EQUUS II INC ET AL, N-2/A, 1996-04-10

EQUUS II INC ET AL
N-2/A, 1996-04-10

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As filed with the Securities and Exchange Commission on April 10, 1996

Securities Act File No. 333-01431

U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM N-2

[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

[X] Pre-Effective Amendment No. 2

Post-Effective Amendment No. _____

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

2929 Allen Parkway, Suite 2500
Houston, Texas 77019
(Address of principal executive offices (number, street, city, state, zip code)

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

Nolan Lehmann
Equus II Incorporated
2929 Allen Parkway, Suite 2500
Houston, Texas 77019
(Name and address (number, street, city, state, zip code) of agent for service)

With copies to:

John T. Unger
Snell & Smith, P.C.
1000 Louisiana, Suite 3650
Houston, Texas 77002

Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement.

If any securities being registered on this form will be offered on a delayed or
continuous basis in reliance on Rule 415 under the Securities Act of 1933, other
than securities offered in connection with a dividend reinvestment plan, check
the following box. /X/

It is proposed that the filing will become effective when declared effective
(check appropriate box)

/ / when declared effective pursuant to Section 8(c).

If appropriate check the following box:

/ / this [post-effective] amendment designates a new effective date for
a previously filed [post-effective amendment][registration statement].

/ / This Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act and the Securities Act
registration statement number of the earlier effective registration statement
for the same offering is ________________.

CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
Proposed Proposed
Amount Maximum Maximum Amount of
Title of Securities Being Offering Price Aggregate Registration
Being Registered Registered Per Unit Offering Price* Fee

<S> <C> <C> <C> <C>
Shares of Common Stock,
par value $.001
per share 1,046,191 $12.50 $13,077,377.50 $4,509.44

</TABLE>

* Calculated pursuant to Rule 457(c) under the Securities Act of 1933, as
amended. Based on a discount from the average of the high and low sales price
reported on the American Stock Exchange on February 29, 1996.

The registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment that specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until this Registration Statement shall
become effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
EQUUS II INCORPORATED
Form N-2
Cross-Reference Sheet

Parts A and B of Prospectus

ITEM NO. CAPTION LOCATION IN PROSPECTUS
- -------- ------- ----------------------
1. Outside Front Cover Front Cover Page

2. Inside Front and Outside Back Front Cover Page
Cover Page

3. Fee Table and Synopsis Prospectus Summary; Fee Table;
Available Information

4. Financial Highlights Selected Financial Data;
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations

5. Plan of Distribution Not Applicable

6. Selling Stockholders Not Applicable

7. Use of Proceeds Use of Proceeds

8. General Description of the Front Cover Page; Prospectus
Registrant Summary; The Fund; Risk
Factors and Special
Considerations; Description of
Common Stock; Financial
Statements

9. Management Management of the Fund

10. Capital Stock, Long-Term Debt and
Other Securities The Offer; Description of
Common Stock; Tax Matters

11. Defaults and Arrears on Senior
Securities Not Applicable

12. Legal Proceedings Not Applicable

13. Table of Contents of the Statement
of Additional Information Table of Contents of the
Statement of Additional
Information
<PAGE>

LOCATION IN STATEMENT
ITEM NO. CAPTION OF ADDITIONAL INFORMATION
- -------- ------- -------------------------
14. Cover Page Front Cover Page

15. Table of Contents Front Cover Page

16. General Information and History Not Applicable

17. Investment Objectives and Investment Objectives and
Policies Policies; Investment
Restrictions

18. Management Management of the Fund

19. Control Persons and Principal
Holders of Securities Beneficial Owner

20. Investment Advisory and Other
Services Management of the Fund

21. Brokerage Allocation and Other
Practices Portfolio Transactions

22. Tax Status Tax Matters

23. Financial Statements Financial Statements

PART C

Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C to this Registration Statement.

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

<PAGE>

PROSPECTUS Subject to Completion Dated April 10, 1996

1,046,191 SHARES

EQUUS II INCORPORATED

COMMON STOCK

Equus II Incorporated (the "Fund") is issuing to its stockholders of record
("Record Date Stockholders") as of the close of business on April 10, 1996,
transferable rights ("Rights") entitling the holders thereof to subscribe for an
aggregate of 1,046,191 shares (the "Shares") of the Fund's common stock, $.001
par value ("Common Stock") at the rate of one share of Common Stock for each
three Rights held and entitling each holder of Rights to subscribe, subject to
certain limitations and subject to allotment, for any Shares not acquired by
exercise of primary subscription Rights (the "Offer"). No fractional Rights or
Shares will be issued. See "The Offer." The subscription price per Share (the
"Subscription Price") will be $12.75.

THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK TIME, ON MAY 8, 1996, unless
extended as described herein (the "Expiration Date"). Stockholder inquiries
should be directed to the Information Agent, MacKenzie Partners, Inc., at (800)
322-2885.

The Fund is a closed-end, non-diversified management investment company that has
elected to be a business development company. The Fund commenced operations in
1991, and, as of December 31, 1995, had net assets of $61,853,289. The Fund's
investment objective is 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 that intend to acquire other businesses including through
leveraged buyouts. Equus Capital Management Corporation (the "Investment
Adviser") manages the Fund. The address of the Fund is 2929 Allen Parkway,
Houston, Texas 77019 and its telephone number is (713) 529-0900.

The Fund's currently outstanding shares of Common Stock are, and the Shares
offered hereby will be, listed on the American Stock Exchange (the "AMEX") under
the symbol "EQS." The Fund announced the Offer after the close of trading on the
AMEX on March 5, 1996. The net asset value per share of Common Stock at the
close of business on March 5, 1996, and April 9, 1996, was $22.22 and $23.85,
respectively, and the last reported sale price of a share of the Fund's Common
Stock on the AMEX on those dates was $15.50 and $15.875, respectively.

SEE "RISK FACTORS AND SPECIAL CONSIDERATIONS" BEGINNING ON PAGE 24 FOR A
DISCUSSION OF CERTAIN MATTERS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
INVESTORS.

Because the Subscription Price per share is likely to be less than the net asset
value per share, the Offer is likely to result in substantial dilution of the
aggregate net asset value of the shares owned by stockholders who do not fully
exercise their Rights. In addition, as a result of the terms of the Offer,
stockholders who do not fully exercise their Rights should expect that they
will, upon the completion of the Offer, own a smaller proportional interest in
the Fund than would otherwise be the case. The Fund's directors and officers,
individually, as Record Date Stockholders, have advised the Fund that they will
purchase Shares with an aggregate Subscription Price of at least $200,000 in
accordance with the primary subscription and up to an additional $200,000 to the
extent Shares become available to them in accordance with the allotment
provisions of the over-subscription privilege. See "The Offer -- Terms of the
Offer."

This Prospectus sets forth concisely certain information about the Fund that
investors should know before investing and it should be read and retained for
future reference. A Statement of Additional Information dated April 10, 1996
(the "SAI"), containing additional information about the Fund has been filed
with the Securities and Exchange Commission (the "Commission") and is
incorporated by reference in its entirety into this Prospectus. A copy of the
SAI, the table of contents of which appears on page 47 of this Prospectus, may
be obtained without charge by contacting the Fund at (713) 529-0900.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.

===========================================================================
Subscription Price Sales Load Proceeds to the Fund (1)
- ---------------------------------------------------------------------------
Per Share . . $ 12.75 None $12.75
- --------------------------------------------------------------------------
Total . . . . $ 13,338,935 None $13,338,935
===========================================================================

(1) Before deduction of offering expenses incurred by the Fund, estimated at
$220,000.

April 10, 1996

<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
MORE DETAILED INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS.

TERMS OF THE OFFER

Equus II Incorporated (the "Fund") is issuing to stockholders of record
("Record Date Stockholders") as of the close of business on April 10, 1996 (the
"Record Date"), transferable rights ("Rights") to subscribe for an aggregate of
1,046,191 shares of Common Stock (sometimes referred to herein as the "Shares")
of the Fund. Each Record Date Stockholder is being issued one Right for each
full share of Common Stock owned on the Record Date. The Rights entitle the
holder to acquire at the Subscription Price (as hereinafter defined) one Share
for each three Rights held. Rights may be exercised at any time during the
period (the "Subscription Period"), which commences on April 10, 1996, and ends
at 5:00 p.m., New York time on May 8, 1996, unless extended by the Fund to a
date not later than May 31, 1996 (the "Expiration Date"). The right to acquire
during the Subscription Period at the Subscription Price one Share for each
three Rights held is hereinafter referred to as the "Primary Subscription." See
"The Offer -- Terms of the Offer."

OVER-SUBSCRIPTION PRIVILEGE. In addition, any holder of Rights who fully
exercises all Rights initially issued to or purchased by him or her (other than
those Rights that cannot be exercised because they represent the right to
acquire less than one Share) is entitled to subscribe for Shares that were not
otherwise subscribed for by others on Primary Subscription (the
Over-Subscription Privilege"). For purposes of determining the number of Shares
a Record Date Stockholder may acquire pursuant to the Offer, broker-dealers
whose shares are held of record by Cede & Co., Inc. ("Cede"), nominee for The
Depository Trust Company ("DTC"), or by any other depository or nominee will be
deemed to be the holders of the Rights that are issued to Cede or such other
depository or nominee on their behalf. Shares acquired pursuant to the
Over-Subscription Privilege are subject to allotment, which is more fully
discussed under "The Offer -- Over-Subscription Privilege."

SUBSCRIPTION PRICE. The subscription price per share (the "Subscription
Price") will be $12.75.

EXERCISING RIGHTS. Rights will be evidenced by subscription certificates
("Subscription Certificates") and may be exercised by completing a Subscription
Certificate and delivering it, together with payment, either by means of a
notice of guaranteed delivery or a check, to First Interstate Bank of Texas,
N.A., Houston, Texas (the "Subscription Agent"). Rights holders will have no
right to rescind a purchase after the Subscription Agent has received payment.
See "The Offer -- Method of Exercise of Rights" and "The Offer -- Payment for
Shares." Shares issued pursuant to an exercise of Rights will be listed on the
AMEX.

SALE OF RIGHTS. The Rights are transferable until the Expiration Date
and have been admitted to dealing on the AMEX. Although no assurance can be
given that a market for the Rights will develop, trading in the Rights on the
AMEX will begin at 10:00 a.m. on the Business Day after the Record date and will
continue until the close of trading on the Business Day prior to the Expiration
Date. The value of the Rights, if any, will be reflected by the market price.
Rights may be sold by individual holders or may be submitted to the Subscription
Agent for sale. Any Rights submitted to the Subscription Agent for sale must be
received by the Subscription Agent on or before May 7, 1996, one Business Day
(as defined below) prior to the Expiration Date, due to normal settlement
procedures. The Common Stock will begin trading ex-Rights on the second Business
Day after the Record Date. If the Subscription Agent receives Rights for sale in
a timely manner, it will use its best efforts to sell the Rights on the AMEX.
The Subscription Agent will also attempt to sell any Rights a Rights holder is
unable to exercise because such Rights represent the right to subscribe for less
than one Share. Any commissions will be paid by the selling Rights holders.
Neither the Fund nor the Subscription Agent will be responsible if Rights cannot
be sold and neither has guaranteed any minimum sales price for the Rights. For
purposes of this Prospectus, a "Business Day" shall mean any day on which
trading is conducted on the AMEX.

Stockholders are urged to obtain a recent trading price for the Rights
on the AMEX from their broker, bank, financial adviser, or the financial press.

INFORMATION AGENT. Stockholders' inquiries should be directed to:

MacKenzie Partners, Inc.
156 Fifth Avenue
New York, New York 10010
(800) 322-2885

IMPORTANT DATES TO REMEMBER

EVENT DATE
----- ----

Record Date............................. April 10, 1996
Subscription Period..................... April 10, 1996 through May 8, 1996*
Expiration Date of the Offer............ May 8, 1996*
Subscription Certificates and
Payment for Shares Due................ May 8, 1996*
Notices of Guaranteed Delivery Due**.... May 8, 1996*
Delivery of Subscription Certificate
pursuant to Notices of Guaranteed
Delivery Due........................... May 13, 1996*
Confirmation to Participants............ May 20, 1996*

* Unless the Offer is extended to a date not later than May 31, 1996.

** A stockholder exercising Rights must deliver to the Subscription Agent
by the Expiration Date either (1) a Subscription Certificate and payment
for Shares or (2) a Notice of Guaranteed Delivery and payment for
Shares.

USE OF PROCEEDS - PURPOSE OF THE OFFER

The net proceeds of the Offer will be used to increase the assets of the
Fund in order to repay indebtedness incurred by the Fund to make new investments
and to fulfill commitments that the Fund has made for follow-on investments. In
addition, the Offer affords existing stockholders the opportunity to purchase
additional shares of Common Stock at a price that may be below market value
and/or net asset value without incurring the transaction costs associated with
open-market purchases. The increase in the net assets of the Fund may reduce the
Fund's expense ratio, thus benefitting both participating and non-participating
stockholders. See "Use of Proceeds" and "The Offer -- Purpose of the Offer."

INFORMATION REGARDING THE FUND

The Fund is a business development company, incorporated in the State of
Delaware as a corporation in 1991. The Fund's investment objective is to achieve
capital appreciation by making investments in equity and equity-oriented
securities (including common stock and preferred stock, debt securities
convertible into common or preferred stock, or a combination of debt and equity
securities, warrants, options and other rights to acquire such securities or
partnership interests) issued by privately-owned companies in transactions
negotiated directly with such companies. The Fund seeks to invest primarily in
medium-sized companies that intend to acquire other businesses including through
leveraged buyouts. See "The Fund -Investment Objective and Policies." The Fund's
outstanding common stock, par value $.001 per share (the "Common Stock"), is
listed and traded on the AMEX under the symbol "EQS." The average weekly trading
volume of the Common Stock on the AMEX during the year ended December 31, 1995,
was 20,652 shares. As of December 31, 1995, the net assets of the Fund were
approximately $61.9 million. For a discussion of the Fund's investments see "The
Fund -- Current Portfolio Companies."

INFORMATION REGARDING THE INVESTMENT ADVISER

Equus Capital Management Corporation (the "Investment Adviser") has
served as the investment adviser to the Fund since its inception. The Investment
Adviser also provides certain administrative services to the Fund. Sam P.
Douglass, Nolan Lehmann, Gary L. Forbes, and Randall B. Hale, the principal
officers of the Investment Adviser, have an average of more than 20 years
experience in the business of providing investment advisory services with
respect to the acquisition,
3

management, and disposition of private and public companies in leveraged
transactions. The Investment Adviser is currently affiliated with three
investment funds that, as of December 31, 1995, had net assets of approximately
$ 89 million. The Fund pays the Investment Adviser a quarterly management fee at
the annual rate of 2% of the Fund's quarterly net assets. The Investment Adviser
is also entitled to receive an incentive fee equal to 20% of the net realized
capital gains of the Fund less unrealized depreciation on a cumulative basis.
The investment advisory fee is higher than comparable fees paid by most other
investment companies. See "Management of the Fund -- Investment Adviser." Since
the Investment Adviser's management fee is based on the net assets of the Fund,
the Investment Adviser will benefit from the Offer. In addition, two Directors
who are interested persons of the Fund could benefit indirectly from the Offer
because of their relationships with the Investment Adviser. See "The Offer --
Purpose of the Offer." Equus Capital Corporation ("ECC") provides certain
investment advisory services to the Fund. See "Management of the Fund --
Sub-Adviser Agreement." The Investment Adviser pays ECC for its services out of
the incentive fee that the Investment Adviser receives from the Fund.

RISK FACTORS AND SPECIAL CONSIDERATIONS

The following summarizes certain matters that should be considered, among
others, in connection with the Offer. See "Risk Factors and Special
Considerations."

Dilution An immediate dilution of the aggregate net asset
value of the shares owned by stockholders who do not
fully exercise their Rights is likely to be
experienced as a result of the Offer because the
Subscription Price will be less than the then net
asset value per share, and the number of shares
outstanding after the Offer is likely to increase in
greater percentage than the increase in the size of
the Fund's assets. In addition, as a result of the
terms of the Offer, stockholders who do not fully
exercise their Rights should expect that they will,
at the completion of the Offer, own a smaller
proportional interest in the Fund than would
otherwise be the case. Although it is not possible to
state precisely the amount of such a decrease in
value, because it is not known at this time what the
net asset value per share will be at the Expiration
Date, such dilution could be substantial. For
example, assuming that all Rights are exercised and
that the Subscription Price of $12.75 is 46.5% below
the Fund's then net asset value per share, the Fund's
net asset value per share (before deduction of
expenses incurred in connection with the Offer) would
be reduced by approximately $2.78 per share.

Discount From Shares of closed-end funds frequently trade at a
Net Asset Value 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 inception of trading. See "Market
for Common Stock and Net Asset Value Information."

Non-Diversified Status The Fund is a non-diversified investment company
under the Investment Company Act of 1940, as amended
(the "1940 Act"). The 1940 Act does not limit the
proportion of the Fund's assets that may be invested
in securities of a single issuer. The Fund's
investments are limited, however, in order for the
Fund to qualify as a "registered investment company"
for purposes of the Internal Revenue Code of 1986
(the "Code"). To the extent that the Fund takes large
positions in a small number of issuers, the Fund's
net asset value and the market price of Common Stock
may fluctuate as a result of changes in the financial
condition of the market's assessment of such issuers
to a greater extent than that of a diversified
investment company. See "Risk Factors and Special
Considerations -- Non-Diversified Status."

