing a capital loss of $8,315;

    .    the preferred stock of Hot & Cool Holdings, Inc. was sold for $1,
         realizing a capital loss of $1,086,631;

    .    the remaining shares of Drypers Corporation were written-off, realizing
         a capital loss of $1,974,706; and

    .    the preferred and common stock of The Drilltec Corporation was
         written-off, realizing a capital loss of $7,645,000.

         In addition, additional proceeds related to the previous sale of three
Portfolio Companies were received in 2000. The Fund realized a capital gain of
$680,636 as a result of additional compensation from the escrow account related
to the 1998 sale of WMW Industries. The Fund realized a capital gain of $683,697
as a result of additional compensation from the escrow account related to the
1999 sale of HTD Corporation. Also, as a result of the earnout related to the
sale of CRC Holdings Corp. in 1999, the Fund received cash of $994,458 and
17,739 shares of LGE and realized the $994,458 as a capital gain. The Fund also
received proceeds from the liquidation of Equus Video Corporation and realized a
capital loss of $5,919.

Unrealized Appreciation and Depreciation of Portfolio Securities

         See "Factors that May Affect Future Results, the Market Price of Common
Stock, and the Accuracy of Forward-Looking Statements" regarding the valuation
of the Fund's Portfolio Companies. The valuation of the Portfolio Companies is
the most significant area of judgment impacting the financial statements.

                                       27

<PAGE>

         Net unrealized depreciation increased by $924,020 during the year ended
December 31, 2002 from $4,492,994 to $5,417,014. Such increase resulted from an
increase in estimated fair value of securities of ten of the Fund's Portfolio
Companies of $20,949,486, a decrease in estimated fair value of securities of
fourteen of the Fund's Portfolio Companies of $20,457,188, and the transfer of
$1,416,318 in net unrealized depreciation to net realized losses from the sale
or disposition of investments in five Portfolio Companies.

         Net unrealized depreciation increased by $3,674,031 during the year
ended December 31, 2001 from $818,963 to $4,492,994. Such increase resulted from
an increase in estimated fair value of securities of two of the Fund's Portfolio
Companies of $3,730,000, a decrease in estimated fair value of securities of
fourteen of the Fund's Portfolio Companies of $17,455,390, and the transfer of
$10,051,359 in net unrealized depreciation to net realized losses from the sale
or disposition of investments in seven Portfolio Companies.

         Net unrealized depreciation decreased by $281,625 during the year ended
December 31, 2000, from $1,100,588 to $818,963. Such net decrease resulted from
an increase in estimated fair value of securities of eight of the Fund's
Portfolio Companies of $11,678,434, a decrease in estimated fair value of
securities of nine of the Fund's Portfolio Securities of $15,789,610 and the
transfer of $4,392,801 in net unrealized depreciation to net realized losses
from the sale or disposition of investments in eight Portfolio Companies.

Dividends

         No dividends were declared in 2002. In lieu of any cash dividends in
2001, the board of directors declared a stock dividend of one additional share
for each ten shares held by its stockholders of record on December 3, 2001 and
the Fund issued 566,638 shares on December 17, 2001. The board of directors
declared a dividend of $3,843,842 ($0.55 per share) during 2000. The 2000
dividends were paid in additional shares of common stock or in cash by specific
election of each shareholder in December 2000. The 2000 dividend represented
some long-term capital gains carried over from 1999 and ordinary income but was
primarily a return of capital. The Fund paid $1,482,244 in cash and issued
294,990 additional shares of stock at $8.00568, in December 2000, in connection
with such dividends. In 2000, the Fund recorded non-cash compensation expense
for the dividends paid on stock held by officers of $388,663.

Portfolio Investments

         During the year ended December 31, 2002, the Fund invested $783,749 in
two new limited liability companies, which in turn invested in two existing
Portfolio Companies, and made follow-on investments of $8,451,097 in twelve
portfolio companies, including $2,354,775 in accrued interest and dividends
received in the form of additional portfolio securities and accretion of
original issue discount on promissory notes.

         For the year ended December 31, 2002, the Fund received an additional
5,576, 88,000, 315,000 and 1,629 shares of preferred stock of Container
Acquisition, Inc., ENGLobal Corporation ("ENG"), PalletOne, Inc. and Sovereign
Business Forms, Inc. ("Sovereign") in payment of $557,600, $88,000, $315,000 and
$162,900 in dividends, respectively. In addition, Sovereign elected to convert
$502,659 of accrued interest into the balance of the 15% promissory notes due to
the Fund.

         On January 4, 2002, the Fund invested $483,749 to acquire a 24% member
interest in Alenco

                                       28

<PAGE>

Window Holdings II, LLC ("AWH2"), which was formed to loan $2,000,000 to Alenco
Holding Corporation ("AHC") in exchange for a secured promissory note and a
warrant to acquire 93,675 shares of AHC common stock for $0.01 per share. On
September 16, 2002, AWH2 paid a distribution to the Fund of $483,522, after AHC
repaid the loan.

         On January 7, 2002, the Fund invested an additional $425,000 in FS
Strategies, Inc. ("FSS") as a capital contribution. On March 29, 2002, the Fund
invested an additional $1,667,000 in FSS in exchange for 1,667 shares of
preferred stock.

         On February 27, 2002, the Fund invested an additional $150,000 in the
form of a working capital loan to Spectrum Management, LLC, ("Spectrum") which
was repaid on August 7, 2002. In addition, on October 30, 2002, the Fund
invested $1,303,698 in Spectrum in exchange for a 16% senior subordinated
promissory note.

         During 2002, the Fund invested an additional $330,000 in Sternhill
Partners I, L.P. pursuant to a $3,000,000 commitment made in March 2000.
$1,830,000 of such commitment has been funded through December 31, 2002. The
Fund has been notified by Sternhill that it does not expect to call on the Fund
for approximately $450,000 of the original commitment.

         On April 29, 2002, the Fund invested an additional $1,571,000 in
CCI-ANI Finance, LLC, a limited liability company which acquired a subordinated
promissory note of Container Care International, Inc. ("Container Care"). The
note, with a face value of $2,000,000 plus accrued interest of $233,333, was
purchased for $1,850,000 from the former owner of Container Care.

         On April 30, 2002, the Fund transferred its investment in Travis
International, Inc. ("Travis") to Milam Enterprises, LLC ("Milam"). The Fund
received $921,577 in cash and an interest in Milam, which was formed to hold
certain assets of Travis not included in the sale of its business operations and
to perform certain obligations which might arise pursuant to the sale of the
Travis business.

         On May 8, 2002, the Fund received $878,667 from Jones Industrial
Services, Inc. for payment of a note receivable plus accrued interest and the
redemption of 18,887 warrants.

         During the year ended December 31, 2002, ENG made principal payments on
its 9.5% promissory note of $220,000, reducing the note balance to $2,780,000.

         During the year ended December 31, 2002, the Fund advanced $441,480 in
cash to Equicom, Inc. pursuant to a 10% promissory note.

         During the year ended December 31, 2002, the Fund exchanged two 15%
promissory notes from The Bradshaw Group in the amount of $222,945 each for a
15% promissory note in the amount of $459,545, including $13,655 of accrued
interest.

         For the year ended December 31, 2002, the original issue discount
accretion and interest on the discounted 15% promissory note from Doane Pet Care
Enterprises, Inc. amounted to $359,577, bringing the balance of the note to
$1,787,802 at December 31, 2002.

         During the year ended December 31, 2002, the Fund received a 12%
promissory note from Turfgrass America, Inc. ("Turfgrass") in exchange for
accrued interest in the amount of $288,580. In addition, the original issue
discount was accreted on the 12% subordinated promissory note from

                                       29

<PAGE>

Turfgrass, bringing the note balance to $3,781,804 at December 31, 2002. The
original issue discount is being accreted over the life of the note.

         During the year ended December 31, 2002, the Fund invested an
additional $208,144 in American Trenchless Technologies, LLC ("ATT") in a
preferred unit offering. On October 17, 2002, the Fund invested $300,000 in
Glendale, LLC, which was formed to invest in ATT in connection with a
restructuring of its debt and a recapitalization of its balance sheet.

         During the year ended December 31, 2001, the Fund invested $15,386,789
in six new companies, including non-cash securities of $10,573,214 in three
companies as the result of a merger or sale of existing Portfolio Companies. In
addition, the Fund made follow-on investments of $8,709,395 in eleven portfolio
companies, including $2,332,847 in accrued interest and dividends received in
the form of additional portfolio securities and accretion of original issue
discount on a promissory note.

         During the year ended December 31, 2000, the Fund invested $7,435,001
in four new companies and made follow-on investments of $4,968,405 in ten
portfolio companies. These follow-on investments included $1,209,344 in accrued
interest and dividends received in the form of additional portfolio securities
and accretion of original issue discount.

         For a description of the business of each Portfolio Company in which
the Fund has invested, see "Current Portfolio Companies".

         Of the companies in which the Fund has investments at December 31,
2002, only ENG and NCS are publicly held. The others each have a small number of
shareholders and do not generally make financial information available to the
public. However, each company's operations and financial information are
reviewed by Management to determine the proper valuation of the Fund's
investment. See "Valuation".

New Accounting Pronouncements

         In December 2002, SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123"
was issued. SFAS 148 amends SFAS 123, "Accounting for Stock-Based Compensation",
to provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The provisions of SFAS 148 are
effective for financial statements for fiscal years ending after December 15,
2002. SFAS 148 does not change the provisions of SFAS 123 that permit entities
to continue to apply the intrinsic value method of Accounting Principles
Bulletin No. 25, "Accounting for Stock Issued to Employees". We continue to
account for stock-based compensation in accordance with the provisions of APB
No. 25. We have provided the disclosures required by SFAS 148.