Speculative Investments Private equity and leveraged buyout investments
involve a high degree of business and financial risk
and can result in substantial losses. In addition,
the portfolio securities acquired by the Fund are
initially illiquid. See "Risk Factors and Special
Considerations -- Leveraged Portfolio Investments and
-- Lack of Liquidity of Portfolio Investments."

Borrowing The Fund may borrow funds to make new or follow-on
investments, to maintain its pass- through tax status
as a regulated investment company, to pay
contingencies and expenses, or to pay dividends. As a
result the Fund is exposed to the risks of leverage,
which may be considered a speculative investment
technique. 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. The Fund
may borrow funds in an amount up to 50% of the value
of its assets (including investments made with
borrowed funds). See "The Fund -- Investment
Objective and Policies -- Borrowing" and "Risk
Factors and Special Considerations -- Borrowing."

Repurchase of Shares The Fund's stockholders will be free to dispose of
their Shares on the AMEX or other markets on which
the Shares may trade, but, as a closed-end fund, the
Fund's stockholders do not have the right to redeem
their Shares. The Fund is authorized, but is not
required, to repurchase its shares (including by
means of tender offers) in order to attempt to reduce
or eliminate any discount in the market price of
shares from net asset value or to increase the net
asset value of its shares, or both. The Fund has from
time-to-time repurchased its shares on the open
market. During 1995, the Fund repurchased 145,500
shares of Common Stock on the open market. See
"Market for Common Stock and Net Asset Value
Information -- Repurchase of Shares."

Distributions The Fund has a policy to pay an annual dividend at a
minimum rate of $.50 per share. In the event that
taxable income, including realized capital gains,
exceeds $.50 per share in any year, additional
dividends may be declared to distribute such excess.
See "Investment Objective and Policies -- Dividends
and Distributions" for a discussion of the Fund's
distribution policies. Distributions can be made
payable by the Fund either in the form of a cash
distribution or a stock dividend. The Fund has not
adopted any set policy concerning whether dividends
will be paid only in cash, only in stock, or in stock
or cash by specific election. If the Fund does not
have available cash to pay the minimum dividends it
may borrow the required funds or sell some of its
portfolio investments.

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

Legal Proceeding The Fund has been advised that on or about
April 1, 1996, two stockholders of the Fund filed an
action in federal district court against the
Directors of the Fund and the Investment Adviser
asserting that by approving the Offer they violated
their fiduciary duties to the stockholders of the
Fund under the Investment Company Act and Delaware
law . See "The Offer -- Legal Proceeding."

FEE TABLE

The following table sets forth certain fees and expenses of the Fund.

SHAREHOLDER TRANSACTION EXPENSES:

Sales Load (as a percentage of offering price).................. 0%

ANNUAL EXPENSES (AS A PERCENTAGE OF NET ASSETS):

Management Fees (1)............................................. 2.00%
Interest Payments on Borrowed Funds............................. 0.51%
Other Expenses.................................................. 1.47%

Total Annual Expenses........................................... 3.98%

EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------ ------- ------- --------

You would pay the following expenses
on a $1,000 investment assuming
a 5% annual return $39.80 $125.47 $219.92 $500.60

- -------------
(1) Does not include the management incentive fee payable to the Investment
Adviser equal to 20% of the net realized capital gains less unrealized capital
depreciation of the Fund calculated on a cumulative basis. The Investment
Adviser pays ECC out of its management incentive fee. See "Management of the
Fund."

The purpose of the foregoing table and example is to assist
Rights holders in understanding the various costs and expenses that an investor
in the Fund bears either directly or indirectly. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RATES OF RETURN. THE
ACTUAL EXPENSES OF THE FUND MAY BE GREATER OR LESS THAN THOSE SHOWN. The figures
provided under Other Expenses are based upon amounts for the prior fiscal year.
For more complete descriptions of certain of the Fund's cost and expenses, see
"Management of the Fund" in the Prospectus and the SAI.

AVAILABLE INFORMATION

The Fund is subject to the informational requirements of the
Securities Exchange Act of 1934 and in accordance therewith files reports, proxy
statements, and other information with the Securities and Exchange Commission
(the "Commission"). Such reports, proxy and information statements, and other
information filed by the Fund can be inspected and copied at public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.
Judiciary Plaza, Washington, D.C. 20549 and at the Commission's Regional Offices
located at Seven World Trade Center, Suite 1300, New York, New York 10048 and
Citicorp Plaza, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material may also be obtained at prescribed rates from the Public
Reference Section of the Commission at its principal office at 450 Fifth Street,
N.W., Judiciary Plaza, Washington, D.C. 20549. The Fund's Common Stock is listed
on the American Stock Exchange and the Fund's registration statements, reports,
proxy and information statements, and other information may be inspected and
copied at the offices of the American Stock Exchange at 86 Trinity Place, New
York, New York 10006-1881.

This Prospectus incorporates documents by reference that are not
presented herein or delivered herewith. These documents are available, without
charge, upon request from Investor Relations Department, Attention: Ms. Tracy H.
Cohen, Equus II Incorporated, 2929 Allen Parkway, Suite 2500, Houston, Texas
77019, telephone number (713) 529-0900.

SELECTED FINANCIAL DATA

Following is a summary of selected financial data and per share
data of the Fund and its predecessors for the five years ended December 31,
1995. Such information for the two years ended December 31, 1992, has been
restated to reflect the merger of Equus Investments Incorporated with and into
the Fund.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1995 1994 1993 1992(1) 1991
--------- --------- --------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Total investment income ............................. $ 3,075 $ 1,921 $ 1,552 $ 1,796 $ 2,814
Net investment income(loss) ......................... $ (668) $ 518 $ (2,813) $ (1,403) $ 1,091
Realized gain (loss) on sale
of portfolio securities, net ...................... $ 7,669 $ (350) $ (2,458) $ 10,744 $ (1,896)
Increase (decrease) in
unrealized appreciation
of portfolio securities, net ...................... $ (1,281) $ (2,563) $ 11,178 $ (6,034) $ 7,029
Total increase (decrease) in
net assets from operations ........................ $ 5,720 $ (2,395) $ 5,907 $ 3,307 $ 6,224
Dividends ........................................... $ 5,815 $ 763 $ 2,049 $ 3,228 $ --
Total assets at end of period ....................... $ 132,450 $ 109,941 $ 114,411 $ 105,614 $ 85,705
Net assets at end of period ......................... $ 61,853 $ 60,880 $ 64,679 $ 59,436 $ 57,750
Net cash provided (used)
by operating activities ........................... $ (672) $ (186) $ (1,962) $ (325) $ 176
Shares outstanding at end of period ................. 3,139 3,053 3,099 3,013 2,880
Average shares outstanding during period ............ 2,968 3,084 3,013 2,880 2,880
</TABLE>
<TABLE>
<CAPTION>
PER SHARE DATA:
DECEMBER 31,
-------------------------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net investment income (loss) ....................... $ (0.22) $ 0.17 $ (0.93) $ (0.49) $ 0.38
Realized gain (loss) on sale
of portfolio securities, net .................... $ 2.58 $ (0.12) $ (0.82) $ 3.73 $ (0.66)
Increase (decrease) in
unrealized apprecia-
tion of portfolio
securities, net .................................. $ (0.43) $ (0.83) $ 3.71 $ (2.10) $ 2.44
Dividends .......................................... $ 2.00 $ 0.25 $ 0.68 $ 1.12 $ --
Net asset value (including
unrealized appreciation),
end of year ...................................... $ 19.71 $ 19.94 $ 20.87 $ 19.72 $ 20.05
</TABLE>
- ------------
(1) The financial data for 1992 and 1991 include the accounts of Equus
Investments II, L.P., the predecessor entity of the Fund.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION

LIQUIDITY AND CAPITAL RESOURCES

The Fund was formed as a successor to Equus Investments II, L.P. (the
"Partnership" or "Predecessor Entity") pursuant to a reorganization in which all
of the assets and liabilities of the Partnership were transferred to the Fund on
July 1, 1992, in exchange for 1,866,132 shares of common stock of the Fund (the
"Exchange"). Such shares were then distributed on a pro rata basis to the
partners of the Partnership, effectively liquidating the Partnership. Each
Limited Partner received one share of common stock of the Fund for each unit of
partnership interest owned. The Fund has qualified for pass-through tax
treatment as a "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986. On September 11, 1992, the Fund's shares of common stock
were listed for trading on the American Stock Exchange, under the symbol "EQS".

On March 26, 1993, the Fund and Equus Investments Incorporated ("EQI")
entered into an Agreement and Plan of Merger, as amended, which called for the
merger of EQI with and into the Fund (the "Merger"). Pursuant to this agreement,
on June 30, 1993, the Fund issued 1,147,137 additional shares of common stock,
net of 130 shares redeemed in lieu of fractional shares, to the stockholders of
EQI in a tax free exchange to acquire all of the outstanding common stock of
EQI. Each share of EQI was converted into 0.54 of a share of the Fund's common
stock.

At December 31, 1995, the Fund had $71,610,360 of its assets invested in
portfolio securities of 21 companies, and has committed to invest up to an
additional $9,615,500 in four of such companies and $8,600,000 in two new
companies under certain conditions. Current temporary cash investments,
anticipated future investment income, proceeds from borrowings, proceeds from
the sale of existing portfolio securities and proceeds from the Offer are
believed to be sufficient to finance these commitments. At December 31, 1995,
the Fund had $5,750,000 outstanding on a $13,000,000 revolving line of credit
loan from a bank. Subsequent to December 31, 1995, the Fund received a
commitment for a new $20,000,000 revolving line of credit with another bank
which will replace the prior revolving line of credit.

On June 22, 1994, the Board of Directors of the Fund approved a stock
repurchase program, pursuant to which the Fund repurchased on the open market
and cancelled 46,200 shares of its stock for $640,159 in 1994. Such stock was
repurchased at an average discount of 28.74% from its net asset value. In 1995,
the Fund repurchased and cancelled 145,500 shares of its stock for $1,993,642.
The stock repurchased in 1995 was repurchased at an average discount of 33.61%
from its net asset value. The Fund has not repurchased any stock since August
1995.

Net cash used by operating activities was $402,820, $185,849 and
$1,962,354 for the three years ended December 31, 1995. Increased expenses paid
during 1993 included $1,346,839 in incentive fees to the Investment Adviser that
were accrued by EQI as of December 31, 1992, and $454,040 in expenses related to
the June 30, 1993 merger of EQI with and into the Fund.

At December 31, 1995, the Fund had $60,232,594 of its total assets of
$132,450,176 invested in temporary cash investments consisting of money market
securities. This amount includes proceeds from a $60,000,000 note payable to a
bank that is utilized to enable the Fund to achieve adequate diversification to
maintain its pass-through tax status as a regulated investment company. Such
amount was repaid to the bank on January 2, 1996.

The Fund has the ability to borrow funds and issue forms of
indebtedness, 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 contingencies or to make follow-on or new investments.

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.

RESULTS OF OPERATIONS

INVESTMENT INCOME AND EXPENSE

Net investment income (loss) after all expenses amounted to $(668,114),
$518,473, and $(2,812,912) for the three years ended December 31, 1995. Income
from portfolio securities increased to $2,859,707 in 1995 as compared to
$1,613,414 in 1994 and $1,184,121 in 1993, due to the increase in amounts
invested in interest and dividend-bearing portfolio securities during 1995 and
1994. The Fund also received $593,665 in dividends and payments to induce the
Fund to convert preferred stock to common stock of one portfolio company in
1995, which had paid none in 1994 or 1993. In addition, the Fund accrued
$185,850 of interest income on one portfolio security in 1995 which had been
completely reserved in 1994 as uncollectible. Interest income from temporary
cash investments was $215,527 in 1995, $307,722 in 1994 and $368,289 in 1993.
The decrease in 1995 as compared to 1994 and 1993 was a result of lower
investable balances throughout the year.

The net investment losses in 1995 and 1993 were primarily attributable
to the accrual of $1,277,595 and $1,947,330, respectively, in deferred
management incentive fees caused by the realized gains from the sales of
portfolio securities in 1995 and an increase in the net unrealized appreciation
of portfolio securities during 1993. Also, in 1993, the Fund recorded
non-recurring expenses of $454,040 related to the Merger.

Mailing, printing and other expenses increased to $338,434 during 1995,
as compared to $165,330 during 1994 and $171,308 during 1993, due to the higher
cost for the preparation and distribution of the annual report and proxy
statement for the annual shareholder meeting held in June 1995. Interest expense
increased to $318,048 in 1995 as compared to $135,252 in 1994 and $157,317 in
1993, due to the increase of the average daily balances outstanding on the lines
of credit to $2,839,315 in 1995, from $994,520 in 1994 and $821,918 in 1993.

The Investment Adviser receives management fee compensation at an annual
rate of 2% of the net assets of the Fund. Such fees amounted to $1,237,775,
$1,212,457 and $1,243,559 in 1995, 1994 and 1993, respectively.

The Investment Adviser also receives from the Fund or must reimburse to
the Fund a management incentive fee equal to 20% of net realized capital gains
less unrealized capital depreciation, computed on a cumulative basis over the
life of the Fund. Incentive fee reimbursements of $203,250 were received by the
Fund from the Investment Adviser during the year ended December 31, 1993.
Deferred management incentive fee expense (income) for 1995, 1994 and 1993
totaled $1,277,595, $(582,622) and $1,947,330, respectively. The deferred
management incentive fee is reflected as an expense of the Fund when there is an
increase in the Fund's net unrealized appreciation of portfolio securities and
is reflected as a reduction in expense to the Fund when there is a decrease in
the Fund's net appreciation of portfolio securities. Deferred management
incentive fees are not paid until such appreciation is realized.

REALIZED GAINS AND LOSSES ON SALES OF PORTFOLIO SECURITIES

During the year ended December 31, 1995, the Fund realized net capital
gains of $7,668,524 from the sale of securities of six Portfolio Companies. The
Fund sold 116,590 shares of Allied Waste Industries, Inc. common stock for
$1,049,310, realizing a capital gain of $490,032; 96,000 shares of Garden Ridge
Corporation common stock for $2,928,000, realizing a capital gain of $2,906,667;
175,000 shares of NCI Building Systems, Inc. common stock for $3,064,685,
realizing a capital gain of $2,785,063; 30,000 shares of Tech-Sym Corporation
for $909,433, realizing a capital gain of $801,142 and 49,444 shares of USA
Waste Services, Inc. for $899,218, realizing a capital gain of $685,620.

During the year ended December 31, 1994, the Fund realized $350,309 of
net capital losses from the sale of its investments in the securities of five
Portfolio Companies. During 1994 the Fund sold 37,501 shares of NCI for
$637,517, realizing a net capital gain of $577,596 on such sale. In addition,
the Fund received $213,944 from the escrow account related to the sale of Denver
Technologies, Inc. and received a final payment of $22,138 related to the sale
of Gulf Coast Entertainment Corporation. Such amounts were recorded as capital
gains. On July 19, 1994, the Fund sold its investment in MidCon Bottlers, L. P.
for $950,000, realizing a $910,968 capital gain. The Fund also sold 28 shares of
Travis International, Inc. preferred stock for $28,000 and 5,855 shares of
Garden Ridge Corporation common stock for $5,855, in each case at the Fund's
cost. During 1994, a loss of $2,074,955 on the Fund's investment in Springtime,
Inc. I, was realized when Springtime declared bankruptcy.

During the year ended December 31, 1993, the Fund realized $2,457,906 of
net capital losses from the sale or disposition of its investments of nine
Portfolio Companies. The Fund sold 223,333 shares of A.C. Liquidating
Corporation, 228,076 shares of EnClean, Inc., 441,776 shares of NCI Building
Systems, Inc., 427,000 shares of Springtime, Inc. I, 20,000 shares of USA Waste
Services, Inc., 50,000 shares of Williams & Mettle Co. and 8,439,739 shares of
Yellow Cab Service Corporation ("Yellow Cab"), realizing net capital gains
(losses) of $(1,449,999), $(4,898), $4,725,580, $(1,070,607), $182,350,
$(944,500) and $(4,369,692), respectively. The Fund also wrote off its remaining
514,887 shares of A.C. Liquidating Corporation common stock realizing a capital
loss of $316,140. In addition, $710,000 and $80,000 of payments were received
from Gulf Coast Entertainment Corporation and La Prairie, Inc. and recorded as
capital gains.

UNREALIZED APPRECIATION AND DEPRECIATION OF PORTFOLIO SECURITIES

Net unrealized appreciation on investments decreased $1,280,549 during
the year ended December 31, 1995, from $9,255,817 to $7,975,268. Such net
decrease resulted from increases in the estimated fair value of securities of
six of the Fund's Portfolio Companies aggregating $13,601,466, decreases in the
estimated fair value of securities of five portfolio Companies aggregating
$10,971,005 and the transfer of $3,911,010 in net unrealized appreciation to net
realized gains from the sale of investments in five companies.

Net unrealized appreciation on investments decreased $2,562,801 during
the year ended December 31, 1994, from $11,818,618 to $9,255,817. Such net
decrease resulted from increases in the estimated fair value of securities of
four of the Fund's Portfolio Companies aggregating $5,432,740, decreases in the
estimated fair value of securities of ten Portfolio Companies aggregating
$9,041,307 and a net transfer of $1,045,766 from unrealized losses to realized
losses from the disposition of investments in three companies.

Net unrealized appreciation on investments increased $11,178,304 during
the year ended December 31, 1993, from $640,314 to $11,818,618. Such net
increase resulted from increases in the estimated fair value of securities of
ten of the Fund's Portfolio Companies aggregating $11,498,594, decreases in the
estimated fair value of securities of six Portfolio Companies aggregating
$4,573,073 and a net transfer of $4,252,783 from unrealized to realized losses
from the disposition of investments in seven companies.

DIVIDENDS

The Fund declared dividends of $5,814,990 ($2.00 per share), $763,268
($0.25 per share) and $2,049,038 ($0.68 per share) during 1995, 1994 and 1993,
respectively. The Fund adopted a policy effective in 1995, to make dividend
distributions of at least $0.50 per share on an annual basis. In the event that
taxable income, including realized capital gains, exceeds $0.50 per share in any
year, additional dividends may be declared to distribute such excess. The 1994
dividend was paid in cash and represented a return of capital. The 1995 and 1993
dividends, which represented the Fund's net capital gains for tax purposes, were
paid in additional shares of common stock or in cash by specific election of the
shareholders in December 1995 and January 1994. The Fund paid $2,753,180 and
$662,594 in cash and issued 231,080 and 85,981 additional shares of stock at
$13.25 and $16.125 per share, in December 1995 and January 1994, respectively,
in connection with such dividends.

PORTFOLIO INVESTMENTS

During the year ended December 31, 1995, the Fund invested $11,917,308
in five new Portfolio Companies and made follow-on investments in seven
Portfolio Companies of $2,734,411, including $865,909 in accrued interest and
dividends and conversion inducement payments received in the form of additional
portfolio securities.

On May 9, 1995, Garden Ridge Corporation ("GRDG") effected a 4.5-for-1
stock split of its outstanding common stock in connection with an initial public
offering ("IPO") of its common stock. The number of shares held by the Fund has
been adjusted to reflect such stock split. During June 1995, the fund exercised
warrants and options to acquire an additional 107,694 shares of GRDG common
stock for $407,172. Concurrent with the IPO, GRDG redeemed the 59,207 shares of
preferred stock for $355,242 and repaid the $3,195,671 in subordinated notes
held by the Fund.

On June 30, 1995, CogniSeis Development, Inc. was merged into Tech-Sym
Corporation. The Fund received 62,759 shares of Tech-Sym Corporation common
stock in a tax-free exchange for its CogniSeis Development, Inc. common stock.
In addition, on June 30, 1995, Allied Waste Industries, Inc. ("Allied") repaid
in full the $1,000,000 bridge note owed to the Fund. The accrued interest of
$67,494 on the bridge loan was paid to the Fund in August 1995 in the form of
13,864 shares of Allied common stock.

In May 1995, the Fund invested $271,000 in Midway Airlines Corporation
("Midway") in exchange for a 12% subordinated note and $71,000 in A. C.
Liquidating Corporation. in exchange for a 10% promissory note. In connection
with the Midway note, the Fund received warrants to buy up to 203,250 shares of
Class C common stock of Midway for $.01 per share through April 2002. During
June 1995, the Fund reacquired 80,662 shares of Class C common stock and 48,990
shares of junior preferred stock of Midway which it had previously recorded as
sold under a contract for sale to certain other shareholders of Midway.

In July 1995, the Fund acquired 67,500 shares of Series B senior
convertible preferred stock of Industrial Equipment Rentals, Inc. ("IER") for
$250,050 and advanced $499,950 to IER in exchange for a 9% senior subordinated
debenture.

During the third quarter of 1995, the Fund advanced an additional
$100,000 to Williams & Mettle Co. on the junior participation prime + 1.75%
note. In addition, the Fund's $204,750 in accrued interest receivable on the
Williams & Mettle Co. 12% subordinated promissory note was rolled into a new
$677,250, 12% subordinated promissory note.

In September 1995, the Fund acquired 2,986,408 shares of common stock
and 3,705,900 shares of Series B preferred stock of Strategic Holdings, Inc.,
for $2,986,408 and $3,705,900, respectively. In addition, the Fund acquired
1,000 shares of SMIP, Inc. for $150,000 and invested $175,000 in a 15%
promissory note of SMIP, Inc. Strategic Holdings, Inc. was formed to acquire
Strategic Materials, Inc., formerly known as Allwaste Recycling, Inc., the glass
recycling division of Allwaste, Inc.

In October 1995, the Fund invested $2,600,000 in exchange for a 36.11%
limited partnership interest in Summit/DPC Partners, L. P., a limited
partnership created to invest in DPC Acquisition Corp., which was created to
acquire Doane Products Company, which is believed to be the largest manufacturer
in the United States of dry pet food for private label customers. Summit
currently owns approximately 17.5% of the equity of DPC Acquisition Corp.

During December 1995, the Fund invested $2,250,000 in Carruth-Doggett
Industries, Inc. ("CDI"), in exchange for a 10% senior subordinated promissory
note. In addition, the Fund received warrants to buy 33,333 shares of common
stock of CDI for $.01 per share through December 14, 2005, and 333 shares of
common stock of CDE Corp for $.01 per share through December 14, 2005. CDI
operates five Case Equipment dealerships in and around the Houston area.

In December 1995, the Fund advanced $50,000 on a $200,000 prime rate
promissory note to American Residential Services, Inc., a company formed to
acquire existing businesses which provide plumbing, heating and air conditioning
and electrical services to the residential community.

On December 31, 1995, the Fund converted its Series C, Series D and 9%
cumulative preferred stock of Allied Waste Industries, Inc. ("AWIN") into
149,250, 398,335 and 421,802 shares of AWIN common stock, respectively. In
addition, the Fund exercised its warrants to buy 48,438 and 22,000 shares of
AWIN common stock for $175,830 and $93,500 respectively.

Also on December 31, 1995 the Fund converted its Series A and Series B
preferred stock of Champion Healthcare Corporation ("CHC") into 603,327 and
58,404 shares of CHC common stock respectively. In addition, the Fund received
171,921 shares of CHC common stock, valued at $593,665, in payment of preferred
stock dividends and as inducement to enter into the transaction and to forego
any additional dividends on the Series C and Series D preferred stock of CHC.

During the year ended December 31, 1994, the Fund made follow-on
investments of $9,532,649 in nine Portfolio Companies.

During the year ended December 31, 1993, the Fund made follow-on
investments of $11,285,430 in six Portfolio Companies and invested $3,974,700 in
two new Portfolio Companies.

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, 1995,
only AWIN, CHC, Drypers Corporation, GRDG, NCI Building Systems, Inc., Sports
and Leisure and Tech-Sym Corporation 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".

SUBSEQUENT EVENTS

Subsequent to December 31, 1995, the Fund sold 32,759 shares of Tech-Sym
Corporation for $1,029,900, realizing a net capital gain of $911,655 on such
sale.

On January 2, 1996, the Fund exercised its warrants to acquire 163,044
shares of AWIN on a net exercise basis. This resulted in the Fund receiving
56,054 shares of AWIN, which were paid for by tendering the remaining 106,990
shares to AWIN. On January 26, 1996, the Fund sold the 56,054 shares of common
stock along with an additional 70,000 shares of AWIN common stock in AWIN'S
secondary stock offering. The Fund received proceeds of $813,679, resulting in a
realized capital gain of $461,917.

In January 1996, the Fund advanced an additional $100,000 to American
Residential Services, Inc. pursuant to the terms of a $200,000 prime rate
promissory note.

Subsequent to December 31, 1995, the Fund repaid $61,900,000 of notes
payable to the bank.

Senior Securities
(at end of fiscal year)

Certain information about the senior securities representing
indebtedness issued by the Fund is set forth in the following table. The Fund
had no senior securities outstanding prior to 1991 and has not issued any class
of senior securities that is preferred stock.

TOTAL AMOUNT
OUTSTANDING ASSET AVERAGE
EXCLUSIVE OF COVERAGE MARKET VALUE
YEAR(1) TREASURY SECURITIES(2) PER UNIT(3) PER UNIT(4)
- ------- ---------------------- ----------- ------------
Bank Loans
(Revolving Lines of Credit)
1991.......................... $25,000,000 $3,310 N/A
1992.......................... 40,750,000 2,459 N/A
1993.......................... 45,000,000 2,437 N/A
1994.......................... 45,600,000 2,335 N/A
1995.......................... 65,750,000 1,941 N/A
- ------------
(1) The Fund and its predecessors had no senior securities representing
indebtedness outstanding prior to 1991.

(2) Total amount of senior securities outstanding at the end of the year
presented.

(3) The asset coverage ratio for a class of senior securities representing
indebtedness is calculated as the Fund's total assets less all
liabilities and indebtedness not represented by senior securities,
divided by senior securities representing indebtedness. This asset
coverage ratio is multiplied by $1,000 to determine Asset Coverage Per
Unit. The Asset Coverage Per Unit is expressed in terms of dollar
amounts per share. (4) Not applicable, as senior securities are not
registered for public trading.

MARKET FOR COMMON STOCK AND NET ASSET VALUE INFORMATION

The Fund's outstanding shares of Common Stock are, and the Shares will
be, listed for trading on the American Stock Exchange under the symbol "EQS".
The Fund's shares commenced trading on the AMEX on September 11, 1992. The Fund
had approximately 7,200 stockholders at February 16, 1996, 2,128 of which were
registered holders. Registered holders do not include those stockholders whose
stock has been issued in street name. The net asset value per share of the
Fund's common stock at December 31, 1995, was $19.71.

The following table shows for the period indicated (1) the high and low
sales prices per share of the Fund's Common Stock on the AMEX, (2) the net asset
value per share as determined on the Friday prior to the date of each price
quotation, and (3) the discount to net asset value (expressed as a percentage)
represented by the price quotation.
<TABLE>
<CAPTION>
QUARTER ENDED 3/31/94 6/30/94 9/30/94 12/31/94 3/31/95 6/30/95 9/30/95 12/31/95
- ------------- ------- ------- ------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High Sales Price $18.25 $15.50 $14.625 $13.875 $13.125 $14.75 $16.00 $15.875
Net Asset Value $20.98 $20.38 $20.05 $20.29 $19.24 $21.48 $22.26 $22.22
Discount to Net
Asset Value 13.0% 23.9% 27.1% 31.6% 31.8% 31.3% 28.1% 28.6%

Low Sales Price $14.75 $13.25 $13.25 $12.625 $12.25 $12.25 $13.875 $13.00
Net Asset Value $20.23 $19.81 $19.84 $19.76 $19.38 $19.54 $22.13 $19.79
Discount to Net
Asset Value 27.1% 33.1% 33.2% 36.1% 36.8% 37.3% 37.3% 34.3%
</TABLE>
13

The closing sales price for the Common Stock price on AMEX on April 9,
1996, was $15.875 per share, the net asset value on such date was $23.85, and
the discount to net asset value on such date was 33.4%.

The shares of Common Stock have historically traded at a discount to net
asset value. During portions of 1994 and 1995 the Fund repurchased shares in an
effort to reduce the discount to net asset value. See "Repurchase of Shares"
below. In the fourth quarter of 1994, the Fund also announced a policy of
distributing a minimum of $0.50 per share in dividends each year. In the event
that taxable income, including realized capital gains, exceeds $0.50 per share
in any year, additional dividends may be declared to distribute such excess. See
"Investment Objective and Policies -- Dividends and Distributions."

REPURCHASE OF SHARES

The Fund is a closed-end, management investment company and as such its
stockholders do not, and will not, have the right to redeem its shares. The
Fund, however, may repurchase its shares from time to time as and when it deems
such a repurchase advisable. Pursuant to the 1940 Act, the Fund may repurchase
its shares on a securities exchange (provided that the Fund has informed its
stockholders within the preceding six months of its intention to repurchase such
shares) or as otherwise permitted in accordance with Rule 23c-1 under the 1940
Act. Under that Rule, certain conditions must be met regarding, among other
things, distribution of net income for the preceding fiscal year, identity of
the seller, price paid, brokerage commissions, prior notice to stockholders of
an intention to purchase shares and purchasing in a manner and on a basis which
does not discriminate unfairly against the other stockholders through their
interest in the Fund.

Shares repurchased by the Fund are cancelled at the time of repurchase,
but constitute authorized shares of the Fund available for reissuance.

When the Fund repurchases its shares for a price below their net asset
value, the net asset value of those shares that remain outstanding will be
enhanced, but this does not necessarily mean that the market price of those
outstanding shares will be affected, either positively or negatively. Further,
interest on borrowings to finance share repurchase transactions will reduce the
net income of the Fund.

During the period from June 1994 through August 1995, the Fund
repurchased an aggregate of 191,700 shares of its Common Stock at prices per
share ranging from $12.375 to $14.75 in transactions effected on the AMEX
pursuant to authorization by the Fund's Board of Directors. Such repurchases
were effected at the then prevailing market price, and were not financed with
any borrowings.

The Fund does not currently have an established tender offer program or
established schedule for considering tender offers. No assurance can be given
that the Board of Directors of the Fund will decide to undertake any such tender
offers in the future, or, if undertaken, that they will reduce any market
discount.

THE OFFER

Terms of the Offer

The Fund is issuing to Record Date Stockholders Rights to subscribe for
the Shares. Each Record Date Stockholder is being issued one transferable Right
for each share of Common Stock owned on the Record Date. The Rights entitle the
holder to acquire at the Subscription Price one Share for each three Rights
held. No Rights will
14

be issued for fractional shares. Rights may be exercised at any time during the
Subscription Period, which commences on April 10, 1996, and ends at 5:00 p.m.,
New York time, on May 8, 1996, unless extended by the Fund to a date not later
than May 31, 1996, 5:00 p.m., New York time. See "Expiration of the Offer."

In addition, any holder of Rights who fully exercises all Rights
initially issued to or purchased by him or her (other than those Rights that
cannot be exercised because they represent the right to acquire less than one
Share) is entitled to subscribe for Shares that were not otherwise subscribed
for by others on Primary Subscription. For purposes of determining the maximum
number of Shares a Record Date Stockholder may acquire pursuant to the Offer,
broker-dealers whose shares are held of record by Cede or by any other
depository or nominee will be deemed to be the holders of the Rights that are
issued to Cede or such other depository or nominee on their behalf. Shares
acquired pursuant to the Over-Subscription Privilege are subject to allotment,
which is more fully discussed below under "Over-Subscription Privilege."

The directors and officers of the Fund, individually, as Record Date
Stockholders, have advised the Fund that they will purchase Shares with an
aggregate Subscription Price of at least $200,000 in accordance with the Primary
Subscription and up to an additional $200,000 to the extent such Shares become
available to them in accordance with the allotment provisions of the
Over-Subscription Privilege. Such over-subscriptions by such directors and
officers may disproportionately increase their existing ownership, resulting in
a higher percentage ownership of outstanding shares of the Fund. Any Shares so
acquired by such directors or officers, as "affiliates" of the Fund as that term
is defined under the Securities Act of 1933, as amended (the "Securities Act"),
may only be sold in accordance with Rule 144 under the Securities Act or
pursuant to an effective registration statement under the Securities Act. In
general, under Rule 144, as currently in effect, an "affiliate" of the Fund is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of 1% of the then outstanding shares of Common Stock or
the average weekly reported trading volume of the Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain restrictions on the manner of sale, to notice requirements and to the
availability of current public information about the Fund. In addition, any
profit resulting from the sale of Shares so acquired, if such Shares are held
for a period of less than six months, will be returned to the Fund.

Rights will be evidenced by Subscription Certificates. The number of
Rights issued to each holder will be stated on the Subscription Certificates
delivered to such holder. The method by which Rights may be exercised and Shares
paid for is set forth below in "Method of Exercise of Rights" and "Payment for
Shares." A Rights holder will have no right to rescind a purchase after the
Subscription Agent has received payment. See "Payment for Shares" below.
Shares issued pursuant to an exercise of Rights will be listed on the AMEX.

The Rights are transferable until the Expiration Date and have been
admitted for trading on the AMEX. Assuming a market exists for the Rights, the
Rights may be purchased and sold through usual brokerage channels and sold
through the Subscription Agent. Although no assurance can be given that a market
for the Rights will develop, trading in the Rights on the AMEX will begin at
10:00 a.m. on the Business Day after the Record Date and may be conducted until
the close of trading on the Business Day prior to the Expiration Date. Trading
of the Rights on the AMEX will be conducted on a regular way basis until and
including the last AMEX trading day prior to the Expiration Date. The method by
which Rights may be transferred is set forth below in "Method of Transferring
Rights." Currently outstanding shares of Common Stock will begin trading
Ex-Rights on the Second Day after the Record Date. Since fractional Shares will
not be issued, Rights holders who receive, or who are left with, fewer than
three Rights will be unable to exercise such Rights and will not be entitled to
receive any cash in lieu of such fractional Shares. However, the Subscription
Agent will automatically attempt to sell the number of Rights, which a Rights
holder is unable to exercise for such reason, after return of a completed and
fully exercised Subscription Certificate, and will remit the proceeds of any
such sale net of commissions to the Rights holder. The underlying Shares will
also be admitted for trading on the AMEX.