         In November 2002 FASB interpretation, or FIN 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantee of Indebtedness of Others" was issued. FIN 45 requires that upon
issuance of a guarantee, the guarantor must recognize a liability for the fair
value of the obligation it assumes under that guarantee. FIN 45's provisions for
initial recognition and measurement should be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The guarantor's previous
accounting for guarantees that were issued before the date of FIN

                                       30

<PAGE>

45's initial application may not be revised or restated to reflect the effect of
the recognition and measurement provisions of FIN 45. The disclosure
requirements are effective for financial statements of both interim and annual
periods that end after December 15, 2002, and have been adopted by the Fund.

Subsequent Events

     Subsequent to December 31, 2002, the Fund repaid a net $59,950,000 of notes
payable to the bank, using the restricted temporary cash investments of
$58,000,000 held at year end.

     On February 19, 2003, ENGlobal, Inc. made a principal payment on its 9.5%
promissory note of $110,000, reducing the note balance to $2,670,000.

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

     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 March 2000. $1,500,000 of such
commitment has now been funded.

     On March 4, 2003, the Fund received $108,004 from Milam Enterprises, LLC,
realizing a capital gain of $106,092.

     On March 7, 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.

Item 7A. 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 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. Their fair values are determined on
the basis of the terms of the debt security and the financial condition of the
issuer.

     Borrowings under the Fund's lines of credit expose the Fund to certain
market risks. Based on the average outstanding borrowings under its lines of
credit for the year ended December 31, 2002 and 2001, respectively, of
approximately $12,325,119 and $8,572,877, a change of one percent in the
interest rate would have caused a change in interest expense of approximately
$123,251 and $85,729. This change would have resulted in a change of $0.02 in
the net asset value per share at December 31, 2002 and 2001. The Fund did not
enter into its credit facility for trading purposes and the line of credit
carries interest at a pre-agreed upon percentage point spread from the prime
rate. In addition, there were no significant changes to the factors that affect
market risk from 2001 to 2002. The Fund's existing line of credit expires on
June 1, 2003. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" regarding the Fund's liquidity and capital resources.

                                       31

<PAGE>

     A major portion of the Fund's investment portfolio consists of debt and
equity investments in private companies. Modest changes in public market equity
prices generally do not significantly impact the estimated fair value of these
investments. However, significant changes in market equity prices can have a
longer-term effect on valuations of private companies, which could affect the
carrying value and the amount and timing of gains or losses realized on these
investments. A 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.

                                       32

<PAGE>

Item 8. Financial Statements and Supplementary Data.

                        Report of Independent Accountants

To the Board of Directors and Stockholders of
     Equus II Incorporated:

     In our opinion, the accompanying balance sheet, including the schedule of
portfolio securities, and the related statements of operations, changes in net
assets and cash flows and the selected per share data and ratios present fairly,
in all material respects, the financial position of Equus II Incorporated (a
Delaware corporation) at December 31, 2002, and the results of its operations,
changes in net assets and its cash flows for the year ended December 31, 2002 in
conformity with accounting principles generally accepted in the United States of
America. These financial statements and selected per share data and ratios are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and selected per share data and ratios
based on our audit. We conducted our audit of these statements and selected per
share data and ratios in accordance with auditing standards generally accepted
in the United States of America, which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements and
selected per share data and ratios are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included physical inspection or
confirmation of securities owned as of December 31, 2002. We believe that our
audit provides a reasonable basis for our opinion. The financial statements of
Equus II Incorporated as of December 31, 2001 and for each of the two years in
the period then ended as well as the selected per share data and ratios for each
of the four years in the period then ended were audited by other independent
public accountants who have ceased operations. Those independent public
accountants expressed an unqualified opinion on those financial statements and
selected per share data and ratios in their report dated March 1, 2002, which
included an explanatory paragraph that described Equus Capital Management
Corporation's (the "Management Company") valuation of investments in portfolio
securities in the absence of readily ascertainable market values.

     As discussed in Note 3, the financial statements include investments in
portfolio securities valued at $82,653,260 (107% of net assets) as of December
31, 2002 whose values have been estimated by the Management Company and approved
by the Board of Directors of Equus II Incorporated in the absence of readily
ascertainable market values. Those estimated values may differ materially from
the values that would have been used had a ready market for the securities
existed.

     The Fund has a line of credit with a lender that expires on June 1, 2003.
Should the Fund be unable to repay the line of credit, extend it or refinance it
with another lender, portfolio securities may be required to be sold and such
sales may be at values that are materially less than the Management Company's
estimates of fair value. This matter and other liquidity matters are discussed
in Note 2.

PricewaterhouseCoopers LLP
Houston, Texas
March 21, 2003 (except for the
first and sixth paragraphs discussed
in Note 2 as to which the date is
April 1, 2003)

                                       33

<PAGE>

The following report is a copy of a report previously issued by Arthur Andersen
LLP and has not been reissued by Arthur Andersen LLP. Equus II Incorporated's
balance sheet as of December 31, 2000 and the statements of operations, changes
in net assets and cash flows for the year ended December 31, 1999 and the
selected per share data and ratios for the year ended December 31, 1997 are not
required to be presented and are not included in this Form 10-K.

                Report of Previous Independent Public Accountants

To Equus II Incorporated:

     We have audited the accompanying balance sheets of Equus II Incorporated (a
Delaware corporation), including the schedules of portfolio securities, as of
December 31, 2001 and 2000, and the related statements of operations, changes in
net assets and cash flows for each of the three years in the period ended
December 31, 2001, and the selected per share data and ratios for each of the
five years in the period ended December 31, 2001. These financial statements and
selected per share data and ratios are the responsibility of the management of
Equus II Incorporated. Our responsibility is to express an opinion on these
financial statements and selected per share data and ratios based on our audits.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
and selected per share data and ratios are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included physical
inspection or confirmation of securities owned as of December 31, 2001, by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

     As discussed in Note 3, the financial statements include investments in
portfolio securities valued at $79,750,789 (104% of net assets) and $90,328,540
(99% of net assets) as of December 31, 2001 and 2000, respectively, whose values
have been estimated by Equus Capital Management Corporation (the "Management
Company") and approved by the Board of Directors of Equus II Incorporated in the
absence of readily ascertainable market values. We have reviewed the procedures
used by the Management Company in arriving at their estimates of value of such
securities and have inspected the underlying documentation, and in the
circumstances we believe the procedures are reasonable and the documentation is
appropriate. However, because of the inherent uncertainty of valuation, the
Management Company's estimates of values may differ significantly from the
values that would have been used had a ready market existed for the securities
and the differences could be material.

     In our opinion, the financial statements and selected per share data and
ratios referred to above present fairly, in all material respects, the financial
position of Equus II Incorporated as of December 31, 2001 and 2000, the results
of its operations, changes in net assets and cash flows for each of the three
years in the period ended December 31, 2001, and the selected per share data and
ratios for each of the five years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.

/s/Arthur Andersen LLP

ARTHUR ANDERSEN LLP
Houston, Texas
March 1, 2002

                                       34

<PAGE>

                              EQUUS II INCORPORATED
                                 BALANCE SHEETS
                           DECEMBER 31, 2002 AND 2001
<TABLE>
<CAPTION>
                                                                        2002             2001
                                                                        ----             ----
Assets
------
<S>                                                                <C>              <C>
Investments in portfolio securities at fair value
     (cost $92,611,224 and $90,371,825,                            $  87,194,210    $  85,878,831
     respectively)
Cash                                                                         442           23,465
Temporary cash investments, at cost which
     approximates fair value                                             516,236           10,212
Restricted temporary cash investments, at cost
     which approximates fair value                                    58,000,000       62,000,000
Accounts receivable                                                       15,330           15,061
Accrued interest receivable                                            2,610,639        2,891,107
                                                                   -------------    -------------

          Total assets                                             $ 148,336,857    $ 150,818,676
                                                                   =============    =============

Liabilities and net assets
--------------------------

Liabilities:
     Accounts payable and accrued liabilities                      $     200,882    $     267,011
     Due to management company                                           384,880          384,834
     Revolving line of credit                                         12,775,000       11,200,000
     Line of credit promissory note                                   58,000,000       62,000,000
                                                                   -------------    -------------

          Total liabilities                                           71,360,762       73,851,845
                                                                   -------------    -------------

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            6,233
     Additional paid-in capital                                       82,496,540       82,575,274
     Undistributed net investment losses                                (423,919)      (1,176,350)
     Undistributed net capital gains                                     314,255           54,668
     Unrealized depreciation of
       portfolio securities, net                                      (5,417,014)      (4,492,994)
                                                                   -------------    -------------

          Total net assets                                         $  76,976,095    $  76,966,831
                                                                   =============    =============

          Net assets per share                                     $       12.35    $       12.35
                                                                   =============    =============
</TABLE>

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

                                       35

<PAGE>

                              EQUUS II INCORPORATED
                            STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

<TABLE>
<CAPTION>
                                                                  2002           2001           2000
                                                                  ----           ----           ----
<S>                                                           <C>            <C>             <C>
Investment income:
     Interest income from portfolio securities                $ 1,063,676    $ 1,501,956     $ 3,549,979
     Dividend income from portfolio securities                  1,661,865      1,098,074       1,079,949
     Interest from temporary cash investments                      21,170         58,655         141,427
     Other income                                                 240,000         55,000         345,549
                                                              -----------    -----------     -----------
         Total investment income                                2,986,711      2,713,685       5,116,904
                                                              -----------    -----------     -----------