Purpose of the Offer

The Board of Directors of the Fund has determined that it would be in
the best interests of the Fund and the stockholders to increase the assets of
the Fund in order to repay indebtedness incurred by the Fund to make

investments and to fulfill commitments that the Fund has made for follow-on
investments. The increase in assets of the Fund should allow the Fund to
increase the number of investments in its portfolio, resulting in more
diversification of investments. The Offer seeks to reward existing stockholders
by giving them the right to purchase additional shares at a price that may be
below market and/or net asset value without incurring transaction costs
associated with open market purchases. The distribution to stockholders of
transferable Rights that themselves may have intrinsic value will also afford
non-subscribing stockholders the potential of receiving a cash payment upon sale
of such Rights, receipt of which may be viewed as compensation for the possible
dilution of their interests in the Fund. In addition, the increase in the net
assets of the Fund may reduce the Fund's expense ratio, thus benefitting both
participating and non-participating stockholders.

The Fund's Investment Adviser will benefit from the Offer because the
Investment Adviser's quarterly management fee is based on the net assets of the
Fund. See "Management of the Fund." It is not possible to state precisely the
amount of additional compensation the Investment Adviser will receive as a
result of the Offer because the proceeds of the Offer will be invested in
additional portfolio securities which will fluctuate in value. However, assuming
all Rights are exercised and that the Fund receives the maximum proceeds of the
Offer, the annual compensation to be received by the Investment Adviser would be
increased by approximately $262,379. Three of the Fund's Directors who voted to
authorize the Offer are "interested persons" of the Investment Adviser within
the meaning of the 1940 Act. Two of these Directors, Sam P. Douglass and Nolan
Lehmann, could benefit indirectly from the Offer because of their relationships
with the Investment Adviser. The other five Directors are not "interested
persons" of the Fund. See "Management of the Fund" in the SAI. While it was
cognizant of the possible participation of the directors of the Fund in the
Offer as stockholders, the Fund's Board of Directors nevertheless concluded that
the Offer was in the best interest of stockholders, since all stockholders of
the Fund are treated equally under the terms of the Offer.

The Fund may, in the future and at its discretion, choose to make
additional rights offerings from time to time for a number of shares and on
terms that may or may not be similar to the Offer. Any such future rights
offering will be made in accordance with the 1940 Act. Under the laws of
Delaware, the state in which the Fund is incorporated, the Board of Directors is
authorized to approve rights offerings without obtaining stockholder approval.
The staff of the Commission has interpreted the 1940 Act as not requiring
stockholder approval of a rights offering at a price below the then current net
asset value so long as certain conditions are met, including a good faith
determination by the Fund's board of directors that such offering would result
in a net benefit to existing stockholders. The Fund's Board of Directors has
made this determination with respect to the Offer.

Over-Subscription Privilege

If all of the Rights initially issued are not exercised, any Shares for
which subscriptions have not been received will be offered, by means of the
Over-Subscription Privilege, to holders of Rights who have exercised all the
Rights initially issued to or purchased by them and who wish to acquire more
than the number of Shares for which the Rights issued to them are exercisable.
Holders of Rights who exercise all the Rights initially issued to or purchased
by them will have the opportunity to indicate on the Subscription Certificate
how many Shares they are willing to acquire pursuant to the Over-Subscription
Privilege. If sufficient Shares remain after the Primary Subscriptions have been
exercised, all over-subscriptions will be honored in full. If sufficient Shares
are not available to honor all over-subscriptions, the available Shares will be
allocated first among holders who subscribe for an aggregate of 250 or fewer
Shares (inclusive of Shares subscribed for by such holders in the Primary
Subscription). Shares remaining thereafter will be allocated among those who
over-subscribe based on the number of Rights held. The percentage of remaining
Shares each over-subscribing holder may acquire will be rounded down to result
in delivery of whole Shares. The allocation process may involve a series of
allocations in order to assure that the total number of Shares available for
over-subscriptions is distributed on a pro rata basis.

The method by which Shares will be distributed and allocated pursuant to
the Over-Subscription Privilege is as follows. Shares will be available for
purchase pursuant to the Over-Subscription Privilege only to the extent that the
maximum number of Shares is not subscribed for through the exercise of the
Primary Subscription by the Expiration Date. If the Shares so available ("Excess
Shares") are not sufficient to satisfy all subscriptions pursuant

to the Over-Subscription Privilege, the Excess Shares will be allocated pro rata
(subject to the elimination of fractional Shares) among those holders of Rights
exercising the Over-Subscription Privilege, in proportion, not to the number of
Shares requested pursuant to the Over-Subscription Privilege, but to the number
of Rights held; provided, however, that if such pro rata allocation results in
any holder being allocated a greater number of Excess Shares than such holder
subscribed for pursuant to the exercise of such holder's Over-Subscription
Privilege, then such holder will be allocated only such number of Excess Shares
as such holder subscribed for and the remaining Excess Shares will be allocated
among all other holders exercising Over-Subscription Privileges. The formula to
be used in allocating the Excess Shares is as follows:

HOLDER'S RIGHTS POSITION
------------------------
Total Number of Rights Held X Excess Shares Remaining
by all Over-Subscribers

The Fund will not offer or sell any Shares that are not subscribed for
under the Primary Subscription or the Over-Subscription Privilege.

The Subscription Price

The Subscription Price for the Shares to be issued pursuant to the
Rights will be $12.75 per Share.

The Fund announced the Offer after the close of trading on the AMEX on
March 5, 1996. The net asset value per share of Common Stock at the close of
business on March 5, 1996, and April 9, 1996, was $22.22 and $23.85,
respectively. The last reported sale price of a share of the Fund's Common Stock
on the AMEX on those dates was $15.50 and $15.875, respectively, representing a
30.2% discount and a 33.4% discount, respectively, in relation to the net asset
value per share of Common Stock at the close of business on such dates.

Sales by Subscription Agent

Holders of Rights who do not wish to exercise any or all of their Rights
may instruct the Subscription Agent to sell any unexercised Rights. The
Subscription Certificates representing the Rights to be sold must be received by
the Subscription Agent on or before May 7, 1996. Upon the timely receipt of
appropriate instructions to sell Rights, the Subscription Agent will use its
best efforts to complete the sale and will remit the proceeds of sale, net of
commissions, to the holders and the Subscription Agent will remit the proceeds
of the purchase or sale, net of commissions, to the Rights holder three Business
Days following the date of such purchase or sale. If the Rights can be sold,
sales of such Rights will be deemed to have been effected at the weighted
average price received by the Subscription Agent on the day such Rights are
sold. The selling Rights holder will pay all brokerage commissions incurred by
the Subscription Agent. In addition, upon return of a completed and fully
exercised Subscription Certificate, the Subscription Agent will automatically
attempt to sell any Rights a Rights holder is unable to exercise because such
Rights will represent the right to subscribe for less than one Share. There can
be no assurance that the Subscription Agent will be able to complete the sale of
any such Rights and neither the Fund nor the Subscription Agent has guaranteed
any minimum sales price for the Rights. All such Rights will be sold at the
market price, if any, on the AMEX.

Method of Transferring Rights

The Rights evidenced by a single Subscription Certificate may be
transferred in whole by endorsing the Subscription Certificate for transfer in
accordance with the accompanying instructions. A portion of the Rights evidenced
by a single Subscription Certificate (but not fractional Rights) may be
transferred by delivering to the Subscription Agent a Subscription Certificate
properly endorsed for transfer, with instructions to register such portion of
the Rights evidenced thereby in the name of the transferee (and to issue a new
Subscription Certificate to the transferee evidencing such transferred Rights).
In such event, a new Subscription Certificate evidencing the balance of the
Rights will be issued to the Rights holder or, if the Rights holder so
instructs, to an additional transferee.

Holders wishing to transfer all or a portion of their Rights (but not
fractional Rights) should allow at least three Business Days prior to the
Expiration Date for (i) the transfer instructions to be received and processed
by the Subscription Agent, (ii) a new Subscription Certificate to be issued and
transmitted to the transferee or transferees with respect to transferred Rights,
and to the transferor with respect to retained rights, if any, and (iii) the
Rights evidenced by such new Subscription Certificates to be exercised or sold
by the recipients thereof. Neither the Fund nor the Subscription Agent shall
have any liability to a transferee or transferor of Rights if Subscription
Certificates are not received in time for exercise or sale prior to the
Expiration Date.

Except for the fees charged by the Subscription Agent (which will be
paid by the Fund as described below), all commissions, fees and other expenses
(including brokerage commissions and transfer taxes) incurred in connection with
the purchase, sale or exercise of Rights will be for the account of the
transferor of the Rights, and none of such commissions, fees or expenses will be
paid by the Fund or the Subscription Agent.

The Fund anticipates that the Rights will be eligible for transfer
through, and that the exercise of the Primary Subscription and the
Over-Subscription Privilege may be effected through the facilities of DTC.

Expiration of the Offer

The Offer will expire at 5:00 p.m., New York time, on May 8, 1996,
unless extended by the Fund to a date not later than May 31, 1996, 5:00 p.m.,
New York time (the "Expiration Date"). Rights will expire on the Expiration Date
and thereafter may not be exercised.

Information Agent

The Information Agent is MacKenzie Partners, Inc. Any questions or
request for assistance or materials may be directed to the Information Agent at
its telephone number and address listed below:

MacKenzie Partners, Inc.
156 Fifth Avenue
New York, New York 10010
(800) 322-2885

The Information Agent will receive a fee estimated to be $15,000 and
reimbursement for all out-of-pocket expenses related to the Offer.

Stockholders may also contact their brokers or nominees for information
with respect to the Offer.

Subscription Agent
The Subscription Agent is First Interstate Bank of Texas, N.A. The
Subscription Agent will receive from the Fund an amount estimated to be
$100,000, comprised of the fee for its services and the reimbursement for
certain expenses related to the Offer. The Subscription Agent is also the Fund's
dividend disbursing agent, transfer agent and registrar. Inquiries to the
Subscription Agent should be directed to First Interstate Bank of Texas, N.A.,
Institutional Trust Department, P.O. Box 4441, MS 189, Houston, Texas
77201-4441, (telephone (800) 507-9357).
Facsimile telephone number for Notices of Guaranteed Delivery is (212) 815-6213.

Method of Exercise of Rights

Rights may be exercised by filling in and signing the reverse side of
the Subscription Certificate and mailing it in the envelope provided, or
otherwise delivering the completed and signed Subscription Certificate to the
Subscription Agent, together with payment for the Shares as described below
under "Payment for Shares." Rights may also be exercised through a Rights
holder's broker, who may charge such Rights holder a servicing fee in connection
with such exercise. Fractional Shares will not be issued, and Rights holders who
receive, or who are
18

left with, fewer than three Rights will not be able to exercise such Rights. The
Subscription Agent will automatically attempt to sell the number of Rights that
a Rights holder is unable to exercise for this reason after return of a
completed and fully exercised Subscription Certificate (prior to May 7, 1996)
and will remit the proceeds of such sale net of commissions to the Rights
holder.

Completed Subscription Certificates must be received by the Subscription
Agent prior to 5:00 p.m., New York time, on the Expiration Date (unless payment
is effected by means of a notice of guaranteed delivery as described below under
"Payment for Shares"). The Subscription Certificate and payment should be
delivered to First Interstate Bank of Texas, N.A., Houston, Texas, Attention:
Tender and Exchange Department at the following address:

If By Mail: First Interstate Bank of Texas, N.A.
Tender and Exchange Department
P.O.Box 11248
Church Street Station
New York, New York 10286-1248.

If By Hand or
Overnight Courier: First Interstate Bank of Texas, N.A.
Tender and Exchange Department
101 Barclay Street
Receive and Deliver Window
Ground Level
New York, New York 10286

Payment of Shares

Holders of Rights who acquire Shares on Primary Subscription or pursuant
to the Over-Subscription Privilege may choose between the following methods of
payment:
(1) A subscription will be accepted by the Subscription Agent if, prior
to 5:00 p.m., New York time, on the Expiration Date, the Subscription Agent has
received (i) a Notice of Guaranteed Delivery by telegram or otherwise from a
bank, a trust company, or a New York or American Stock Exchange member,
guaranteeing delivery of a properly completed and executed Subscription
Certificate and (ii) payment of the full Subscription Price for the Shares
subscribed for on Primary Subscription and any additional Shares subscribed for
pursuant to the Over-Subscription Privilege. The Subscription Agent will not
honor a Notice of Guaranteed Delivery if a properly completed and executed
Subscription Certificate is not received by the Subscription Agent by the close
of business on the third Business Day after the Expiration Date. The Notice of
Guaranteed Delivery may be delivered to the Subscription Agent in the same
manner as Subscription Certificates at the addresses set forth above, or may be
transmitted to the Subscription Agent by facsimile transmission (telecopy number
(212) 815-6213; telephone number to confirm receipt is (800) 507-9357).

(2) Alternatively, a holder of Rights can send the Subscription
Certificate together with payment in the form of a check for the Shares
subscribed for on Primary Subscription and additional Shares subscribed for
pursuant to the Over-Subscription Privilege to the Subscription Agent based on
the Subscription Price of $12.75 per Share. To be accepted, such payment,
together with the executed Subscription Certificate, must be received by the
Subscription Agent at the addresses noted above prior to 5:00 p.m., New York
time, on the Expiration Date.

The Subscription Agent will deposit all stock purchase checks received by it
prior to the final due date into a segregated interest-bearing account pending
proration and distribution of Shares. The Subscription Agent will not accept
cash as a means of payment for Shares. EXCEPT AS OTHERWISE SET FORTH BELOW, A
PAYMENT PURSUANT TO EITHER METHOD MUST BE IN UNITED STATES DOLLARS BY MONEY
ORDER OR
19

CHECK DRAWN ON A BANK LOCATED IN THE CONTINENTAL UNITED STATES, MUST BE PAYABLE
TO "FIRST INTERSTATE BANK OF TEXAS, AS RIGHTS AGENT FOR EQUUS II INCORPORATED."
If the aggregate Subscription Price paid by a Rights holder is insufficient to
purchase the number of shares of Common Stock that the holder indicates are
being subscribed for, or if a Rights holder does not specify the number of
shares of Common Stock to be purchased, then the Rights holder will be deemed to
have exercised first, the Primary Subscription Rights (if not already fully
exercised) and second, the Over-Subscription Privilege to the full extent of the
payment tendered. If the aggregate Subscription Price paid by a Rights holder
exceeds the amount necessary to purchase the number of shares of Common Stock
for which the Rights holder has indicated an intention to subscribe, then the
Rights holder will be deemed to have exercised first, the Primary Subscription
Rights (if not already fully subscribed) and second, the Over-Subscription
Privilege to the full extent of the excess payment tendered.

Within ten Business Days following the Expiration Date (the
"Confirmation Date"), a confirmation will be sent by the Subscription Agent to
each holder of Rights (or, if the Fund's shares are held by Cede or any other
depository or nominee, to Cede or such other depository or nominee), showing (i)
the number of Shares acquired pursuant to the Primary Subscription, (ii) the
number of Shares, if any, acquired pursuant to the Over-Subscription Privilege,
(iii) the per Share and total purchase price for the Shares and (iv) any excess
to be refunded by the Fund to such holder as a result of payment for Shares
pursuant to the Over-Subscription Privilege which the holder is not acquiring.
Any payment required from a holder of Rights must be received by the
Subscription Agent on the Expiration Date, or if the Rights holder has elected
to make payment by means of a notice of guaranteed delivery, on the third
Business Day after the Expiration Date. Any excess payment to be refunded by the
Fund to a holder of Rights, or to be paid to a holder of Rights as a result of
sales of Rights on his behalf by the Subscription Agent or exercises by Rights
holders of their Over-Subscription Privileges, will be mailed by the
Subscription Agent to such holder within fifteen Business Days after the
Expiration Date. All payments by a holder of Rights must be in United States
dollars by money order or check drawn on a bank located in the continental
United States of America and payable to "First Interstate Bank of Texas, N.A.,
as Rights Agent for Equus II Incorporated."

Whichever of the two methods described above is used, issuance and
delivery of certificates for the Shares purchased are subject to collection of
checks and actual payment pursuant to any notice of guaranteed delivery.

A Rights holder will have no right to rescind a purchase after the
Subscription Agent has received payment either by means of a notice of
guaranteed delivery or a check.

If a holder of Rights who acquires Shares pursuant to the Primary
Subscription or the Over-Subscription Privilege does not make payment of any
amounts due, the Fund reserves the right to take any or all of the following
actions: (i) find other purchasers for such subscribed-for and unpaid-for
Shares; (ii) apply any payment actually received by it toward the purchase of
the greatest whole number of Shares which could be acquired by such holder upon
exercise of the Primary Subscription or the Over-Subscription Privilege; (iii)
sell all or a portion of the Shares purchased by the holder, in the open market,
and apply the proceeds to the amounts owed; and (iv) exercise any and all other
rights or remedies to which it may be entitled, including, without limitation,
the right to set off against payments actually received by it with respect to
such subscribed Shares and to enforce the relevant guaranty of payment.

Holders who hold shares of Common Stock for the account of others, such
as brokers, trustees or depositaries for securities, should notify the
respective beneficial owners of such shares as soon as possible to ascertain
such beneficial owners' intentions and to obtain instructions with respect to
the Rights. If the beneficial owner so instructs, the record holder of such
Rights should complete Subscription Certificates and submit them to the
Subscription Agent with the proper payment. In addition, beneficial owners of
Common Stock or Rights held through such a holder should contact the holder and
request the holder to effect transactions in accordance with the beneficial
owner's instructions.
20

The instructions accompanying the Subscription Certificates should be
read carefully and followed in detail. DO NOT SEND SUBSCRIPTION CERTIFICATES TO
THE FUND.

THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE SUBSCRIPTION AGENT WILL BE AT THE ELECTION AND RISK OF
THE RIGHTS HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH CERTIFICATES
AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO ENSURE DELIVERY TO
THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO 5:00 P.M., NEW YORK
CITY TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE
AT LEAST FIVE BUSINESS DAYS TO CLEAR, YOU ARE STRONGLY URGED TO PAY, OR ARRANGE
FOR PAYMENT, BY MEANS OF A CERTIFIED OR CASHIER'S CHECK OR MONEY ORDER.

All questions concerning the timeliness, validity, form, and eligibility
of any exercise of Rights will be determined by the Fund, whose determinations
will be final and binding. The Fund in its sole discretion may waive any defect
or irregularity, or permit a defect or irregularity to be corrected within such
time as it may determine, or reject the purported exercise of any Right.
Subscriptions will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time as the Fund determines
in its sole discretion.

Neither the Fund nor the Subscription Agent will be under any duty to
give notification of any defect or irregularity in connection with the
submission of Subscription Certificates or incur any liability for failure to
give such notification.

Delivery of Stock Certificates

Certificates representing Shares purchased pursuant to the Primary
Subscription will be delivered to subscribers as soon as practicable after the
corresponding Rights have been validly exercised and full payment for such
Shares has been received and cleared. Certificates representing Shares purchased
pursuant to the Over-Subscription Privilege will be delivered to subscribers as
soon as practicable after the Expiration Date and after all allocations have
been effected.

Federal Income Tax Consequences

For federal income tax purposes, neither the receipt nor the exercise of
the Rights by Record Date Stockholders will result in taxable income to holders
of the Common Stock, and no loss will be realized if the Rights expire without
exercise.

With respect to Rights issued to Record Date Stockholders that are
subsequently exercised or disposed of, if the fair market value of the Rights on
the date of distribution is equal to 15 percent or more of the fair market value
of the Common Stock, the adjusted basis in the Rights exercised or disposed of
is determined by allocating the adjusted basis in the Common Stock with respect
to which the distribution is made between such Rights and such Common Stock in
proportion to their fair market value on the date of distribution (the "General
Rule"). In these circumstances, the adjusted basis in the Shares acquired
through exercise of the Rights is the Subscription Price plus the adjusted basis
in the Rights exercised. If the fair market value of the Rights on the date of
distribution is less than 15 percent of the fair market value of the Common
Stock on that date, in the absence of an election to apply the General Rule, the
adjusted basis in the Rights exercised or disposed of is zero, and the adjusted
basis in the newly acquired Common Stock is the Subscription Price. An election
to apply the General Rule should be made in the form of a statement attached to
the stockholder's tax return for the year in which the Rights were received and
must be made with respect to all Rights received in this distribution. The
election, once made, is irrevocable with respect to these Rights.

With respect to Rights that are purchased, the basis in the Rights is
their cost, and the basis of the newly acquired Shares issued upon exercise of
such Rights is the Subscription Price for the newly acquired Shares plus the
basis in the Rights exercised. If any purchased Rights expire without exercise,
the Rights holder will recognize a short-term capital loss.

If Rights are sold, the gain or loss will be the difference between
their adjusted basis and their sale price. The gain or loss recognized upon the
sale of the Rights will be capital gain or loss if the Rights were held as a
capital asset at the time of sale and will be long-term capital gain or loss if
the Rights are deemed to have been held at the time of sale for more than one
year. The holding period for the Rights that are sold includes the holding
period of the Common Stock in respect of which the Rights were distributed.

The holding period for a Share acquired upon exercise of a Right begins
with the date of exercise. The gain or loss recognized upon a sale of that Share
will be capital gain or loss if the Share was held as a capital asset at the
time of sale and will be long-term capital gain or loss if it was held at the
time of sale for more than one year.

The foregoing is a general summary of the applicable provisions of the
Code and United States Treasury regulations presently in effect, and does not
cover state or local taxes. The Code and such regulations are subject to change
by legislative or administrative action. Stockholders are advised to consult
their own tax advisers with respect to the particular tax consequences to them
with respect to exercise or transfer of Rights.

Employee Plan Considerations

Stockholders that are employee benefit plans subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") (including
corporate savings and 401(k) plans), Keogh Plans of self-employed individuals
and Individual Retirement Accounts (collectively, "Benefit Plans") should be
aware that additional contributions of cash in order to exercise Rights would be
treated as Benefit Plan contributions and, when taken together with
contributions previously made, may subject a Benefit Plan to excise taxes for
excess or nondeductible contributions. In the case of Benefit Plans qualified
under Section 401(a) of the Code, additional cash contributions could cause the
maximum contribution limitations of Section 415 of the Code or other
qualification rules to be violated. Benefit Plans contemplating making
additional cash contributions to exercise Rights should consult with their
counsel prior to making such contributions.

Benefit Plans and other tax exempt entities, including governmental
plans, should also be aware that if they borrow in order to finance their
exercise of Rights, they may become subject to the tax on unrelated business
taxable income ("UBTI") under Section 511 of the Code. If any portion of an
Individual Retirement Account ("IRA") is used as security for a loan, the
portion so used is also treated as distributed to the IRA depositor.

ERISA contains prudence and diversification requirements and ERISA and
the Code contain prohibited transaction rules that may impact the exercise of
Rights. Among the prohibited transaction exemptions issued by the Department of
Labor that may exempt a Benefit Plan's exercise of Rights are Prohibited
Transaction Exemption 84-24 (governing purchases of shares in investment
companies) and Prohibited Transaction Exemption 75-1 (covering shares of
securities).

Due to the complexity of these rules and the penalties for
noncompliance, Benefit Plans should consult with their counsel regarding the
consequences of their exercise of Rights under ERISA and the Code.

Dilution

An immediate dilution of the aggregate net asset value of the shares
owned by stockholders who do not fully exercise their Rights is likely to be
experienced as a result of the Offer because the Subscription Price is likely to
be less than the then net asset value per share, and the number of shares
outstanding after the Offer is likely to

increase in greater percentage than the increase in the size of the Fund's
assets. In addition, as a result of the terms of the Offer, stockholders who do
not fully exercise their Rights will, at the completion of the Offer, own a
smaller proportional interest in the Fund than would otherwise be the case.
Although it is not possible to state precisely the amount of such a decrease in
value, because it is not known at this time what the net asset value per share
will be at the Expiration Date, such dilution could be substantial. For example,
assuming that all Rights are exercised and that the Subscription Price of $12.75
is 46.5% below the Fund's then net asset value per share, the Fund's net asset
value per share (before deduction of expenses incurred in connection with the
Offer) would be reduced by approximately $2.78 per share.

Legal Proceeding

The Fund has been advised that on or about April 1, 1996, an action was
filed in federal district court in Houston, Texas by two stockholders of the
Fund against the directors of the Fund, the Investment Adviser, and the Fund, as
nominal defendant, asserting that by approving the Offer the Investment Adviser
and the directors of the Fund violated their fiduciary duties to the Fund's
stockholders under the Investment Company Act of 1940 and Delaware common law,
that the Fund and the Investment Adviser aided and abetted the breaches of
fiduciary duties, and that the directors' approval of the Offer constitutes
unratifiable ULTRA VIRES and illegal conduct. The plaintiffs seek to have the
action certified as a class action on behalf of all of the stockholders of the
Fund but do not specify the amount of any damages that have been suffered. No
answers have been filed to the complaint, but the Fund and the Investment
Adviser intend to vigorously defend against this action, and management of the
Fund believes that ultimate resolution of such complaint will not have a
material adverse effect on the Fund's financial position or results of
operations. Notwithstanding the allegations of the plaintiffs in this action,
the Board of Directors have determined that the Fund should proceed with the
Offer, that the Offer will result in a net benefit to existing stockholders, and
that the expected benefits to the Fund and to all stockholders outweigh any
potential dilutive effects from the Offer.

USE OF PROCEEDS

The net proceeds of the Offer, assuming all Shares offered hereby are sold,
are estimated to be approximately $13,119,000, after deducting expenses payable
by the Fund estimated at approximately $220,000. The Investment Adviser
anticipates that such proceeds will be used by the Fund, in accordance with the
Fund's investment objective, to repay indebtedness incurred by the Fund to make
new investments and to fulfill commitments that the Fund made for follow-on
investments. The Fund intends to apply substantially all of the proceeds of the
Offer to repay indebtedness outstanding under its revolving credit facility. At
April 9, 1996, the Company had $16,127,477 in indebtedness outstanding under
such facility at a current interest rate of 8.25% per annum. Such indebtedness
matures on April 3, 1997. To the extent the net proceeds of the Offer exceed the
amount required to repay such indebtedness, the Fund anticipates that such
proceeds will be invested in new or follow-on investments within three months.
Pending such investment, in accordance with the Fund's investment objectives and
policies, the proceeds will be held in securities issued or guaranteed by the
U.S. Treasury or U.S. Government agencies and other short-term money market
instruments. See "Investment Objective and Policies -- Temporary Investments."

RISK FACTORS AND SPECIAL CONSIDERATIONS

Investors should consider the following risk factors and special
considerations associated with an exercise of Rights and an additional
investment in 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 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

The Fund is classified as a "non-diversified" investment company under
the Act, which means the Fund is not limited by the Act in the proportion of its
assets that may be invested in the securities of a single issuer. However, the
Fund has in the past conducted and intends to continue to conduct its operations
so as to qualify as a "regulated investment company" for purposes of the Code,
which will relieve the Fund of any liability for federal income tax to the
extent its earnings are distributed to stockholders. See "Tax Matters." To so
qualify, among other requirements, the Fund will limit its investments so that,
at the close of each quarter of the taxable year, (i) not more than 25% of the
market value of the Fund's total assets will be invested in the securities of a
single issuer, and (ii) with respect to 50% of the market value of its total
assets, not more than 5% of the market value of its total assets will be
invested in the securities of a single issuer and the Fund will not own more
than 10% of the outstanding voting securities of a single issuer. The Fund's
investments in cash, cash equivalents, and U.S. Government Securities are not
subject to these limitations. To the extent the Fund takes large positions in
the securities of a small number of issuers, 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 in the market's assessment of such issuers to a greater
extent than that of a diversified investment company.

Number of Investments; Industry Concentration

The Fund is limited in the amount of its assets it may invest in any one
portfolio company. Generally, the Fund does not intend to initially invest more
than 15% of the value of its assets in a single portfolio company. However,
follow-on investments may result in greater than 15% of the Fund's assets being
invested in a single portfolio company. While these restrictions limit the
exposure of the capital of the Fund in any single investment, the Fund's capital
will be invested in a limited number of portfolio companies and financial
difficulty on the part of any single portfolio company will expose it to a
greater risk of loss than would be the case if it were a "diversified" company
holding numerous investments. The Fund currently has investments in 21 portfolio
companies, of which four exceed 10% of the value of its net assets.

The Fund intends to spread its investments among several industries.
Although Management does not intend to invest more than 25% of the Fund's assets
in portfolio companies in a particular industry or to otherwise concentrate in
any one or a few industries, if the most attractive investments available to
Management and the Fund are concentrated in a small number of industries, the
Fund's portfolio may become concentrated in those industries. In such event, the
Fund would be exposed to the risk of adverse developments in or affecting any
single industry to a greater extent than if its investments were dispersed over
a greater variety of industries.

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. The Fund's portfolio companies incur
substantial indebtedness in connection with leveraged buyout or other highly
leveraged transactions. Such indebtedness generally represents from 66% to 90%
of the capitalization of a portfolio company. See "The Fund -- Investment
Objective and Policies." In the event a portfolio company cannot generate
adequate cash flow to meet the principal and interest payments on such
indebtedness, the Fund's equity 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 of the investments in such companies, will
depend in a significant part upon prevailing interest rates.

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, and applicable state securities law or
unless an exemption from such registration requirements is available. The
securities acquired by the Fund generally will not qualify for sale under Rule
144 under the Securities Act, which permits limited sales under specified
conditions. When restricted securities are sold to the public, the Fund may be
deemed an "underwriter" or possibly a controlling person with respect thereto
for the purpose of the Securities Act and may be subject to liability as such
under the Securities Act.

In addition, contractual or practical limitations may restrict the
Fund's ability to liquidate its securities in portfolio companies since in most
cases the securities of such companies will be privately held and the Fund may
own a relatively large 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 or issuers in particular
industries. Furthermore, since many or all of the Fund's investments will be
unrated, certain potential buyers who are restricted to making investments in
rated securities may not be available to purchase any such investment. 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.

The Fund may, upon (i) the determination of the Board of Directors of
the Fund that it would not be in the best interest of the stockholders of the
Fund to liquidate such securities and distribute the proceeds thereof, and (ii)
the receipt of a no-action letter or exemptive order from the Commission, make
distributions in kind of the portfolio securities of the Fund as the Board of
Directors of the Fund deems advisable. Distributions of securities in kind will
be made only of marketable securities and to the extent permitted under
applicable federal and state securities laws. The sale of any securities
distributed in kind to stockholders may be subject to the same legal,
contractual and practical limitations described above that apply to the Fund.
Transfer of such securities may be legally restricted, there may be no public
market for such securities, each stockholder will hold a relatively small
percentage of such securities, and each stockholder will bear the brokerage and
other expenses involved in disposing of such securities.

Need for Follow-on Investments

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. See "The Fund -- Investment
Objective and Policies." 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 leveraged buyout
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, and may include Management or their
affiliates. Some of these competitors may have greater financial resources and
more personnel than the Fund and/or the Investment Adviser and may be subject to
different and frequently less stringent regulation.

Borrowing

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 Code or to pay contingencies and expenses. The Fund is
permitted under the 1940 Act to borrow funds if, immediately after the
borrowing, it will have an asset coverage (as defined in the 1940 Act) 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 neither the Board of Directors nor the Investment Adviser has control,
including general economic conditions, conditions in the financial markets and
the impact of the financing on the tax treatment of the stockholders. See "The
Fund -- Investment Objective and Policies -Borrowing."

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 involuntarily liquidated.

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 the 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 "Tax
Matters." If the asset coverage for debt securities issued by the Fund declines
to less than 200 percent (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.

Because of the nature and size of its portfolio investments, the Fund
borrows money from time to time to make qualifying investments to maintain its
tax status under the Code. There can be no assurance that debt financing will be
available on terms that the Board of Directors considers to be acceptable and in
the best interests of the Fund. If borrowing is unavailable, the Fund may be
required to make an untimely disposition of an investment or lose its
pass-through tax status. See "Loss of Conduit Tax Treatment" below.

Loss of Conduit Tax Treatment

The Fund may cease to qualify for conduit tax treatment if it is unable
to comply with the diversification requirements contained in Subchapter M of the
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. The
Fund will borrow funds if 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. Under the 1940 Act,
the Fund will not be permitted to make distributions to stockholders unless it
meets certain asset coverage requirements.
See "Tax Matters" and "Regulation" in the SAI.

Market Value and Net Asset Value

The shares of Common Stock are listed on the AMEX. 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. Since the commencement of the
Fund's operations, the Fund's shares have generally traded in the market at a
discount to net asset value. The Fund's shares are not subject to redemption.
Investors desiring liquidity may, subject to applicable securities laws, trade
their shares in the Fund on any exchange where such shares are then trading at
current market value, which may differ from the then current net asset value.
For information concerning the trading history of the Fund's shares, see "Market
for Common Stock and Net Asset Value Information."

The Fund may attempt from time to time to reduce or eliminate a market
value discount from the net asset value of its shares by repurchasing shares on
the open market when it can do so at prices below the then current net asset
value or by making a tender offer at net asset value. The Fund may incur debt to
finance these transactions. During 1994 and 1995, the Fund purchased 191,700
shares of Common Stock on the open market. There can be no assurance that the
prospect of repurchases of shares through open market purchases or tender offers
will cause the Fund's shares to trade at a price equal to their net asset value.
See "Market for Common Stock and Net Asset Value Information - Repurchase of
Shares."

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. 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. Cost is used to approximate fair value of other
investments until significant developments affecting an investment provide a
basis for use of an appraisal valuation. Thereafter, portfolio investments are
carried at appraised values as determined quarterly by ECC, subject to the
approval of the Board of Directors. Because of the inherent uncertainty of the
valuation of portfolio securities which do not have readily ascertainable market
values, ECC's estimate of fair value may significantly differ from the fair
value that would have been used had a ready market existed for the securities.
See "Management of the Fund -- Valuation" for a discussion of how the Fund's
investment are valued.