Expenses:
     Management fee                                             1,532,152      1,618,784       1,911,275
     Interest expense                                             573,997        437,197       1,508,788
     Non-cash compensation expense (benefit)                      (14,434)    (1,522,422)        388,663
     Professional fees                                            250,704        452,414         167,784
     Director fees and expenses                                   241,266        252,456         239,302
     Mailing, printing and other expenses                         119,747        179,531         172,339
     Franchise taxes                                               50,964         91,030         129,305
     Excise tax                                                    36,832              -               -
     Administrative fees                                           50,000         50,000          50,000
                                                              -----------    -----------     -----------
          Total expenses                                        2,841,228      1,558,990       4,567,456
                                                              -----------    -----------     -----------
Net investment income                                             145,483      1,154,695         549,448
                                                              -----------    -----------     -----------

Realized gain (loss) on dispositions of
     portfolio securities, net                                    802,235     (7,196,407)     (6,160,547)
                                                              -----------    -----------     -----------

Unrealized depreciation of portfolio securities, net:
     End of year                                               (5,417,014)    (4,492,994)       (818,963)
     Beginning of year                                         (4,492,994)      (818,963)     (1,100,588)
                                                              -----------    -----------     -----------
     (Increase) decrease in unrealized
        depreciation of portfolio securities, net                (924,020)    (3,674,031)        281,625
                                                              -----------    -----------     -----------
     Total increase (decrease) in net
        assets from operations                                $    23,698    $(9,715,743)    $(5,329,474)
                                                              ===========    ===========     ===========
</TABLE>

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

                                       36

<PAGE>

                              EQUUS II INCORPORATED
                       STATEMENTS OF CHANGES IN NET ASSETS
              FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

<TABLE>
<CAPTION>
                                                             2002             2001            2000
                                                             ----             ----            ----
<S>                                                     <C>              <C>              <C>
Operations:

     Net investment income                              $     145,483    $   1,154,695    $     549,448
     Realized gain (loss) on dispositions of
        portfolio securities, net                             802,235       (7,196,407)      (6,160,547)
     Increase (decrease) in unrealized
        appreciation of portfolio securities, net            (924,020)      (3,674,031)         281,625
                                                        -------------    -------------    -------------

Increase (decrease) in net assets
     from operations                                           23,698       (9,715,743)      (5,329,474)
                                                        -------------    -------------    -------------

Capital transactions:

     Non-cash compensation expense (benefit)
        recorded in additional paid in capital                (14,434)      (1,522,422)         388,663
     Increase (decrease) from officer notes, net                    -         (536,781)         447,887
     Stock repurchase                                               -       (2,182,988)      (4,518,887)
     Dividends declared                                             -                -       (3,843,842)
     Shares issued in common stock dividend                         -                -        2,361,598
                                                        -------------    -------------    -------------
     Decrease in net assets from capital
         share transactions                                   (14,434)      (4,242,191)      (5,164,581)
                                                        -------------    -------------    -------------

Increase (decrease) in net assets                               9,264      (13,957,934)     (10,494,055)

Net assets, at beginning of year                           76,966,831       90,924,765      101,418,820
                                                        -------------    -------------    -------------
Net assets, at end of year                              $  76,976,095    $  76,966,831    $  90,924,765
                                                        =============    =============    =============
</TABLE>

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

                                       37

<PAGE>

                              EQUUS II INCORPORATED
                            STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

<TABLE>
<CAPTION>
                                                               2002             2001            2000
                                                               ----             ----            ----
<S>                                                       <C>              <C>              <C>
Cash flows from operating activities:
     Interest and dividends received                      $     912,404    $   1,715,076    $   2,279,113
     Cash paid to management company,
        directors, bank and suppliers                        (2,921,745)      (3,220,927)      (4,470,400)
                                                          -------------    -------------    -------------
        Net cash used by operating activities                (2,009,341)      (1,505,851)      (2,191,287)
                                                          -------------    -------------    -------------

Cash flows from investing activities:
     Purchase of portfolio securities                        (6,880,071)     (11,190,122)     (11,194,062)
     Proceeds from dispositions of portfolio securities       6,944,160       10,101,979       20,565,743
     Principal payments from portfolio securities               853,522          789,633        7,222,349
     Sales (purchases) of restricted temporary
      cash investments, net                                   4,000,000       15,000,000      (27,000,000)
     Repayments from (advances to) portfolio
      companies, net                                               (269)         (13,595)          50,263
                                                          -------------    -------------    -------------
        Net cash provided (used) by
          investing activities                                4,917,342       14,687,895      (10,355,707)
                                                          -------------    -------------    -------------

Cash flows from financing activities:
     Advances from bank                                     246,935,000      272,150,000      310,850,000
     Repayments to bank                                    (249,360,000)    (283,250,000)    (298,950,000)
     Repurchase of common stock                                       -       (2,182,988)      (4,634,820)
     Dividends paid                                                   -           (1,442)      (1,485,497)
     Payments received on officer notes                               -           92,531          991,161
                                                          -------------    -------------    -------------
        Net cash provided (used) by
          financing activities                               (2,425,000)     (13,191,899)       6,770,844
                                                          -------------    -------------    -------------

Net increase (decrease) in cash and
       cash equivalents                                         483,001           (9,855)      (5,776,150)

Cash and cash equivalents at
     beginning of year                                           33,677           43,532        5,819,682
                                                          -------------    -------------    -------------
Cash and cash equivalents at end of year                  $     516,678    $      33,677    $      43,532
                                                          =============    =============    =============
</TABLE>

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

                                       38

<PAGE>

                              EQUUS II INCORPORATED
                            STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
                                   (Continued)

<TABLE>
<CAPTION>
                                                              2002           2001          2000
                                                              ----           ----          ----
<S>                                                       <C>            <C>            <C>
Reconciliation of increase (decrease)
      in net assets from operations to net cash
      used by operating activities:

Increase (decrease) in net assets from operations         $    23,698    $(9,715,743)   $(5,329,474)

Adjustments to reconcile increase (decrease)
     in net assets from operations to net cash
      used by operating activities:

     Realized (gain) loss on dispositions of
        portfolio securities, net                            (802,235)     7,196,407      6,160,547
     Decrease (increase) in unrealized
        appreciation, net                                     924,020      3,674,031       (281,625)
     Decrease (increase) in accrued
        interest receivable                                   280,468      1,334,839     (1,628,447)
     Increase in accounts receivable                                -           (600)             -
     Accrued interest or dividends
        exchanged for portfolio securities                 (2,354,775)    (2,332,847)    (1,209,344)
     Non-cash compensation expense (benefit)                  (14,434)    (1,522,422)       388,663
     Decrease in accounts payable                             (66,129)       (69,726)      (239,137)
     Increase (decrease) in due to
        management company                                         46        (69,790)       (52,470)
                                                          -----------    -----------    -----------
Net cash used by operating activities                     $(2,009,341)   $(1,505,851)   $(2,191,287)
                                                          ===========    ===========    ===========
</TABLE>

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

                                       39

<PAGE>

                              EQUUS II INCORPORATED
                       SELECTED PER SHARE DATA AND RATIOS
                   FOR THE FIVE YEARS ENDED DECEMBER 31, 2002

<TABLE>
<CAPTION>
                                                         2002           2001           2000           1999           1998
                                                         ----           ----           ----           ----           ----
<S>                                                    <C>           <C>            <C>            <C>            <C>
Selected per share data:
------------------------
Investment income                                      $   0.48      $    0.43      $    0.79      $    0.95      $    0.71
Expenses                                                   0.46           0.25           0.71           1.35           1.12
                                                       --------      ---------      ---------      ---------      ---------
Net investment income (loss)                               0.02           0.18           0.08          (0.40)         (0.41)
Realized gain (loss) on dispositions of
   portfolio securities, net                               0.13          (1.13)         (0.95)          7.41          (0.67)
Increase (decrease) in unrealized appreciation
   of portfolio securities, net                           (0.15)         (0.57)          0.05          (8.34)         (4.06)
                                                       --------      ---------      ---------      ---------      ---------
Increase (decrease) in net assets from operations             -          (1.52)         (0.82)         (1.33)         (5.14)
                                                       --------      ---------      ---------      ---------      ---------
Capital transactions:
Dividends declared                                            -              -          (0.55)         (3.86)         (0.59)
Effect of common stock repurchases                            -           0.17           0.46           0.09              -
Dilutive effect of shares issued in common
   stock dividend and exercise of options                     -          (0.30)         (0.19)         (1.12)         (0.15)
                                                       --------      ---------      ---------      ---------      ---------
Net decrease in assets from capital transactions              -          (0.13)         (0.28)         (4.89)         (0.74)
                                                       --------      ---------      ---------      ---------      ---------
Net increase (decrease) in net assets                         -          (1.65)         (1.10)         (6.22)         (5.88)
Net assets at beginning of year                           12.35          14.00          15.10          21.32          27.20
                                                       ---------      --------       --------      ---------      ---------
Net assets at end of year                              $  12.35      $   12.35      $   14.00      $   15.10      $   21.32
                                                       =========      ========       ========      =========      =========
Weighted average number of shares
   outstanding during year, in thousands                  6,233          6,363          6,457          5,445          5,312
Market value per share at end of year                  $   6.64      $    7.79      $    8.01      $    9.38      $   14.66

Selected ratios:
----------------

Ratio of  total expenses to average
   net assets                                              3.69%          1.86%          4.75%          6.74%          4.57%
Ratio of net investment income (loss)
   to average net assets                                   0.19%          1.38%          0.57%         (2.00)%        (1.67)%
Ratio of increase (decrease) in net
   assets from operations to average net assets            0.03%        (11.57)%        (5.54)%        (6.65)%       (20.97)%
Total return on market price                             (14.76)%        (2.75)%        (8.74)%        (9.69)%       (26.68)%
</TABLE>