Repurchase Agreements

For cash management purposes, the Fund may engage in repurchase
agreement transactions involving money market instruments with banks, registered
broker-dealers and government securities dealers approved by the Fund's Board of
Directors. The Fund will not enter into repurchase agreements with the
Investment Adviser or any of its affiliates. Under the terms of a typical
repurchase agreement, the Fund would acquire any underlying debt obligation for
a relatively short period (usually not more than one week) subject to an
obligation of the seller to repurchase, and the Fund to resell, the obligation
at an agreed price and time, thereby determining the yield during the Fund's
holding period. Thus, repurchase agreements may be seen to be loans by the Fund
collateralized by the underlying debt obligation. This arrangement results in a
fixed rate of return that is not subject to market fluctuations during the
Fund's holding period. The value of the underlying securities will be at least
equal at all times to the total amount of the repurchase obligation, including
interest. The Fund bears a risk of loss in the event that the other party to a
repurchase agreement defaults on its obligations and the Fund is delayed in or
prevented from exercising its rights to dispose of the collateral securities,
including the risk of a possible decline in the value of the underlying
securities during the period in which the Fund seeks to assert these rights. The
Investment Adviser, acting under the supervision of the Fund's Board of
Directors, reviews the creditworthiness of those banks and dealers with which
the Fund enters into repurchase agreements to evaluate these risks and monitors
on an ongoing basis the value of the securities subject to repurchase agreements
to ensure that the value is maintained at the required level.

Regulation

The Fund has elected to be treated as a business development company
under the 1940 Act. The 1940 Act imposes numerous restrictions on the activities
of the Fund, including restrictions on the nature of their investments, their
use of borrowed funds for Fund purposes and their issuance of securities,
options, warrants or rights, and requires that a majority of the Directors be
individuals who are not "interested persons" of the Fund as defined under the
1940 Act. Such restrictions may prohibit the purchase of certain investments by
the Fund that would otherwise be suitable for investment by the Fund or render
such purchases inadvisable. See "Regulation" in the SAI.

Because there are no judicial and few administrative interpretations of
the provisions of the 1940 Act pertaining to business development companies,
there is no assurance that such provisions will be interpreted or
administratively implemented in a manner consistent with the Fund's investment
objectives and intended manner of operation. In the event that the Board of
Directors of the Fund determines that the Fund cannot economically pursue its
investment objective under the 1940 Act, they may at some future date decide to
withdraw the Fund's election to be treated as a business development company and
convert the Fund into a management investment company or an operating company
not subject to regulation under the 1940 Act, or cause the Fund to liquidate.
These changes may not be effected without the approval of a majority of the
shares of the Fund. See "The Fund -- Investment Objective and Policies."

Dilution

be less than the then net asset value per share, and the number of shares
outstanding after the Offer is likely to increase in greater percentage than the
increase in the size of the Fund's assets. In addition, as a result of the terms
of the Offer, stockholders who do not fully exercise their Rights should expect
that they will, at the completion of the Offer, own a smaller proportional
interest in the Fund than would otherwise be the case. Although it is not
possible to state precisely the amount of such a decrease in value, because it
is not known at this time what the net asset value per share will be at the
Expiration Date, such dilution could be substantial. For example, assuming that
all Rights are exercised and that the Subscription Price of $12.75 is 46.5%
below the Fund's then net asset value per share, the Fund's net asset value per
share (before deduction of expenses incurred in connection with the Offer) would
be reduced by approximately $2.78 per share.

THE FUND

GENERAL

The Fund, incorporated in Delaware on August 16, 1991, is a
non-diversified, closed-end management investment company that has elected to be
a business development company under the 1940 Act. The Fund's Common Stock is
traded on the AMEX under the symbol "EQS." The Fund was organized as a successor
corporate business development company to the Partnership pursuant to a
reorganization in which all of the assets and liabilities of the Partnership
were transferred to the Fund on July 1, 1992, in exchange for shares of Common
Stock of the Fund. On June 30, 1993, Equus Investments Incorporated ("EQI"), a
Delaware corporation and successor business development company to Equus
Investments I, L.P. was merged with and into the Fund. References to the Fund
are intended to include the Partnership and EQI and its predecessor where the
context requires.

INVESTMENT OBJECTIVE AND POLICIES
General

The Fund's investment objective is to achieve capital appreciation. The
Fund seeks to achieve its objective principally by making investments in equity
and equity-oriented securities issued by privately-owned companies ("portfolio
companies") in transactions negotiated directly with such companies and
subsequently disposing of such investments. The Fund seeks to invest primarily
in small and medium-sized companies located in the United States that intend to
acquire other businesses including through leveraged buyouts. The Fund may
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 or preferred stock or debt combined with
warrants, options, or 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 1940 Act. The Fund will not withdraw such election or change its
primary investment objective unless, in either case, such action is authorized
by the vote of a majority of the shares of the Fund. ALL OTHER INVESTMENT
POLICIES OF THE FUND MAY BE CHANGED WITHOUT A VOTE OF STOCKHOLDERS.

As a business development company, the Fund is limited in its choice of
investments under the 1940 Act. The Fund will not purchase any securities on
margin (except for the use of short-term credit necessary for the clearance of
transactions), make short sales of securities, purchase or sell commodities or
commodity contracts, write put or call options, purchase or sell real estate
(except in connection with leveraged buyout transactions) or real estate
mortgage loans, lend its portfolio securities to any other person or enter into
repurchase agreements with respect to its portfolio securities. See "Regulation"
in the SAI.
29

Portfolio Companies

The Fund principally makes equity and equity-oriented investments in
negotiated private transactions in companies located in the United States that
intend to acquire other businesses including through leveraged buyouts.

The Fund may make equity and equity-oriented investments in new
companies or companies in an early stage of development that the Investment
Adviser believes have significant growth and profit potential. The Fund may also
make investments in other companies that are marginally profitable or incurring
losses, that have negative net worth or that are involved in bankruptcy,
reorganization or similar proceedings. Such investments would involve businesses
that the Investment Adviser believes have turnaround potential through the
infusion of additional working capital and strengthened management. Investment
in such companies could involve additional elements of risk. Investments in such
special situations will be made only where the Investment Adviser has a specific
plan to improve the operating performance of such companies. It is expected that
the aggregate amount of investments by the Fund of the types described in this
paragraph will represent less than 15% of the total amount of the net assets of
the Fund.

Although investments will be sought on a nationwide basis, it is
expected that the Fund's portfolio companies will be concentrated in the
southwestern United States because of the Investment Adviser's location and
business contacts and experience.

Investment Practices

Substantially all of the net assets of the Fund are invested or
committed to be invested in securities of portfolio companies. The Fund's
investments in portfolio companies are usually structured in private
transactions negotiated directly with the owner or issuer of the securities
acquired. Such securities consist principally of common stock and preferred
stock, but may also include equity-oriented securities such as debt securities
convertible into common or preferred stock, or a combination of debt and equity
securities, warrants, options and other rights to acquire such securities or
partnership interests.

A portion of the Fund's investments in a portfolio company may involve
the purchase of short-term or long-term notes or debentures. Such debt
instruments may be subordinated to one or more classes of senior indebtedness of
the portfolio company (such as funds borrowed from financial institutions) and
generally be convertible into common or preferred stock of the portfolio company
or have warrants or options issued in connection therewith which will enable the
Fund to purchase shares of common or preferred stock at a future date.

The Fund concentrates its investment efforts on companies of a type and
size that, in the Investment Adviser's view, provide opportunities for
significant capital appreciation, relative ease of acquisition and disposition,
reduced competition for investment 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 equity investment in a portfolio company typically ranges from
$2,000,000 to $7,000,000. The balance of the purchase price of a portfolio
company is supplied by debt financing and other equity investors, if necessary.

The Fund attempts to reduce certain of the risks inherent in leveraged
and private equity-oriented investments (see "Risk and Other Important Factors")
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 portfolio
companies to 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.
30

The Fund has qualified for the tax treatment applicable to regulated
investment companies under Subchapter M of the Code since its incorporation.
Subchapter M provides that, in order to qualify as a regulated investment
company, at the end of each quarter the Fund's portfolio must meet certain
diversification requirements. See "Tax Matters" and "Risk and Other Important
Factors - Loss of Conduit Tax Treatment." These diversification requirements may
limit the Fund's ability to make new or follow-on investments upon the sale of
other investments, since each new investment would require a revaluation of the
Fund's total assets, including capital appreciation of existing investments. In
addition, the 10% voting securities limitation may affect the size or type of
equity investment that the Fund may make. The Fund may borrow funds to make
investments to satisfy the foregoing diversification requirements. See "Tax
Matters."

The Fund makes equity investments as a sole investor, with other
professional private equity investors or other persons. The Fund ordinarily is
not the sole investor in a portfolio company. Joint equity participants may
include the management of the portfolio company, other business development
companies, small business investment companies, other institutional investors,
and venture capital groups. See "Conflicts of Interest" in the SAI. The Fund
currently co-invests in four portfolio companies with Equus Capital Partners,
L.P. ("ECP"), an affiliated business development company, which investments
represent 38% of the net assets of the Fund. 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.

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 implement fully 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. In addition, the Fund may borrow to raise all or a
portion of the funds required to make follow-on investments. See "Borrowing"
below. The total of the Fund's initial and follow-on investments in a single
portfolio company may exceed the initial investment limitation described above.

A portion of the Fund's investment in a portfolio company may take the
form of a commitment by the Fund to invest funds in such portfolio company
beyond the initial investment.

Reference should be made to the SAI for additional information
concerning the Fund's investment practices and co-investments.

Borrowing

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 Code, to pay contingencies and expenses, or to pay
dividends. The Fund may also commit to invest funds in a portfolio company
beyond its initial investment or guarantee the obligations of a portfolio
company. The Fund is permitted under the 1940 Act to borrow funds in an amount
not to exceed one-half of its available capital (an asset coverage ratio of
200%). The Fund may borrow funds in an amount up to 50% of the value of its
assets (including investments made with borrowed funds). This may be done either
through the issuance of debt securities or by obtaining loans from commercial
banks or other sources. If the Fund borrows funds through the issuance of a
"senior security representing indebtedness" (as defined in the 1940 Act),
distributions to stockholders or the repurchase of shares is prohibited unless
the Fund's asset coverage ratio is 200% at the time of the distribution or
repurchase. See "Regulation" in the SAI. The amount and nature of any borrowings
will depend on a number of factors over which neither the Fund nor the
Investment Adviser has control, including general economic conditions,
conditions in the financial markets, and the impact of the financing on the tax
treatment of the stockholders.
31

Loans obtained or debt securities issued by the Fund may provide for
interest payable at a floating rate (for example, linked to prime or commercial
rates) or a fixed rate on funds drawn down and a standby commitment fee applied
to any portion of the lending commitment not drawn down. The Fund also expects
that, as a condition to lending, lenders to the Fund may place restrictions on
the Fund, which may include reserve requirements or operating restrictions, and
may limit the ability of the Investment Adviser to control investments or their
refinancing and the ability of the Fund to make distributions to stockholders.

Although the use of leverage entails certain risks, it also enables the
Fund to better control the timing of its purchases and sales of investments by
increasing the Fund's liquidity. There can be no assurance that the Fund will
borrow when considered desirable. The Fund may not be able to arrange debt
financing on terms acceptable to the Board of Directors, or the Board of
Directors may believe borrowings are not in the Fund's best interest. If the
Fund were unable to obtain debt financing, the Fund might be required to sell a
portfolio investment at an inopportune time, or to forego the purchase of an
attractive potential or follow-on investment, due to a short-term liquidity
problem. In either case, the value of the Fund's investment portfolio, and of
the Shares, could be adversely affected. See "Risk Factors and Special
Considerations -- Borrowing."

The Fund had outstanding the following sources of financing as of
December 31, 1995:
<TABLE>
<CAPTION>
AVERAGE ANNUAL PORTFOLIO
AMOUNT AMOUNT RETURN TO COVER
CLASS OUTSTANDING OUTSTANDING ANNUAL RATE OF INTEREST INTEREST (1)
- ----- ----------- ----------- ---------------------------- ----------------
INITIAL As of Dec. 31, 1995
------- -------------------
<S> <C> <C> <C> <C> <C>
Revolving line of credit.. $60,000,000 $2,079,452 8.00% 8.50% 0.13%
Revolving line of credit.. 5,750,000 759,863 8.50% 8.50% 0.05%
</TABLE>
- ----------
(1) The total annual portfolio return to cover interest ("Annual Return" is
calculated as the total estimated 1995 annual interest payments per class of
financing, divided by total assets at December 31, 1995. The Annual Return
needed to cover all classes of financing as of December 31, 1995, combined is
0.18%.

ILLUSTRATION. The following table is provided to assist the investor in
understanding the effects of leverage. The figures appearing in the table are
hypothetical and the actual return may be greater or less than appearing in the
table. The table assumes that the Fund has an average of $2,000,000 and
$10,000,000 outstanding under its revolving lines of credit.

Assumed return on portfolio
(net of expenses)................ -10% -5% 0% 5% 10%

Corresponding return to common
stockholders..................... -23.06% -12.36% -1.65% 9.06% 19.76%

OPERATING EXPENSES

The Investment Adviser, at its expense, provides the Fund with office
space, facilities, equipment and personnel (whose salaries and benefits will be
paid by the Investment Adviser) necessary for the conduct of the Fund's
business. See "Management of the Fund -- Investment Adviser."

The Fund pays certain expenses relating to its operations, including the
management fees and incentive compensation to the Investment Adviser; fees and
expenses of the outside Directors; finder's fees; direct costs of proposed
investments in portfolio companies; depositary fees of unaffiliated
depositaries; fees of unaffiliated transfer agents, registrars, and disbursing
agents; the administrative fee to the Investment Adviser; portfolio transaction
expenses; interest; legal and accounting expenses; costs of printing and mailing
proxy materials and reports to
32

stockholders; AMEX fees; custodian fees; taxes; litigation costs; costs of
disposing of investments, including brokerage fees and commissions; and other
extraordinary or non-recurring expenses and other expenses properly payable by
the Fund.

DIVIDENDS AND DISTRIBUTIONS

The Fund intends to distribute to its stockholders all of its net
investment income at least annually. On November 7, 1994, the Fund announced a
policy of distributing annually a dividend of at least $.50 per share. In the
event that taxable income, including realized capital gains, exceeds $.50 per
share in any year, additional dividends may be declared to distribute such
excess. If, for any calendar year, total distributions exceed net investment
income and net realized capital gains, the excess will generally be treated as a
tax-free return of capital (up to the amount of the stockholder's tax basis in
his shares). The amount treated as a tax-free return of capital will reduce a
stockholder's adjusted basis in his shares, thereby increasing his potential
gain or reducing his potential loss on the sale of his shares. Such excess,
however, will be treated as ordinary dividend income up to the amount of the
Fund's current and accumulated earnings and profits. Distributions can be made
payable by the Fund either in the form of a cash distribution or a stock
dividend. The Fund has not adopted any set policy concerning whether dividends
will be paid only in cash, only in stock, or in stock or cash by specific
election. If the Fund does not have available cash to pay the minimum dividends
it may borrow the required funds or sell some of its portfolio investments.

The Fund may either distribute its net capital gains from the sale of
investments each year or retain and pay income tax on all or a portion of any
net realized long-term capital gains. The Fund may retain net proceeds to pay
contingencies and expenses and make new or follow-on investments. For
information concerning the tax treatment of these distributions to the Fund and
to stockholders, see "Tax Matters." For a discussion of certain possible
restrictions on the Fund's ability to pay dividends on the Shares, see
"Regulation" in the SAI.

The Fund declared dividends of $5,814,990 ($2.00 per share) and $763,268
($0.25 per share) during 1995 and 1994, respectively. The 1994 dividend was paid
in cash and represented a return of capital. The 1995 dividend, which
represented the Fund's capital gains for tax purposes, was paid in additional
shares of Common Stock or in cash by specific election of the stockholders in
December 1995. The Fund paid $2,753,180 in cash and issued 231,080 additional
shares of stock at $13.25 per share in December 1995 in connection with such
dividends.

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.

To the extent that the Fund invests in interest-bearing subordinated
debt securities or dividend paying preferred stock, the Fund will distribute net
investment income earned on such investments from time to time, to the extent
not retained for follow-on investments, expenses and contingencies. If net
investment income is retained, the Fund will be subject to Federal income tax.

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 1940 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, financings requirements, management additions or replacements and
development of a public market for the securities of the portfolio company. When
necessary, the Investment Adviser, on behalf of the Fund, may also assign staff
professionals with financial or management expertise to assist portfolio company
management on specific problems.

CURRENT PORTFOLIO COMPANIES

Following is a list of the Fund's portfolio companies at December 31,
1995.

A. C. LIQUIDATING CORPORATION

A. C. Liquidating Corporation ("ACL"), Houston, Texas, has disposed of
its operating businesses and currently holds two parcels of real estate and a
note receivable. ACL is offering the real estate for sale and intends to
distribute the net proceeds of such sale, collections on the note receivable and
its remaining cash to its shareholders as soon as possible. At December 31,
1995, the Fund's investment in ACL consisted of $188,014 in 10% secured
promissory notes and $488,500 in 10% Series C cumulative preferred stock, and
the investment was valued at $188,014. Stock held by the Fund represents a 49%
fully-diluted equity interest in ACL. Mr. Lehmann, President of the Fund, serves
as a director of ACL.

ALLIED WASTE INDUSTRIES, INC. (NASDAQ: AWIN)

Allied Waste Industries, Inc. ("Allied"), Scottsdale, Arizona, is
involved in the acquisition and management of solid waste disposal operations.
The Company owns or operates 33 collection companies, 21 transfer stations, 18
landfills and 8 recycling facilities located in ten states. The December 31,
1995 closing price of Allied's common stock on the NASDAQ National Market was
$7.125 per share. At December 31, 1995, the Fund's investment in Allied, valued
at $8,768,825 with a cost of $5,316,834, consisted of 1,397,698 shares of
restricted common stock valued at an average of $6.27 per share, and warrants to
buy up to 303,044 shares of common stock at prices ranging from $4.60 to $13.50
per share. The valuation discount, due to restrictions on the Fund's ability to
sell the common stock and warrants, results in an aggregate reduction in value
recorded by the Fund from the market price on December 31, 1995, of $1,867,084.
The Fund's investment in Allied represents an approximate 3% fully-diluted
equity interest in Allied. Mr. Lehmann serves on Allied's Board of Directors.

AMERICAN RESIDENTIAL SERVICES, INC.

American Residential Services, Inc. ("ARS"), Houston, Texas, was created
to acquire existing businesses which provide plumbing, heating and air
conditioning and electrical services to the residential community. Through
December 31, 1995, the Fund had advanced $50,000 to ARS as partial funding
pursuant to a $200,000 prime rate promissory note. Subsequent to December 31,
1995, the Fund committed to invest up to an additional $1,400,000 in ARS,
subject to certain conditions.

BSI HOLDINGS, INC., FORMERLY BRAZOS SPORTSWEAR, INC., AND RELATED
ENTITIES

BSI Holdings, Inc. ("BSI"), Cincinnati, Ohio, is a licensed sportswear
company with operating facilities in nine states. BSI sells to over 15,000
customers, including Wal-Mart, Target and JC Penney, under seven different
trademarks or labels. At December 31, 1995, the Fund's investment in BSI, valued
at $6,028,500 with a cost of $4,858,500, consisted of 166,250 shares of common
stock, $3,350,000 in a 12% senior subordinated debenture, $178,500 in a 10%
subordinated promissory note and warrants to buy up to 64,715 shares of common
stock for $0.01 per share. In addition, the Fund has committed to invest up to
an additional $5,000,000 in BSI, under certain circumstances. The Fund's
investment in BSI represents an approximate 58% fully-diluted equity interest.
Mr. Lehmann and Mr. Hale, a Vice President of the Fund, serve as directors of
BSI.

GCS RE, Inc. ("GCS"), Houston, Texas, was formed to be a general partner
of a real estate partnership, which owns a warehouse that is leased to BSI. At
December 31, 1995, the Fund's investment in GCS consisted of 1,000 shares of
common stock that was valued at $132,910, its original cost. The Fund owns 100%
of the stock of GCS, and GCS owns 50% of the real estate partnership. In
addition, the Fund has committed to invest up to an additional

$565,500 in GCS, under certain circumstances. Mr. Douglass, Chairman and CEO of
the Fund, and Mr. Lehmann serve on the Board of Directors of GCS.

Sports/Leisure, Inc. ("SLI"), Boca Raton, Florida, is a distributor of
leisure sporting wear. At December 31, 1995, the Fund's investment in SLI, which
was received in exchange for preferred stock of BSI, was valued at $5,881 with a
cost of $87,739 and consisted of 87,632 shares of common stock and $5,005
outstanding under an 8% unsecured promissory note. The Fund's investment in SLI
represents less than a 1% fully-diluted equity interest.

CARDIOVASCULAR VENTURES, INC.

Cardiovascular Ventures, Inc. ("CVI"), New Orleans, Louisiana, develops
and operates freestanding clinics for cardiac catheterization procedures. CVI
currently operates six clinics in Florida, Maryland and Texas. At December 31,
1995, the Fund's investment in CVI consisted of 150,000, 214,286 and 56,717
shares of Series A, Series B and Series C convertible preferred stock,
respectively, valued at $1,373,138, its original cost. The Fund's investment
represents an approximate 9% fully-diluted equity interest in CVI.

CARRUTH-DOGGETT INDUSTRIES, INC.

Carruth-Doggett Industries, Inc. ("CDI"), Houston, Texas, operates five
Case Equipment dealerships in the Houston area, which are involved in the sale
or rental of new and used equipment, parts and services. Case is the second
largest manufacturer of farm equipment in North America and the largest
manufacturer of light and medium-sized equipment in the world. At December 31,
1995, the Fund's investment in CDI, valued at its original cost of $2,250,000,
consisted of a $2,250,000, 10% senior subordinated promissory note, a warrant to
buy up to 33,333 shares of CDI for $.01 per share and a warrant to buy up to 333
shares of CDE Corp for $.01 per share. The Fund's investment in CDI represents a
25% fully-diluted equity interest. Mr. Forbes, a Vice President of the Fund,
serves on CDI's Board of Directors.

CHAMPION HEALTHCARE CORPORATION (AMEX: CHC)

Champion Healthcare Corporation ("CHC"), Houston, Texas, was organized
to acquire acute care hospitals in suburban markets, with primary emphasis given
to hospitals that have significant opportunity for improving market share and
cash flow. In December 1994, CHC merged into AmeriHealth Corporation, which was
renamed Champion Healthcare Corporation. Champion currently operates nine
hospitals in seven states. The December 31, 1995 closing price of CHC's common
stock on the American Stock Exchange was $5.3125 per share. At December 31,
1995, the Fund's investment in CHC, valued at $7,357,347 with a cost of
$6,436,207, consisted of 1,038,944 shares of restricted common stock, 3,601 and
83,333 shares of Series C and D convertible preferred stock, respectively, a
$1,500,000, 11% senior subordinated note and warrants to buy 50,246 shares of
common stock from $5.90 to $9.00 per share. The Series C and D preferred stock
are convertible into 7,202 and 166,666 shares of common stock, respectively. The
common stock of CHC was valued by the Fund at an average of $4.13 per share at
December 31, 1995, due to restrictions on the Fund's ability to sell such stock,
which resulted in an aggregate reduction in value from the market price on such
date of $1,226,855. The Fund's investment in CHC represents an approximate 6%
fully-diluted equity interest in CHC. Mr. Lehmann serves on CHC's Board of
Directors.

DAVID'S SUPERMARKETS, INC.

David's Supermarkets, Inc. ("David's"), Grandview, Texas, operates a
chain of twenty-one grocery stores located in small towns in North Central
Texas. At December 31, 1995, the Fund's investment in David's, valued at
$3,334,450, with a cost of $4,069,450, consisted of 735,000 shares of common
stock, 333,445 shares of 3.5% junior preferred stock and warrants to buy up to
538,462 shares of common stock for $1 per share. The Fund's

investment in David's represents a 14% fully-diluted equity interest. Mr.
Douglass and Mr. Forbes serve on David's Board of Directors.

DRYPERS CORPORATION (NASDAQ: DYPR)

Drypers Corporation ("Drypers"), Houston, Texas, manufactures and
distributes disposable diapers and baby wipes sold under the trade name Drypers.
Drypers is believed to be the third leading branded diaper manufacturer in the
United States, and has manufacturing facilities in Marion, Ohio; Vancouver,
Washington; Buenos Aires, Argentina and Puerto Rico. The December 31, 1995
closing price of Drypers' common stock on the NASDAQ National Market was $3.125
per share. At December 31, 1995, the Fund's investment in Drypers, valued at
$2,838,162 with a cost of $6,400,132, consisted of 1,096,892 shares of
restricted common stock and warrants to buy 6,634 shares of common stock for $4
per share. The stock was valued at an average of $2.59 per share of common stock
due to restrictions on the Fund's ability to sell such stock, which resulted in
an aggregate reduction in value from the market price on such date of $589,626.
The Fund's investment in Drypers represents an approximate 14% fully-diluted
equity interest in Drypers. Mr. Lehmann serves as a director of Drypers. The
Fund has committed to make a follow-on investment of up to $2,500,000 in Drypers
in 1996, subject to certain conditions.

GARDEN RIDGE CORPORATION (NASDAQ: GRDG)

Garden Ridge Corporation ("GRDG"), Houston, Texas, is a specialty
retailer of crafts and home decorative items. GRDG operates eleven megastores in
Kentucky, Oklahoma, Tennessee and Texas and is continuing its expansion into
other areas of the United States. GRDG completed its initial public offering of
common stock in May 1995. The December 31, 1995 closing price of GRDG on the
NASDAQ National Market was $38.75 per share. At December 31, 1995, the Fund's
investment in GRDG, valued at $10,963,284 with a cost of $1,061,018, consisted
of 333,471 shares of common stock. The stock was valued at an average of $32.875
per share due to restrictions on the Fund's ability to sell such stock, which
resulted in an aggregate reduction in value from the market price on such date
of $1,958,717. The Fund's investment in GRDG represents an approximate 4%
fully-diluted equity interest in GRDG. Mr. Lehmann serves on GRDG's Board of
Directors.

INDUSTRIAL EQUIPMENT RENTALS, INC.

Industrial Equipment Rentals, Inc. ("IER"), Houma, Louisiana, rents
industrial equipment from locations in Texas, Louisiana, Alabama and
Mississippi, primarily to refineries, petrochemical plants and oil and gas
operations. At December 31, 1995, the Fund's investment in IER, valued at its
original cost of $2,366,700, consisted of 182,230 shares of common stock, 5,371
shares of junior preferred stock, 67,500 shares of Series B senior convertible
preferred stock, $1,077,778 in a 12% subordinated debenture and a $499,950, 9%
senior subordinated debenture. The Fund's investment in IER represents a 18%
fully-diluted equity interest. Mr. Lehmann and Mr.
Hale serve on IER's Board of Directors.

MIDWAY AIRLINES CORPORATION

Midway Airlines Corporation ("Midway"), Chicago, Illinois, is a
commercial airline which began service out of Midway Airport in Chicago in the
fall of 1993. Midway now serves markets on the east coast of the U. S. from its
home base at the Raleigh-Durham Airport. At December 31, 1995, the Fund's
investment in Midway, valued at $771,000 with a cost of $4,214,226, consisted of
452,392 shares of Class C common stock, 274,761 shares of junior preferred
stock, $271,000 in a 12% subordinated note and warrants to buy up to 203,250
shares of Class C common stock for $.01 per share. The Fund's investment in
Midway represents an approximate 4.5% fully-diluted equity interest in Midway.

NCI BUILDING SYSTEMS, INC. (NASDAQ: BLDG)

NCI Building Systems, Inc. ("NCI"), Houston, Texas, manufactures and
distributes pre-engineered metal buildings and components. NCI operates
facilities in Alabama, Indiana, Mississippi, New Mexico, Tennessee and Texas.
The December 31, 1995 closing price of NCI's common stock on the NASDAQ National
Market was $24.75 per share. At December 31, 1995, the Fund's investment in NCI
consisted of 100,000 shares of common stock valued at $2,475,000 with a cost of
$159,783, which represents a 1.6% fully-diluted equity interest in NCI.
Mr. Forbes serves as a director of NCI.

RESTAURANT DEVELOPMENT GROUP, INC.

Restaurant Development Group, Inc. ("RDG"), Houston, Texas, was the
South Florida franchisee of Rally's Inc., a drive-through restaurant chain. RDG
sold its restaurants to Checkers Drive-in Restaurants, Inc. in 1994 for 676,751
shares of common stock of Checkers (NASDAQ: CHKR) and a note receivable in the
amount of $1,693,225. RDG intends to distribute to its shareholders any proceeds
from collections on the note receivable and the sale of Checkers stock. At
December 31, 1995, the Fund's investment in RDG, valued at $1,689,122 with a
cost of $3,805,278, consisted of 610,909 shares of Class A common stock, a
$639,122 prime +2% promissory note, a $350,000, 14% promissory note and warrants
to buy up to 212,500 shares of common stock for $2.80 to $3.00 per share. The
Fund's investment in RDG represents a 42% fully-diluted equity interest. Mr.
Douglass and Mr. Lehmann serve on RDG's Board of Directors.

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, 1995, the Fund's investment in SHI was valued
at $6,692,308, its original cost. The Fund's investment in SHI consisted of
2,986,408 shares of common stock and 3,705,900 shares of Series B preferred
stock. Mr. Lehmann and Mr. Hale serve as directors 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, 1995, the Fund's investment in SMIP was
valued at $325,000, its original cost. The Fund's investment in SMIP consists of
1,000 shares of common stock and a $175,000, 15% promissory note. SMIP is
wholly-owned by the Fund. Mr. Lehmann and Mr. Hale serve as directors of SMIP.

The Fund's investment in SHI and SMIP represents an approximate 50%
fully-diluted equity interest in SHI.

SUMMIT/DPC PARTNERS, L. P.

Summit/DPC Partners, L. P. ("DPC"), Houston, Texas, was formed to invest
in DPC Acquisition Corp, which was created to acquire Doane Products Company,
which is believed to be the largest manufacturer of private label dry pet food
in the United States. At December 31, 1995, the Fund's investment in Summit/DPC
was valued at $2,600,000, its original cost. The Fund's investment consists of
an approximate 36% limited partnership interest in DPC, which in turn owns an
approximate 17% fully-diluted interest in DPC Acquisition Corp.

TECH-SYM CORPORATION (NYSE:TSY)

CogniSeis Development, Inc. ("CogniSeis"), Houston, Texas, develops and
markets specialized computer systems consisting of geophysical application
software and appropriately configured computer equipment. On June 30, 1995,
CogniSeis was merged into Tech-Sym Corporation ("TSY"), a corporation engaged in
the design and
37

manufacture of various products for the defense and electronics industries. The
Fund received 62,759 shares of TSY common stock in a tax-free exchange for its
CogniSeis common stock. The Fund sold 30,000 shares of TSY during November 1995,
and the remaining 32,759 shares in January 1996. The closing market price of TSY
on December 31, 1995, on the New York Stock Exchange was $31.625. At December
31, 1995, the Fund's investment in TSY, valued at $1,036,003 with a cost of
$118,245, consisted of 32,759 shares of common stock, which represents a
fully-diluted equity interest in TSY of less than 1%.

TRAVIS INTERNATIONAL, INC.

Travis International, Inc. ("Travis"), Houston, Texas, distributes
specialty products for industrial and commercial use, including o-rings, gaskets
and sealants, builders' hardware and various other products used in the
construction industry. At December 31, 1995, the Fund's investment in Travis,
valued at $3,853,890 with a cost of $560,290, consisted of 171,284 shares of
common stock, which represents an approximate 15% fully-diluted equity interest
in Travis. Mr. Lehmann serves as a director of Travis.

VIDEO RENTAL OF PENNSYLVANIA, INC. AND RELATED ENTITY

Video Rental of Pennsylvania, Inc. ("VRP"), Houston, Texas, is the
general partner of a limited partnership that has franchise rights to operate
BLOCKBUSTER(R) Entertainment Corporation video cassette stores in the
Pittsburgh, Pennsylvania area. At December 31, 1995, the Fund's investment in
VRP, valued at $3,150,000 with a cost of $2,775,000, consisted of 125,000 shares
of common stock, 125,000 shares of 9% redeemable preferred stock and a
$2,525,000, 10% secured promissory note. The Fund's investment in VRP represents
a 50% fully-diluted equity interest. Messrs. Douglass, Lehmann, Tucker, a Vice
President of the Fund, and Dr. Williams, a director of the Fund, serve as
directors of VRP.

Equus Video Corporation ("Video"), Houston, Texas, was formed by the
Fund to own a 50% limited partnership interest in a partnership whose sole
general partner is a corporation owned by VRP. The limited partnership is
developing additional BLOCKBUSTER(R) Entertainment Corporation video cassette
stores in and around Pittsburgh. At December 31, 1995, the Fund's investment in
10,000 shares of common stock of Video was valued at $25,000, its original cost.
Mr. Douglass and Mr. Lehmann serve as directors of Video.

WILLIAMS & METTLE CO.

Williams & Mettle Co. ("W&M"), Houston, Texas, manufactures and
distributes wire cloth products and products used in industrial filtering and
screening applications in oil and gas production and in water pollution
monitoring wells. At December 31, 1995, the Fund's investment in W&M, valued at
$1,585,826 with a cost of $2,146,305, consisted of 657,895 shares of common
stock, 138,475 shares of Series A convertible preferred stock, 237,126 shares of
Series B convertible preferred stock, a $677,250, 12% subordinated promissory
note, a $512,576 junior participation in a prime +1.75% note and a warrant to
buy 456,718 shares of common stock for $0.01 per share. The fund's investment in
W&M represents an approximate 55% fully-diluted equity interest. Mr. Forbes
serves on the Board of Directors of W&M.

YELLOW CAB SERVICE CORPORATION

Yellow Cab Service Corporation, ("Yellow Cab"), Houston, Texas, is
engaged in taxi and transportation services in Houston and Austin, Texas and
Colorado Springs, Colorado, primarily through independent driverowners. At
December 31, 1995, the Fund's investment in Yellow Cab, valued at $1,750,000
with a cost of $5,134,515, consisted of 1,006,701 shares of common stock and two
3% subordinated notes with principal balances totaling $5,172,097. The Fund's
investment in Yellow Cab represents an approximate 5% fully-diluted equity
interest in Yellow Cab.
38

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, securities issued or guaranteed as to interest and
principal by the United States or by a person or entity controlled or supervised
by and acting as an instrumentality of the government of the United States,
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 or other
short-term, highly liquid investments providing, in the opinion of the
Investment Adviser, appropriate safety of principal. 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, or corporate bonds rated at
least A) 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 or in qualified Temporary Investments for purposes of the
business development company provisions of the 1940 Act. See "Regulation" below.