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

                                       40

<PAGE>

                              EQUUS II INCORPORATED
                        SCHEDULE OF PORTFOLIO SECURITIES
                                DECEMBER 31, 2002
<TABLE>
<CAPTION>
                                                                        Date of
           Portfolio Company                                       Initial Investment          Cost          Fair Value
           -----------------                                       ------------------          ----          ----------
<S>                                                                <C>                      <C>              <C>
Alenco Window Holdings II, LLC                                        January 2002
    Manufacturer & distributor of alumimnum
     and vinyl windows
     -24% membership interest                                                               $      227       $2,900,000

American Trenchless Technology, LLC                                  February 2001
    Boring, tunneling and directional drilling
     -100,000 shares of preferred stock                                                      1,208,144                -
     -1,934,532 shares of common stock                                                         116,550                -
     -50% membership interest in Glendale, LLC                                                 300,000          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                                                       1,400,000       17,000,000

CMC Investments, LLC                                                 December 2001
    Manufacturer of oil and gas drilling rigs
     -21% membership interest                                                                  781,805          748,050
     -4,432 shares of Weatherford International
      common stock                                                                             256,806          176,950

Container Acquisition, Inc.                                          February 1997
    Shipping container repair & storage
     -78,318 shares of preferred stock                                                       7,831,800        2,000,000
     -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        1,970,000
</TABLE>

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

                                       41

<PAGE>

                              EQUUS II INCORPORATED
                        SCHEDULE OF PORTFOLIO SECURITIES
                                DECEMBER 31, 2002
                                   (Continued)

<TABLE>
<CAPTION>
                                                                        Date of
           Portfolio Company                                       Initial Investment          Cost          Fair Value
           -----------------                                       ------------------          ----          ----------
<S>                                                                <C>                      <C>              <C>
Doane PetCare Enterprises, Inc.                                       October 1995
    (formerly Summit/DPC Partners, L.P.)
    Manufacturer of private label pet food
     -15% promissory note with a face
     amount of $1,805,556/(1)(3)/                                                           $1,787,803       $1,787,803
     -1,943,598 shares of common stock                                                       3,936,643        5,000,000

The Drilltec Corporation                                              August 1998
    Provides protection & packaging for pipe & tubing
     -Prime+ 9.75% promissory note /(2)/                                                     1,000,000                -

ENGlobal, Inc. (AMEX: ENG)                                           December 2001
    (formerly Industrial Data Systems Corporation)
    Engineering and consulting services
     -9.5% promissory note/(1)/                                                              2,780,000        2,780,000
     -2,588,000 shares of convertible preferred stock/(1)(3)/                                2,588,000        2,588,000
     -1,225,758 shares of common stock                                                         716,461        1,230,650
     -Options to acquire 200,000 shares of
      common stock                                                                                   -                -

Equicom, Inc.                                                          July 1997
    Radio stations
     -10% promissory notes                                                                   3,116,730        3,116,730
     -657,611 shares of preferred stock                                                      6,576,110           50,000
     -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                -

FS Strategies, Inc.                                                     June 2000
    Temporary staffing and web-based human
     resources services
     -1,667 shares of preferred stock                                                        1,667,000                -
     -110,000 shares of common stock                                                         7,591,667                -

GCS RE, Inc.                                                          February 1989
    Investment in real estate
     -1,000 shares of common stock                                                             320,924          600,000
</TABLE>

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

                                       42

<PAGE>

                              EQUUS II INCORPORATED
                        SCHEDULE OF PORTFOLIO SECURITIES
                                DECEMBER 31, 2002
                                   (Continued)

<TABLE>
<CAPTION>
                                                                        Date of
           Portfolio Company                                       Initial Investment          Cost          Fair Value
           -----------------                                       ------------------          ----          ----------
<S>                                                                <C>                      <C>              <C>
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       $2,500,000
     -Warrant to buy 63,637 shares of common stock
      at $0.01 through June 2008                                                                   100                -

Milam Enterprises, LLC                                               December 1986
    (formerly Travis International, Inc.)
    Asset and contingency holding company
     -9% member interest                                                                         1,911          100,000

NCI Building Systems, Inc.  (NYSE: NCS)                                April 1989
    Design & manufacture metal buildings
     -200,000 shares of common stock                                                           159,784        4,364,000

PalletOne, Inc.                                                       October 2001
    Wooden pallet manufacturer
     -3,465,000 shares of preferred stock/(1)(3)/                                            3,465,000        3,465,000
     -350,000 shares of common stock                                                           350,000           35,000

Reliant Window Holdings, LLC                                         February 2001
    Manufacturer & distributor of aluminum & vinyl windows
     -36.86% membership interest                                                               372,256        4,200,000

Sovereign Business Forms, Inc.                                        August 1996
    Business forms manufacturer
     -15% promissory notes/(1)(3)/                                                           3,745,735        3,745,735
     -19,131 shares of preferred stock/(1)(3)/                                               1,913,100        1,913,100
     -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        2,850,000
     -16% subordinated promissory note/(1)/                                                  1,303,698        1,303,698
</TABLE>

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

                                       43

<PAGE>

                              EQUUS II INCORPORATED
                        SCHEDULE OF PORTFOLIO SECURITIES
                                DECEMBER 31, 2002
                                   (Continued)

<TABLE>
<CAPTION>
                                                                     Date of
                    Portfolio Company                           Initial Investment       Cost           Fair Value
                    -----------------                           ------------------       ----           ----------
<S>                                                              <C>                  <C>               <C>
Sternhill Partners I, LP                                            March 2000
    Venture capital fund
     -3% limited partnership interest                                                 $ 1,801,604       $  700,000

Strategic Holdings, Inc.                                          September 1995
    Processor of recycled glass
     -15% promissory note                                                               6,750,000        6,750,000
     -3,822,157 shares of Series B preferred stock                                      3,820,624        3,820,624
     -Warrant to buy 225,000 shares of common
      stock at $0.4643 per share through August 2005                                            -           21,411
     -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                                            -        1,219,382
     -3,089,751 shares of common stock                                                  3,088,389        1,728,597
     -15% promissory note of SMIP, Inc.                                                   175,000          175,000
     -1,000 shares of SMIP, Inc. common stock                                             150,000           13,423

Turfgrass America, Inc.                                              May 1999
    Grows, sells & installs warm season turfgrasses
     -12% subordinated promissory note                                                    288,580          288,580
     -12% subordinated promissory note                                                    502,035          502,035
     -12% subordinated promissory note
      with a face amount of $4,000,000(3)                                               3,781,804        3,781,804
     -1,507,226 shares of convertible preferred stock                                     768,638          768,638
     -Warrants to buy 250,412 shares of common
      stock at $0.51 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                                                 1,200,000          700,000
                                                                                      -----------      -----------
            Total                                                                     $92,611,224      $87,194,210
                                                                                      ===========      ===========
</TABLE>

(1)  Income-producing. All other securities are considered non-income producing.
(2)  As of December 31, 2002, the Fund has reduced the fair value of these notes
     to zero and has discontinued recognizing any additional interest income on
     these notes due to conditions specific to the respective Portfolio
     Companies. However, the Portfolio Companies are still liable for such notes
     and related interest, and they may be collected in the future.
(3)  Income on these securities is paid-in-kind by the issuance of additional
     securities or through the accretion of original issue discount.

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

                                       44

<PAGE>

                              EQUUS II INCORPORATED
                        SCHEDULE OF PORTFOLIO SECURITIES
                                DECEMBER 31, 2002
                                   (Continued)

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

         In connection with the investments in American Trenchless Technology,
LLC, 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, during the year ended
December 31, 2002, 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 $228,003 from the closing market price to reflect the
estimated effect of restrictions on the sale of such securities at December 31,
2002.

         Income was earned in the amount of $921,273, $1,531,031 and $3,104,423
for the years December 31, 2002, 2001 and 2000, respectively, on portfolio
securities of companies in which the Fund has a controlling interest. Income was
earned in the amount of $1,416,797, $1,023,854 and $1,432,575 for the years
ended December 31, 2002, 2001 and 2000, 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., Milam
Enterprises, LLC, Sternhill Partners I, L.P., and Vanguard VII, L.P. The Fund
provides significant managerial assistance to portfolio companies that comprise
91% of the total value of the investments in portfolio companies at December 31,
2002.

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

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

                                       45

<PAGE>

                              EQUUS II INCORPORATED
                        SCHEDULE OF PORTFOLIO SECURITIES
                                DECEMBER 31, 2002
                                   (Continued)

         The Fund's investments in portfolio securities consist of the following
types of securities at December 31, 2002:

<TABLE>
<CAPTION>
                                                                                                   Percentage
              Type of Securities                         Cost                Fair Value          of Fair Value
              ------------------                         -----               -----------         -------------
<S>                                               <C>                     <C>                             <C>
Common Stock                                      $     20,556,778        $     30,325,570                34.8%
Secured and Subordinated Debt                           26,828,931              24,231,385                27.8%
Preferred Stock                                         36,602,416              17,105,362                19.6%
Limited Liability Company Investments                    5,620,394              12,891,100                14.8%
Limited Partnership Investments                          3,001,604               1,400,000                 1.6%
Options and Warrants                                         1,101               1,240,793                 1.4%
                                                  ----------------        ----------------       -------------
                    Total                         $     92,611,224        $     87,194,210               100.0%
                                                  ================        ================       =============
</TABLE>

         Three notes receivable included in secured and subordinated debt with
an estimated fair value of $9,315,342 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.

         The following is a summary by industry of the Fund's investments as of
December 31, 2002:

<TABLE>
<CAPTION>
                    Industry                                  Fair Value          Percentage
                    --------                                  ----------          ----------
<S>                                                          <C>                        <C>
         Business Products and Services                      $  9,812,533               11.2%
         Commercial Building Products                           4,364,000                5.0%
         Consumer Goods                                         6,787,803                7.8%
         Energy                                                   925,000                1.1%
         Engineering and Consulting Services                    6,598,650                7.6%
         Industrial Products and Services                      16,528,437               19.0%
         Media                                                  3,166,730                3.6%
         Residential Building Products                         24,100,000               27.6%
         Shipping Products and Services                         7,470,000                8.6%
         Turfgrass and Landscape Products                       5,341,057                6.1%
         Venture Funds and Other                                2,100,000                2.4%
                                                             ------------         ----------
         Total                                               $ 87,194,210              100.0%
                                                             ============         ==========
</TABLE>

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

                                       46

<PAGE>

                              EQUUS II INCORPORATED
                        SCHEDULE OF PORTFOLIO SECURITIES
                                DECEMBER 31, 2001

<TABLE>
<CAPTION>
                                                                     Date of
                 Portfolio Company                              Initial Investment        Cost         Fair Value
                 -----------------                              ------------------        ----         ----------
<S>                                                             <C>                   <C>              <C>
A.  C. Liquidating Corporation                                    February 1985
    Asset held for liquidation
     -10% secured promissory notes *                                                   $  188,014     $          -

American Trenchless Technology, LLC                               February 2001
    Boring, tunneling and directional drilling
     -100,000 shares of preferred stock                                                 1,000,000        1,000,000
     -1,934,532 shares of common stock                                                    116,550          116,550

The Bradshaw Group                                                  May 2000
    Sells and services midrange and high-speed
     printing equipment
     -Prime + 2% promissory note *                                                              -          398,383
     -15% promissory note *                                                               222,945          222,945
     -15% promissory note *                                                               222,945          222,945
     -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, Inc.                                              March 1999
    Primary aluminum window manufacturer & distributor
     -20,000 shares of preferred stock                                                  2,000,000        2,472,500
     -1,400,000 shares of common stock                                                  1,400,000        8,750,000

CMC Investments, LLC                                              December 2001
    Manufacturer of oil and gas drilling rigs
     -21% membership interest                                                             525,000          525,000

Container Acquisition, Inc.                                       February 1997
    Shipping container repair & storage
     -72,742 shares of preferred stock                                                  7,274,200        7,274,200
     -Conditional warrant to buy up to 370,588 shares
      of common stock at $0.01 through February 2007                                        1,000            1,000
     -1,370,000 shares of common stock                                                  1,370,000        2,000,000

Doane PetCare Enterprises, Inc.                                   October 1995
    (formerly Summit/DPC Partners, L.P.)
    Manufacturer of private label pet food
     -15% promissory note with a face amount
      of $1,805,556, including amortized discount                                       1,428,225        1,428,225
     -1,943,598 shares of common stock                                                  3,936,643        5,900,000
</TABLE>

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

                                       47

<PAGE>

                              EQUUS II INCORPORATED
                        SCHEDULE OF PORTFOLIO SECURITIES
                                DECEMBER 31, 2001
                                   (Continued)

<TABLE>
<CAPTION>
                                                                     Date of
              Portfolio Company                                 Initial Investment        Cost         Fair Value
              -----------------                                 ------------------        ----         ----------
<S>                                                             <C>                    <C>               <C>
The Drilltec Corporation                                           August 1998
    Provides protection & packaging for pipe & tubing
     -Prime + 9.75% promissory note*                                                   $1,000,000      $   500,000
     -Warrant to buy 10% of the common
      equity for $100 through September 2002                                                    -                -

Equicom, Inc.                                                       July 1997
    Radio stations
     -10% promissory note *                                                             1,638,500        1,638,500
     -10% promissory note                                                               1,036,750        1,036,750
     -657,611 shares of preferred stock                                                 6,576,110        1,000,000
     -452,000 shares of common stock                                                      141,250                -

Equipment Support Services, Inc.                                  December 1999
    Equipment rental
     -8% promissory note *                                                              1,138,000        1,138,000
     -35,000 shares of preferred stock                                                  1,929,000                -
     -35,000 shares of common stock                                                       101,500                -

FS Strategies, Inc.                                                 June 2000
    Temporary staffing and web-based human
     resources services
     -110,000 shares of common stock                                                    7,166,667        2,866,667

GCS RE, Inc.                                                      February 1989
    Investment in real estate
     -1,000 shares of common stock                                                        132,910          650,000

Industrial Data Systems Corporation                               December 2001
     (AMEX - IDS)
    Engineering and consulting services
     -9.5% promissory note                                                              3,000,000        3,000,000
     -2,500,000 shares of convertible preferred stock                                   2,500,000        2,500,000
     -1,225,758 shares of common stock                                                    716,461          605,860

NCI Building Systems, Inc. (NYSE - NCS)                             April 1989
    Design & manufacture metal buildings
     -200,000 shares of common stock                                                      159,784        3,540,000
</TABLE>

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

                                       48

<PAGE>

                              EQUUS II INCORPORATED
                        SCHEDULE OF PORTFOLIO SECURITIES
                                DECEMBER 31, 2001
                                   (Continued)

<TABLE>
<CAPTION>

                                                                    Date of
             Portfolio Company                                  Intial Investment        Cost           Fair Value
             -----------------                                  -----------------        ----           ----------
<S>                                                            <C>                    <C>              <C>
PalletOne, Inc.                                                   October 2001
  Operates wooden pallet manufacturing facilities
    -3,150,000 shares of preferred stock                                               $3,150,000       $3,150,000
    -350,000 shares of common stock                                                       350,000          350,000

Reliant Window Holdings, LLC                                      February 2001
  Aluminum & vinyl window manufacturer & distributor
    -36.86% membership interest                                                           372,256          372,256

Sovereign Business Forms, Inc.                                     August 1996
  Business forms manufacturer
    -15% promissory notes                                                               3,243,077        3,243,077
    -17,502 shares of preferred stock                                                   1,750,200        1,750,200
    -Warrant to buy 551,894 shares of common stock
     at $1 per share through August 2006                                                        -          263,750
    -Warrant to buy 25,070 shares of common stock
     at $1.25 per share through October 2007                                                    -            5,565
    -Warrant to buy 273,450 shares of common stock
     at $1 per share through October 2009                                                       -          130,685

Spectrum Management, LLC                                          December 1999
  Business & personal property protection
    -285,000 units of Class A equity interest                                           2,850,000        2,850,000

Sternhill Partners I, LP                                           March 2000
  Venture capital fund
    -3% limited partnership interest                                                    1,471,604        1,200,000

Strategic Holdings, Inc.                                         September 1995
  Processor of recycled glass
    -15% promissory note *                                                              6,750,000        6,750,000
    -3,822,157 shares of Series B preferred stock                                       3,820,624        3,250,000
    -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          175,000
    -1,000 shares of SMIP, Inc. common stock                                              150,000                -
</TABLE>

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

                                       49

<PAGE>

                              EQUUS II INCORPORATED
                        SCHEDULE OF PORTFOLIO SECURITIES
                                DECEMBER 31, 2001
                                   (Continued)

<TABLE>
<CAPTION>

                                                                    Date of
                 Portfolio Company                              Initial Investment        Cost          Fair Value
                 -----------------                              ------------------        ----          ----------
<S>                                                            <C>                    <C>             <C>
Travis International, Inc.                                        December 1986
  Specialty distribution
    -98,761 shares of common stock                                                    $     5,398       $ 1,200,000

Turfgrass America, Inc.                                             May 1999
  Grows, sells & installs warm season turfgrasses
    -12% subordinated promissory note                                                     502,035           502,035
    -12% subordinated promissory note
     with a face amount of $4,000,000                                                   3,715,000         3,715,000
    -1,507,226 shares of preferred stock                                                  768,638           768,638
    -Warrants to buy 250,412 shares of common
     stock at $0.51 through April 2010                                                          -                 -
    -211,184 shares of common stock                                                       600,000           600,000

United Industrial Services, Inc.                                    July 1998
  Field service for petrochemical & power
    generation industries
    -15% promissory note                                                                  626,958           626,958
    -35,000 shares of preferred stock                                                   3,500,000         2,500,000
    -Warrant to buy 63,637 shares of common stock
     at $0.01 through June 2008                                                               100               100
    -Warrant to buy 18,887 shares of common
     stock at $0.01 through March 2011                                                          -                 -

Vanguard VII, L.P.                                                  June 2000
  Venture capital fund
    -1.3% limited partnership interest                                                  1,200,000         1,100,000

Weatherford International (NYSE - WFT)                              July 2001
  Provides equipment & services used for the drilling,
    completion, and production of oil and natural gas wells
    -69,458 shares of common stock                                                      4,025,091         2,588,042
                                                                                      -----------       -----------
            Total                                                                     $90,371,825       $85,878,831
                                                                                      ===========       ===========
</TABLE>

*    The Fund 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
     interest and it may be collected in the future. As of December 31, 2001,
     the aggregate amount of accrued interest receivable and estimated fair
     value on these notes is $2,454,179 and $10,870,773, respectively.

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

                                       50

<PAGE>

                              EQUUS II INCORPORATED
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 2002, 2001 AND 2000

(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 acquire other businesses, including
leveraged buyouts. 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. Current income is
not a significant factor in the selection of investments. 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 had a $22,500,000
revolving line of credit with Bank of America, N.A. that expired on December 31,
2002. The line of credit was subsequently extended until June 1, 2003, and
amended to provide for maximum borrowings of $18,000,000. 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
$12,775,000 outstanding under this line of credit at December 31, 2002, which is
collateralized by the Fund's investments in portfolio securities. In addition,
the Fund had irrevocable letters of credit in the amount of $3,719,000
outstanding at year end, which reduces the amount of additional borrowings
available under the line of credit. The letters of credit expired subsequent to
year-end. As of April 1, 2003, the Fund's availability under the revolving line
of credit is approximately $1,590,000.

     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 will be
reduced by a corresponding amount. The lender has asked the Fund to take steps
to pay off the line of credit. Accordingly, the Fund is currently in discussions
with several interested parties regarding the sale of certain portfolio
securities at values that could enable the Fund to repay the line of credit. The
Fund is also pursuing arrangements to refinance the line of credit with another
lender and may approach the current lender for another extension of the due
date. There can be no assurance that the Fund can sell

                                       51

<PAGE>

securities sufficient to pay off the line of credit, extend the existing line of
credit or obtain a replacement facility by June 1, 2003. Should the Fund be
unable to repay the line of credit, extend it or refinance it with another
lender, portfolio securities may be required to be sold and such sales may be at
values that are materially less than the Management Company's estimates of fair
value.

     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 Reliant Window Holdings, LLC ("RWH") and
Equicom, Inc. ("Equicom") in the respective amounts of $1,439,000 and $759,000.
RWH is currently servicing its obligations to the financial institution, and the
Management Company does not expect the Fund to be required to provide funding
under this guarantee. 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 $150,000 in 2003 for such purpose. In
addition, the Fund has committed to invest up to $5,550,000 in the two venture
capital funds in its portfolio. At December 31, 2002, $3,030,000 of such amount
had been funded, and an additional $300,000 was funded on March 3, 2003. The
Management Company does not expect the Fund to advance more than $900,000 of its
remaining commitments to the venture capital funds in 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.

     At December 31, 2002 and 2001, the Fund was being charged interest at a
rate of 3.92% and 4.40%, respectively. The interest rate on the line of credit
is currently prime + 4%. 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 years ended December 31,
2002, 2001 and 2000, was $10,842,927, $6,767,397 and $17,149,517, respectively.
During the years ended December 31, 2002, 2001 and 2000, the amount of interest
paid in cash was $544,479, $441,015 and $1,580,299, 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 and Restricted Temporary Cash Investments - The Fund had a
$100,000,000 line of credit promissory note with Bank of America N.A., with
interest payable at 1/2% over the rate earned in its money market account. At
December 31, 2002 and 2001, the Fund was being charged interest at a rate of
1.50% and 2.29%, respectively. 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
RIC under the Internal Revenue Code. The Fund had $58,000,000 and $62,000,000
outstanding on such note at December 31, 2002 and 2001, respectively, which is
collateralized by restricted temporary cash investments of $58,000,000 and
$62,000,000, respectively. Pursuant to the terms of the note, the Fund is
required to repay the outstanding borrowings within five business days of the
initial borrowing date. The Fund repaid the outstanding year end borrowings
within this time period.

     The Fund's line of credit promissory note expired on January 1, 2003.
During March 2003, the Fund borrowed $54,959,521 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 U.S.
Treasury bills, cash and other portfolio securities in the margin account with a
value of $58,706,608. The total amount borrowed was repaid on April 1, 2003. The
Management Company believes the Fund will be able to use this financing
arrangement to maintain its RIC status. However,

                                       52

<PAGE>

there are no assurances that such arrangement will be available to the Fund in
the future. If the Fund is unable to borrow funds in the future to make
qualifying investments, the Fund may no longer qualify as a RIC. The Fund would
then be subject to corporate income tax on its net investment income and net
realized gains and shareholders would be subject to income tax on any
distributions from the Fund. Failure to continue to qualify as a RIC could be
material to the Fund's shareholders in that they would suffer the loss of
conduit tax treatment on any net realized income or gains.

(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 December
31, 2002) is determined on the basis of procedures established in good faith by
the Board of Directors of the Fund. As a general principle, the current "fair
value" of an investment would be the amount the Fund might reasonably expect to
receive for it upon its current sale, in an orderly manner. Appraisal valuations
are necessarily subjective and the Management Company's estimate of values may
differ materially from amounts actually received upon the disposition of
portfolio securities.

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

     Most of the Fund's common equity investments are appraised at a multiple of
free cash flow generated by the Portfolio Company in its most recent fiscal
year, less outstanding funded indebtedness and other senior securities such as
preferred stock. Projections of current year free cash flow may be utilized and
adjustments for non-recurring items are considered. Multiples utilized are
estimated based on the Management Company's experience in the private company
marketplace, and are necessarily subjective in nature. Most of the Portfolio
Companies utilize a high degree of leverage. The banking environment currently
has resulted in pressure on several of these Portfolio Companies to reduce the
amount of leverage in order to maintain such financing. From time to time,
Portfolio Companies are in default of certain covenants in their loan
agreements. When the Management Company has a reasonable belief that the
Portfolio Company will be able to restructure the loan agreements to adjust for
any defaults, the Portfolio Company's securities continue to be valued assuming
that the company is a going

                                       53

<PAGE>

concern. In the event a Portfolio Company cannot generate adequate cash flow to
meet the principal and interest payments on such indebtedness or is not
successful in refinancing the debt upon its maturity, the Fund's investment
could be reduced or eliminated through foreclosure on the Portfolio Company's
assets or the Portfolio Company's reorganization or bankruptcy.

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

     The fair values of debt securities, which are generally held to maturity,
are determined on the basis of the terms of the debt securities and the
financial 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
$82,653,260 (including $1,230,650 in publicly-traded securities, net of a
$228,003 Valuation Discount) and $79,750,789 (including $605,860 in
publicly-traded securities, net of a $276,686 Valuation Discount) at December
31, 2002 and 2001, 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.

     Stock-Based Compensation - The Fund accounts for stock-based compensation
using the intrinsic value method in accordance with the provisions of APB No.
25.

     The weighted average fair value of the stock options granted from our stock
option plans during 2002 was $1.29 per share. During 2001, it was $0.402 per
share (for officer options) and $1.499 per share (for director options) and
during 2000, it was $1.71 per share. The fair value of each stock option grant
is estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions used:

                                  2002               2001                2000
                                  ----    ---------------------------    ----
                                           Officers       Directors
                                          -----------    ------------
     Expected life              10 years     10 years     10 years     10 years
     Risk-free interest rate        5.15%        4.62%        5.32%        6.80%
     Volatility                    21.60%       25.38%       26.27%       26.30%
     Dividend Yield                 6.50%       10.00%        6.50%        6.50%

                                       54

<PAGE>

     Had the Fund accounted for the options using the fair value method under
SFAS 123, the decrease in net assets from operations for each of the three years
in the period ended December 31, 2002 would have been:

<TABLE>
<CAPTION>

                                                          2002              2001               2000
                                                        --------       -------------      ------------
<S>                                                    <C>             <C>                <C>
Increase (decrease) in net assets from                 $  23,698       $  (9,715,743)     $ (5,329,474)
  operations, as reported

Stock-based employee compensation expense
  (benefit) included in increase (decrease) in
  net assets from operations                             (14,434)         (1,522,422)          388,663

Stock-based employee compensation expense
  determined using fair value method                    (106,903)           (105,672)         (551,808)
                                                       ---------       -------------      ------------
Pro forma decrease in net assets from
  operations                                           $ (97,639)      $ (11,343,837)     $ (5,492,619)
                                                       =========       =============      ============
</TABLE>

     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' balances to conform to the current year presentation.

     New Accounting Pronouncements - In December 2002, SFAS No. 148, "Accounting
for Stock-Based Compensation--Transition and Disclosure--an amendment of FASB
Statement No. 123" was issued. SFAS 148 amends SFAS 123, "Accounting for
Stock-Based Compensation", to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of SFAS 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
provisions of SFAS 148 are effective for financial statements for fiscal years
ending after December 15, 2002. SFAS 148 does not change the provisions of SFAS
123 that permit entities to continue to apply the intrinsic value method of
Accounting Principles Bulletin No. 25, "Accounting for Stock Issued to
Employees". We continue to account for stock-based compensation in accordance
with the provisions of APB No. 25. We have provided the disclosures required by
SFAS 148.

     In November 2002 FASB interpretation, or FIN 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantee of
Indebtedness of Others" was issued. FIN 45 requires that upon issuance of a
guarantee, the guarantor must recognize a liability for the fair value of the
obligation it assumes under that guarantee. FIN 45's provisions for initial
recognition and measurement should be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The guarantor's previous
accounting for guarantees that were issued before the date of FIN 45's initial
application may not be revised or restated to reflect the effect of the
recognition and measurement provisions of FIN 45. The disclosure requirements
are effective for financial statements of both interim and annual periods that
end after December 15, 2002, and have been adopted by the Fund.

                                       55

<PAGE>

(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 $50,000 is included in the accompanying
Statements of Operations for each of the three years in the period ended
December 31, 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 rendered to the Fund during 2002, each
director who is not an officer of the Fund received an annual fee of $25,000
paid quarterly in arrears, a fee of $3,000 for each meeting of the Board of
Directors attended in person, a fee of $1,500 for participation in each
telephonic meeting of the Board of Directors and for each committee meeting
attended ($500 for each committee meeting if attended on the same day as a Board
Meeting), 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 and directors of the Fund serve as
directors of Portfolio Companies, and may receive and retain fees, including
non-employee director stock options, from such Portfolio Companies in
consideration for such service. The aggregate amount of such cash fees paid by
Portfolio Companies amounted to $256,750 for the year ended December 31, 2002.
Additionally, two officers of the Management Company serve as directors of the
Fund.

     The Management Agreement will continue in effect until June 30, 2003, and
from year-to-year thereafter provided such continuance is approved at least
annually by (i) a vote of a majority of the outstanding shares of the Fund or
(ii) a majority of the directors who are not "interested persons" of the Fund,
at a meeting called for the purpose of voting on such approval. The Management
Agreement may be terminated at any time, without the payment of any penalty, by
a vote of the Board of Directors of the Fund or the holders of a majority of the
Fund's shares on 60 days' written notice to the Management Company, and would
automatically terminate in the event of its "assignment" (as defined in the
Investment Company Act).

(5)  Federal Income Tax Matters

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

     The Fund is not required to make any distributions for 2002 under income
tax regulations. For the year ended December 31, 2002, the Fund had net
investment income for book purposes of $145,483 and no distributable net
investment income for tax purposes. The difference between book and tax was
primarily attributable to accrued interest receivable from one Portfolio Company
that was written off, offset by taxable income passed through by partnerships in
which the Fund has an investment. The Fund had a net capital gain for book
purposes of $802,235 and a net capital gain for tax purposes of $2,829,000,
which was fully offset by accumulated capital losses from prior years. The
difference was

                                       56

<PAGE>

due primarily to the sale of securities in one Portfolio Company which had been
acquired in a tax-free exchange. As of December 31, 2002, the Fund has 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.

     The aggregate cost of investments for federal income tax purposes as of
December 31, 2002 was $90,502,293. Such investments had unrealized appreciation
of $28,885,442 and unrealized depreciation of $34,302,456 for book purposes, or
net unrealized depreciation of $5,417,014. They had unrealized appreciation of
$30,270,422 and unrealized depreciation of $33,154,589 for tax purposes, or net
unrealized depreciation of $2,884,167 at December 31, 2002.

     For the year ended December 31, 2001, the Fund had net investment income
for book purposes of $1,154,695 and no distributable net investment income for
tax purposes. The difference between book and tax was primarily non-cash
compensation expense recorded on the books related to the payment of the
officers' notes. The Fund had a net realized capital loss for book purposes of
$7,196,407 and $5,047,823 for tax purposes in 2001.

     For the year ended December 31, 2000, the Fund had net investment income
for book purposes of $549,448 and no distributable net investment income for tax
purposes. The difference between book and tax was primarily non-cash
compensation expense recorded on the books related to dividends paid on shares
owned by officers which secure limited recourse notes receivable by the Fund and
non-taxable dividends received from one portfolio company. The Fund had a net
realized capital loss for book purposes of $6,160,547 and a net realized
short-term capital gain of $38,186 for tax purposes, which was fully offset by
the net investment loss.

(6)  Dividends

     No dividends were declared for the year ended 2002. In lieu of any cash
dividends in 2001, the Board of Directors declared a stock dividend of one
additional share for each ten shares held by its stockholders of record as of
December 3, 2001 and the Fund issued 566,638 shares in connection with such
dividend on December 17, 2001. The Board of Directors declared dividends of
$3,843,842 ($0.55 per share) during 2000. The 2000 dividends were paid in
additional shares of common stock or in cash by specific election of the
shareholders in December 2000. The 2000 dividend represented some long-term
capital gains and ordinary income but was primarily a return of capital. The
Fund paid $1,482,244 in cash and issued 294,990 additional shares of stock at
$8.00568 per share, in December 2000 in connection with such dividends. In 2000,
the Fund recorded non-cash compensation expense for the dividends paid on stock
held by officers of $388,663.

(7)  Portfolio Securities

     During the year ended December 31, 2002, the Fund invested $783,749 in two
new limited liability companies, which in turn invested in two existing
Portfolio Companies and made follow-on investments of $8,451,097 in twelve
portfolio companies, including $2,354,775 in accrued interest and dividends
received in the form of additional portfolio securities and accretion of
original issue discount on a promissory note. In addition, the Fund realized a
net capital gain of $802,235 during the year ended December 31, 2002.

     During the year ended December 31, 2001, the Fund invested $15,386,789 in
six new companies, including non-cash securities of $10,573,214 in three
companies as a result of a merger or sale of existing

                                       57

<PAGE>

Portfolio Companies. Also, the Fund made follow-on investments of $8,709,395 in
eleven portfolio companies, including $2,332,847 in accrued interest and
dividends received in the form of additional portfolio securities and accretion
of original issue discount on a promissory note. In addition, the Fund realized
a net capital loss of $7,196,407 during the year ended December 31, 2001.

     During the year ended December 31, 2000, the Fund invested $7,435,001 in
four new companies and made follow-on investments of $4,968,405 in ten portfolio
companies, including $1,209,344 in accrued interest and dividends received in
the form of additional portfolio securities and accretion of original issue
discount on a promissory note. In addition, the Fund realized a net capital loss
of $6,160,547 during the year ended December 31, 2000.

(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 16- 2/3% on the first, second and
third anniversaries of the date of the grant.

     Under the Stock Incentive Plan, options to purchase 1,086,800 and 1,073,600
shares of the Fund's common stock with a weighted average exercise price of
$8.42 and $8.43 per share were outstanding at December 31, 2002 and 2001,
respectively. Of these options, 743,588 and 70,388 shares, with a weighted
average exercise price per share of $8.75 and $18.60, were exercisable at
December 31, 2002 and 2001, respectively. Of the outstanding options at December
31, 2002, 1,042,800 have exercise prices ranging from $7.69 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 2012.

     On September 30, 1999, options to purchase 719,794 shares of common stock
of the Fund were exercised by the officers of the Fund for $15.45 per share. The
exercise price of $11,124,086 was paid in the form of promissory notes from the
officers to the Fund. At December 31, 2000, the notes were secured by the
719,794 shares plus 196,164 additional shares issued to the officers by the Fund
upon payment of dividends. Principal payments of $991,161 were made on the notes
in 2000. In 2001, interest payments of $92,531 were made on the notes. On April
1, 2001, a former officer of the Fund surrendered 41,471 shares in payment of
his note receivable and accrued interest aggregating $548,542. In September
2001, the current officers of the Fund surrendered 802,662 shares in payment of
their notes receivable and accrued interest aggregating $10,505,551. These
payments were recorded as decreases in common stock and additional paid in
capital. The Fund released 71,824 shares to the officers relating to these
payments. As a result of these payments, there are no outstanding notes at
December 31, 2001. There was no change in total net assets as a result of the
note repayment and surrendering of the shares.

     Under variable plan accounting applicable to these transactions,
compensation expense was adjusted to reflect the change in benefit that the
officers would have received assuming that their notes were settled with their
pledged common stock at the end of each reporting period, based on the net asset
value of the Fund. Non-cash compensation expense (benefit) under this
arrangement was $(1,536,856)

                                       58

<PAGE>

for the year ended December 31, 2001 and was recorded as a decrease to
additional paid in capital. Interest earned on the notes receivable of $384,388
and $447,887 was recorded as an increase to additional paid in capital for the
years ended December 31, 2001 and 2000.

         In April 2001, officers of the Fund surrendered options to acquire
247,077 shares of common stock pursuant to the Stock Incentive Plan back to the
Fund, and such options were cancelled. On May 4, 2001, options to acquire a
total of 13,200 shares at $8.4455 per share were issued to the non-officer
directors. In addition, on November 14, 2001, options to acquire a total of
990,000 shares 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 as a result of the terms of the dividend
equivalent rights. Such accounting resulted in additional non-cash compensation
(benefit) of $(14,434) for the year ended December 31, 2002, related to the
990,000 options issued in 2001.

         As of December 31, 2002, all outstanding options are "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. If
all outstanding options for which the market price exceeds the exercise price at
December 31, 2001 had been exercised, the Fund's net asset value would have been
reduced by $0.10 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.

         The following table reflects stock option activity for the three years
ended December 31, 2002:

<TABLE>
<CAPTION>
                                                  2002             2001         2000
                                                  ----             ----         ----
<S>                                           <C>             <C>            <C>
         Options outstanding at the             1,073,600          337,450      324,250
           beginning of the year
         Options granted during the year           13,200        1,003,200       13,200
         Options exercised during the year             -                -            -
         Options surrendered during the year           -          (247,077)          -
         Options expired during the year               -           (19,973)          -
                                               ----------       ----------     --------
         Options outstanding at the end
           of the year                          1,086,800        1,073,600      337,450
                                               ==========       ==========     ========
         Options exercisable at the
           end of the year                        743,588           70,388      288,167
                                               ==========       ==========     ========
</TABLE>

(9)      Subsequent Events

         Subsequent to December 31, 2002, the Fund repaid a net $59,950,000 of
notes payable to the bank, using the restricted temporary cash investments of
$58,000,000 held at year end.

         On February 19, 2003, ENGlobal, Inc. made a principal payment on its
9.5% promissory note of $110,000, reducing the note balance to $2,670,000.

         On February 28, 2003, the Fund received $2,406,398 from Doane PetCare
Enterprises, Inc. for

                                       59

<PAGE>

 payment in full of its 15% promissory note.

         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 March 2000. $1,500,000 of
such commitment has now been funded.

         On March 4, 2003, the Fund received $108,004 from Milam Enterprises,
LLC, realizing a capital gain of $106,092.

         On March 7, 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.

                                       60

<PAGE>

Item 9.    Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosure.

     On Form 8-K dated July 10, 2002, the Fund reported the acceptance of Arthur
Andersen LLP's resignation as accountants for the fiscal year 2002 and the
appointment of PricewaterhouseCoopers LLP as accountants for the fiscal year
2002.

Item 10. Directors and Executive Officers of the Registrant.

     Information about the Directors and Executive Officers of the Registrant is
incorporated by reference to the Fund's Definitive Proxy Statement for the 2003
Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A under the
Securities and Exchange Act of 1934, as amended, prior to April 11, 2003 (the
"2003 Proxy Statement").

Item 11. Executive Compensation.

     Information regarding Executive Compensation is incorporated by reference
to the Fund's 2003 Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

     Information regarding Security Ownership of Certain Beneficial Owners and
Management is incorporated by reference to the Fund's 2003 Proxy Statement.

Item 13. Certain Relationships and Related Transactions

     Information regarding Certain Relationships and Related Transactions is
incorporated by reference to the Fund's 2003 Proxy Statement.

Item 14. 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 reviewed and evaluated the effectiveness
of the Fund's disclosure controls and procedures within 90 days prior to the
date of this report. Based on their review and evaluation, the Fund's Chairman
and Chief 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 Annual Report on Form 10-K was being prepared, and that no
changes are required at this time.

     There have been no significant changes in the Fund's internal controls or
in other factors that

                                       61

<PAGE>

could significantly affect the Fund's internal controls subsequent to the date
the Fund completed its evaluation.

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

(a)(1) Financial Statements                                                Page
       --------------------                                                ----

       Report of Independent Accountants - PricewaterhouseCoopers LLP        33

       Report of Independent Public Accountants - Arthur Andersen LLP        34

       Balance Sheets
       December 31, 2002 and 2001                                            35

       Statements of Operations for the years
       ended December 31, 2002, 2001 and 2000                                36

       Statements of Changes in Net Assets for the
       years ended December 31, 2002, 2001 and 2000                          37

       Statements of Cash Flows for the years ended
       December 31, 2002, 2001 and 2000                                      38

       Selected Per Share Data and Ratios for the
       five years ended December 31, 2002                                    40

       Schedule of Portfolio Securities
       December 31, 2002                                                     41

       Schedule of Portfolio Securities
       December 31, 2001                                                     47

       Notes to Financial Statements                                         51

       All other information required in the financial statement schedules has
been incorporated in the financial statements or notes thereto or has been
omitted since the information is not applicable or not present in amounts
sufficient to require submission of the schedule.

(a)(3) Exhibits

3.     Articles of Incorporation and by-laws

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

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

                                       62

<PAGE>

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

10.   Material Contracts

     (a)  Form of Management Agreement between the Fund and Equus Capital
          Management Corporation. [Incorporated by reference to Exhibit A to the
          Definitive Proxy Statement dated February 24, 1997]

     (b)  1997 Stock Incentive Plan [Incorporated by reference to Exhibit B to
          the Registrant's Definitive Proxy Statement dated February 24, 1997]

     (c)  Amended and Restated Loan Agreement by and between Equus II
          Incorporated and NationsBank of Texas, N.A., dated March 29, 1996
          [Incorporated by reference to Exhibit 10(g) to Registrant's Quarterly
          Report on Form 10-Q for the quarter ended March 31, 1996.]

     (d)  Second Amendment and Restated Loan Agreement by and between Equus II
          Incorporated and Nations Bank, N.A., d/b/a Bank of America, N.A. dated
          June 1, 1999. [Incorporated by reference to Exhibit 10 to Registrant's
          Quarterly Report on form 10-Q for the quarter ended June 30, 1999.]

     (e)  Fourth Amendment to Second Amended and Restated Loan Agreement by and
          between Equus II Incorporated and Bank of America, N.A. dated July 27,
          2001. [Incorporated by reference to Exhibit 10 to Registrant's
          Quarterly Report on form 10-Q for the quarter ended September 30,
          2001.]

     (f)  Fifth Amendment to Second Amended and Restated Loan Agreement by and
          between Equus II Incorporated and Bank of America, N.A. dated July 1,
          2002.

     (g)  Sixth Amendment to Second Amended and Restated Loan Agreement by and
          between Equus II Incorporated and Bank of America, N.A. dated October
          1, 2002.

     (h)  Seventh Amendment to Second Amended and Restated Loan Agreement by and
          between Equus II Incorporated and Bank of America, N.A. dated January
          1, 2003.

     (i)  Eighth Amendment to Second Amended and Restated Loan Agreement by and
          between Equus II Incorporated and Bank of America, N.A. dated February
          14, 2003.

99   Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

     (1)  Certification by Chairman and Chief Executive Officer

     (2)  Certification by President and Principal Financial and Accounting
          Officer

(b)  Reports on Form 8-K

          No reports on Form 8-K were filed by the Fund during the last quarter
          of the period covered by this report.

                                       63

<PAGE>

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.

                                                 EQUUS II INCORPORATED

                                                 /s/ NOLAN LEHMANN
                                                 _________________________
Date:  April 8, 2003                             Nolan Lehmann, President

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
            Signature                    Title                                                  Date
            ---------                    -----                                                  ----
<S>                                      <C>                                                    <C>
/s/ GREGORY J. FLANAGAN                 Director                                               April 8, 2003
________________________________
(Gregory J. Flanagan)

/s/ ROBERT L. KNAUSS                     Director                                               April 8, 2003
___________________________________
(Robert L. Knauss)

/s/ GARY R. PETERSEN                     Director                                               April 8, 2003
___________________________________
(Gary R. Petersen)

/s/ JOHN W. STORMS                       Director                                               April 8, 2003
___________________________________
(John W. Storms)

/s/ FRANCIS D. TUGGLE                    Director                                               April 8, 2003
___________________________________
(Francis D. Tuggle)

/s/ EDWARD E. WILLIAMS                   Director                                               April 8, 2003
___________________________________
(Edward E. Williams)

/s/ NOLAN LEHMANN                        President and Director                                 April 8, 2003
___________________________________
(Nolan Lehmann)                          (principal financial and accounting officer)

/s/ SAM P. DOUGLASS                      Chairman of the Board and Chief                        April 8, 2003
___________________________________
(Sam P. Douglass)                        Executive Officer (principal executive officer)
</TABLE>

                                       64

<PAGE>

                                    EXHIBIT A

                    Form of Annual Certification Required by
        Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934

I, Sam P. Douglass, certify that:

     1.  I have reviewed this annual report on Form 10-K of Equus II
         Incorporated;

     2.  Based on my knowledge, this annual report does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances under which
         such statements were made, not misleading with respect to the period
         covered by this annual report;

     3.  Based on my knowledge, the financial statements, and other financial
         information included in this annual report, fairly present in all
         material respects the financial condition, results of operations and
         cash flows of the registrant as of, and for, the periods presented in
         this annual report;

     4.  The registrant's other certifying officer and I are responsible for
         establishing and maintaining disclosure controls and procedures (as
         defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
         we have:

           a.  designed such disclosure controls and procedures to ensure that
               material information relating to the registrant, including its
               consolidated subsidiaries, is made known to us by others within
               those entities, particularly during the period in which this
               annual report is being prepared;

           b.  evaluated the effectiveness of the registrant's disclosure
               controls and procedures as of a date within 90 days prior to the
               filing date of this annual report (the "Evaluation Date"); and

           c.  presented in this annual report our conclusions about the
               effectiveness of the disclosure controls and procedures based on
               our evaluation as of the Evaluation Date;

     5.  The registrant's other certifying officer and I have disclosed, based
         on our most recent evaluation, to the registrant's auditors and the
         audit committee of registrant's board of directors (or persons
         performing the equivalent function):

           a.  all significant deficiencies in the design or operation of
               internal controls, which could adversely affect the registrant's
               ability to record, process, summarize and report financial data
               and have identified for the registrant's auditors any material
               weaknesses in internal controls; and

           b.  any fraud, whether or not material, that involves management or
               other employees who have a significant role in the registrant's
               internal controls; and

     6.  The registrant's other certifying officer and I have indicated in this
         annual report whether or not

                                       65

<PAGE>

     there were significant changes in internal controls or in other factors
     that could significantly affect internal controls subsequent to the date of
     our most recent evaluation, including any corrective actions with regard to
     significant deficiencies and material weaknesses.

Date: April 8, 2003
                                                     /s/ SAM P. DOUGLASS
                                                     ___________________________
                                                     Sam P. Douglass
                                                     Chairman
                                                     Chief Executive Officer

                                       66

<PAGE>

                                    EXHIBIT A

                    Form of Annual Certification Required by
        Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934

I, Nolan Lehmann, certify that:

     1.  I have reviewed this annual report on Form 10-K of Equus II
         Incorporated;

     2.  Based on my knowledge, this annual report does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances under which
         such statements were made, not misleading with respect to the period
         covered by this annual report;

     3.  Based on my knowledge, the financial statements, and other financial
         information included in this annual report, fairly present in all
         material respects the financial condition, results of operations and
         cash flows of the registrant as of, and for, the periods presented in
         this annual report;

     4.  The registrant's other certifying officer and I are responsible for
         establishing and maintaining disclosure controls and procedures (as
         defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
         we have:

           a.  designed such disclosure controls and procedures to ensure that
               material information relating to the registrant, including its
               consolidated subsidiaries, is made known to us by others within
               those entities, particularly during the period in which this
               annual report is being prepared;

           b.  evaluated the effectiveness of the registrant's disclosure
               controls and procedures as of a date within 90 days prior to the
               filing date of this annual report (the "Evaluation Date"); and

           c.  presented in this annual report our conclusions about the
               effectiveness of the disclosure controls and procedures based on
               our evaluation as of the Evaluation Date;

     5.  The registrant's other certifying officer and I have disclosed, based
         on our most recent evaluation, to the registrant's auditors and the
         audit committee of registrant's board of directors (or persons
         performing the equivalent function):

           a.  all significant deficiencies in the design or operation of
               internal controls, which could adversely affect the registrant's
               ability to record, process, summarize and report financial data
               and have identified for the registrant's auditors any material
               weaknesses in internal controls; and

           b.  any fraud, whether or not material, that involves management or
               other employees who have a significant role in the registrant's
               internal controls; and

     6.  The registrant's other certifying officer and I have indicated in this
         annual report whether or not

                                       67

<PAGE>

     there were significant changes in internal controls or in other factors
     that could significantly affect internal controls subsequent to the date of
     our most recent evaluation, including any corrective actions with regard to
     significant deficiencies and material weaknesses.

Date: April 8, 2003
                                                  /s/ NOLAN LEHMANN
                                                  ______________________________
                                                  Nolan Lehmann
                                                  President
                                                  Principal Financial and
                                                  Accounting Officer

                                       68