MANAGEMENT OF THE FUND

Overall responsibility for management and supervision of the Fund rests
with the Board of Directors. The day-to-day operations of the Fund are delegated
to the Investment Adviser and ECC.

The Board of Directors of the Fund currently has eight members. Five
non-interested individuals (the "Independent Directors") and three interested
persons, as defined by the 1940 Act, serve as directors of the Fund. The
directors are responsible for providing overall guidance and supervision of the
Fund, approving the Fund's investments, and performing various duties imposed on
directors of a business development company by the 1940 Act. Among other things,
the Independent Directors supervise the management arrangements of the Fund, the
custody arrangements with respect to portfolio securities, the selection of
independent accountants, fidelity bonding, and any transactions with affiliates.

The investments and business of the Fund are managed by the Investment
Adviser pursuant to a Management Agreement (the "Management Agreement"). The
Management Agreement provides that the Investment Adviser 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 their business. Such management and administrative services
include, without limitation, providing the Fund with office space, equipment,
facilities and supplies and clerical services; keeping and maintaining the books
and records of the Fund, and handling communications and correspondence with
stockholders; preparing accounting, management and other reports; and providing
such other managerial and administrative services as may be reasonably requested
by the Fund to identify, evaluate, structure, monitor and dispose of its
investments. The Investment Adviser also manages the Fund's cash and short-term,
interest bearing investments. In return for its services and the expenses which
the Investment Adviser assumes under the Management Agreement, the Fund pays the
Investment Adviser, 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 fees are payable quarterly in arrears. The Investment Adviser
earned management fees from the Fund of $1,237,775 for the year ended December
31, 1995. The net assets of the Fund as of December 31, 1995, were approximately
$61.9 million. The management fees charged by the Investment Adviser are higher
than the fee paid by most investment companies.

to meetings of stockholders, litigation expenses, costs of third party
evaluations or appraisals of the Fund (or its assets) or its actual investments,
fees of transfer agents and custodians, legal fees, fees of independent public
accountants, expenses of printing or distributing reports to stockholders,
securities holders and regulatory bodies, federal, state and local taxes, and
other costs and expenses directly allocable and identifiable to the Fund or its
business or investments.

In addition to the management fee, the Fund has agreed to pay the
Investment Adviser quarterly and at the final dissolution or liquidation of the
Fund if the Fund is dissolved on a date other than the end of a fiscal quarter,
an incentive fee in an amount equal to (i) 20% of the net realized capital gains
less unrealized capital depreciation of the Partnership and the Fund on a
cumulative basis from inception through the end of the fiscal quarter, less (ii)
the aggregate amount of the incentive fee payments and special allocation
distributions to the Investment Adviser or ECC in prior periods. If the amount
of the incentive fee in any fiscal quarter is a negative number, or cumulative
net realized capital gains less unrealized capital depreciation at the end of
any period is less than such amount calculated at the end of the previous
period, the Investment Adviser will be required to repay to the Fund all or a
portion of the incentive fee previously paid. No management incentive fees were
paid for the year ended December 31, 1995. Deferred management incentive fees of
$4,295,335 have been accrued by the Fund at December 31, 1995, based on gross
unrealized appreciation of portfolio securities. The deferred incentive fees
will not be paid until such unrealized appreciation is realized.

The Investment Adviser also provides certain administrative services to
the Fund, primarily related to investor communications, pursuant to a service
agreement with the Fund. The Investment Adviser received service fees from the
Fund of $50,000 for the year ended December 31, 1995.

INVESTMENT ADVISER

The Investment Adviser was organized as a Delaware corporation on
September 27, 1983 and maintains its offices at 2929 Allen Parkway, Suite 2500,
Houston, Texas 77019. The Investment Adviser's sole activity is to perform
management, administrative and investment advisory services for the Fund, ECP,
and other investment partnerships or corporations to be formed by the Investment
Adviser. The Investment Adviser is a registered investment adviser under the
Investment Advisers Act of 1940 (the "Advisers Act").

The following directors, officers, and employees of the Fund and the
Investment Adviser are primarily responsible for the day-to-day operations of
the Fund:

Sam P. Douglass, age 63, has been Chairman of the Board and Chief
Executive Officer of the Investment Adviser since its formation in September
1983. Mr. Douglass is also Chairman of the Board and Chief Executive Officer of
ECC. Since December 1978, he has served as Chairman and Chief Executive Officer
of Equus Corporation International ("ECI"), a privately owned corporation
engaged in a variety of investment activities, including leveraged buyouts. Mr.
Douglass has also been Chairman of the Board and Chief Executive Officer of the
Fund since August 1991. Mr. Douglass is a licensed attorney.

Nolan Lehmann, age 51, has been the President and director of the
Investment Adviser since September 1983. Mr. Lehmann has been President and a
director of the Fund since August 1991 and is also President and a director of
ECC. He is a director of Charter National Bank-Colonial, located in Houston,
Texas and Allied Waste Industries, Inc., Champion Healthcare Corporation,
Drypers Corporation, and Garden Ridge Corporation. Mr. Lehmann is a certified
public accountant.

Gary L. Forbes, age 52, has been Vice President of the Investment
Adviser and ECC since November 1991 and a Vice President of the Fund since
December 1991. Mr. Forbes was President of Coal & Timber, Inc., a natural
resources investment company, from January 1991 to November 1991. Mr. Forbes was
Vice President and
40

Chief Financial Officer of Elders Resources North America, Inc. from 1988 to
1991. He is a director of Consolidated Graphics, Inc. and NCI Building Systems,
Inc. Mr. Forbes is a certified public accountant.

Randall B. Hale, age 33, has been Vice President of the Fund, Investment
Adviser, and ECC since November 1992. He has been a director of the Investment
Adviser and ECC since February 1996 and Secretary of the Investment Adviser
since March 1996. From June 1985 to October 1992, he was employed by Arthur
Andersen LLP. Mr. Hale is a certified public accountant.

Patrick M. Cahill, age 35, has been a Vice President of the Fund since
May 1994. He has also been the Controller of the Investment Adviser and ECC
since May 1987. He has been the Treasurer of the Fund and ECC since March 1996.
From June 1982 to May 1987, he was employed by Ernst & Young. Mr. Cahill is a
certified public accountant.

Tracy H. Cohen, age 29, has been a Vice President of the Fund since May
1995 and a Vice President of ECC since April 1995. She is also Investor
Relations Manager of the Investment Company where she has been employed since
April 1995. She has been the Secretary of the Fund and ECC since March 1996.
From September 1990 to April 1995, she was employed by Arthur Andersen LLP. Ms.
Cohen is a certified public accountant.

As a result of its stock ownership in the Investment Adviser, ECI has
80% voting control of the Investment Adviser. ECI is a privately owned
corporation engaged in a variety of investment activities. ECI is owned by
trusts established for the benefit of members of Mr. Douglass's family.

SUB-ADVISER AGREEMENT

The Investment Adviser entered into a Sub-Adviser Agreement (the
"Sub-Adviser Agreement") with Equus Capital Corporation ("ECC") pursuant to
which ECC provides certain investment advisory services for the Fund. The
Sub-Adviser Agreement provides that ECC is responsible for approving the Fund's
quarterly net asset valuations and arranging any necessary financing for the
Fund or leveraged buyout transactions. In return for its services, the
Investment Adviser has agreed to pay ECC quarterly and at the final dissolution
or liquidation of the Fund, if the Fund is dissolved on a date other than the
end of a fiscal quarter, an incentive fee in an amount equal to (i) ten percent
of the net realized capital gains less unrealized capital depreciation of the
Fund on a cumulative basis from inception through the end of each fiscal
quarter, less (ii) the aggregate amount of the incentive fee payments and
special incentive allocation distributions to ECC in prior periods. If the
amount of the incentive fee in any period is a negative number, or cumulative
net realized capital gains less unrealized capital depreciation at the end of
any fiscal quarter is less than such amount calculated at the end of the
previous fiscal quarter, ECC will be required to repay to the Investment Adviser
all or a portion of the incentive fee previously paid. No fees have been paid to
date under the Sub\Adviser Agreement.

EQUUS CAPITAL CORPORATION

ECC is a corporation organized under the laws of the State of Delaware
in September 1983. ECC was organized to serve as managing general partner of the
Partnership and other similar partnerships. ECC is a registered investment
adviser under the Advisers Act.

As a result of its stock ownership in ECC, the Investment Adviser has
100% voting control of ECC. As a result of its stock ownership in the Investment
Adviser, ECI has 80% voting control of the Investment Adviser.

VALUATION

Valuations of the Fund's portfolio investments are made quarterly by ECC
subject to the approval of the Directors. One of the purposes of such valuations
is to determine the amount of the management fee payable to the Investment
Adviser. See "Net Asset Value" in the SAI.

Net asset value per share is determined each quarter by dividing the
value of the net assets of the Fund in dollars (the value of its assets less its
liabilities) by the total number of shares outstanding. Portfolio investments
are carried at fair value with the net change in unrealized appreciation or
depreciation included in the determination of net assets. ECC performs the
valuations 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 generally accepted accounting principles
and the financial reporting policies of the Commission. The applicable methods
prescribed by such principles are described below.

The fair market value of investments for which no market exists
(including most investments made by the Fund) are 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 being valued by ECC
would be the amount which the Fund might reasonably expect to receive for it
upon its current sale. There is a range of values that are reasonable for such
investments at any particular time. Generally, pursuant to procedures
established by the Board of Directors, the fair value of each investment
initially is based primarily upon its original cost to the Fund. 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 the portfolio
company's earnings, cash flow, and net worth, the market prices for similar
securities of comparable companies and an assessment of the company's future
financial prospects. In the case of unsuccessful operations, the appraisal may
be based upon liquidation value.
Appraisal valuations are necessarily subjective.

Investments for which market quotations are readily available and which
are freely transferable will be valued as follows: (i) securities traded on a
securities exchange or the NASDAQ National Market will be valued at the closing
price on the last trading day prior to the date of valuation and (ii) securities
traded in the over-the-counter market will be valued at the average of the
closing bid and asked prices for the last trading day prior to the date of
valuation. Certificates of deposit purchased by the Fund generally will be
valued at their face value, plus interest accrued to 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 will be set by discounting the
closing sales or bid price to reflect 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 issuers.

The Board of Directors of the Fund reviews and approves the valuation
policies at each regular board meeting to determine their appropriateness. The
Board of Directors may also hire independent firms to review ECC's methodology
of valuation or to conduct a valuation.

On a weekly 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. Such weekly net asset values appear in various publications
including BARRON'S and THE WALL STREET JOURNAL.

Shares of closed-end investment companies frequently trade at a discount
to net asset value, but in certain instances have traded above net asset value.
It is not possible to predict whether the Shares will trade at, above or below
net asset value.

CUSTODIAN

The Fund acts as the custodian of its securities to the extent permitted
under the 1940 Act and is subject to the restrictions imposed on self-custodians
by the 1940 Act and the rules and regulations thereunder. The Fund has entered
into an agreement with Southwest Guaranty Trust Company, Houston, Texas, with
respect to the safekeeping of such securities. The principal business office of
such trust company is 2121 Sage Road, Suite 150, Houston, Texas 77056.

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 upon or capital appreciation of the funds or any portion of the
funds of the investment company. The Investment Advisers Act, however, does
permit the payment of compensation based on capital gains 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 in
order to provide for incentive compensation to the Investment Adviser and ECC
based on the capital appreciation of the investments of the Fund. 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 security
holders. For additional information on the regulation of the Fund under the 1940
Act refer to "Regulation" in the SAI.

DESCRIPTION OF COMMON STOCK

GENERAL

The authorized capital stock of the Fund is ten million (10,000,000)
shares of common stock, par value of $.001 (the "Common Stock") and five million
(5,000,000) shares of preferred stock, par value of $.001. All shares of Common
Stock have equal rights as to earnings, assets, dividends and voting privileges
and, when issued, will be fully paid and nonassessable. Shares of Common Stock
have no preemptive, conversion or redemption rights and are freely transferable.
In the event of liquidation, each share of Common Stock is entitled to its
proportion of the Fund's assets after debts and expenses. Stockholders are
entitled to one vote per share of Common Stock and do not have cumulative voting
rights, which means that holders of a majority of the shares of Common Stock, if
they so choose, could elect all of the Directors, and holders of less than a
majority of the shares would, in that case, be unable to elect any Director.

The issued and outstanding shares of Common Stock are freely
transferrable and are listed for trading on the AMEX.

Pursuant to the Restated Certificate of Incorporation of the Fund, the
following are the authorized classes of securities of the Fund as of December
31, 1995:
(3) (4)
AMOUNT HELD BY AMOUNT OUTSTANDING
(1) (2) FUND OR FOR ITS EXCLUSIVE OF AMOUNT
TITLE OF CLASS AMOUNT AUTHORIZED ACCOUNT SHOWN UNDER(3)
- -------------- ----------------- --------------- -------------------
Common Stock 10,000,000 0 3,138,575
Preferred Stock 5,000,000 0 0

ANTI-TAKEOVER PROVISIONS IN CERTIFICATE OF INCORPORATION

The Fund's Restated Certificate of Incorporation does not include any
provisions (such as supermajority voting requirements on matters related to
merger, consolidation, sale of assets or liquidation or classification of
directors with staggered terms of office) that are generally considered to have
the effect of limiting the ability of other entities or persons to acquire
control of the Fund.

The Restated Certificate of Incorporation provides that a favorable vote
of a majority of the shares of the Fund are required to authorize the conversion
of the Fund into an open-end management investment company or to change the
nature of the business of the Fund so that it ceases to be a business
development company.

Reference should be made to the Restated Certificate of Incorporation on
file with the Commission (as an exhibit to the Registration Statement of which
this Prospectus is a part) for the full text of these provisions.

TRANSFER AND DISBURSING AGENT

The Fund has employed First Interstate Bank of Texas, N.A. ("First
Interstate") as its transfer agent to record transfers of the shares of Common
Stock, maintain proxy records, and to process distributions. The principal
business office of First Interstate is 1000 Louisiana Street, Suite 700,
Houston, Texas 77002.

TAX MATTERS

The Fund has qualified for and elected to be treated as a "regulated
investment company" under Subchapter M of the Code. If the Fund qualifies as a
regulated investment company and distributes to stockholders in a timely manner
at least 90% of its "investment company taxable income" each year, it will not
be subject to federal income tax on the portion of its taxable income and gains
it distributes to stockholders. In addition, if the Fund distributes in a timely
manner 98% of its net capital gain income for each one-year period ending on
October 31 and 98% of its ordinary income for each calendar year (as well as any
portion of the respective 2% balances not distributed in the previous year), it
will not be subjected to the 4% nondeductible federal excise tax on certain
undistributed income of regulated investment companies.

Under the 1940 Act, the Fund will not be permitted to make distributions
to stockholders unless it meets certain asset coverage requirements. See
"Regulation" in the SAI. If the Fund is unable to make the required
distributions, it may fail to qualify as a regulated investment company, or be
subjected to a nondeductible 4% excise tax.

For any period during which the Fund qualifies as a regulated investment
company for tax purposes, distributions to stockholders of the Fund's ordinary
income (including dividends, interest and original issue discount) and any net
short-term capital gain generally will be taxable as ordinary income to
stockholders to the extent of the Fund's current or accumulated earnings and
profits. To the extent that the Fund's distributions are not taxable to

stockholders as ordinary income or capital gains, they will be treated as a
return of capital and will reduce the stockholder's basis in his Shares and, to
the extent that they exceed his basis, will be treated as a gain from the sale
of his Shares as discussed below. Distributions which are taxable to
stockholders as ordinary income will constitute dividends for federal income tax
purposes. Distributions received by corporate stockholders will be subject to
the 70% dividend received deduction (i) if, and to the extent that such
distributions are made out of dividend income of the Fund and (ii) the requisite
holding period set forth in Sections 246 and 246A of the Code is satisfied. The
dividends-received deduction is currently 70%.

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

Sections 246 and 246A of the Code contain limitations on the eligibility
of dividends for the dividends-received deduction for corporations in addition
to the limitations discussed. Depending upon the corporate stockholder's
circumstances (including whether it has a 45-day holding period for its Shares
and whether its Shares are debt financed), these limitations may be applicable
to dividends received by the corporate stockholder that would otherwise qualify
for the dividends-received deduction under the principles discussed above.
Accordingly, stockholders should consult their own tax advisers in this regard.

Stockholders who are not subject to tax on their income will not be
required to pay tax on amounts distributed to them.

Distributions of the Fund's net capital gain (designated by the Fund as
capital gain dividends) will be taxable to stockholders as long-term capital
gain regardless of the stockholder's holding period in his Shares. Capital
losses realized by the Fund may offset the Fund's capital gains but not its
ordinary income. Stockholders are not entitled to include any portion of a net
capital loss for a Fund tax year on their individual returns.

The federal tax status of each year's distributions will be reported to
the stockholders and the IRS. Distributions may also be subject to additional
state, local and foreign taxes depending on each stockholder's particular
situation. Stockholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the Fund.

For additional information on various tax matters related to the Fund
refer to "Tax Matters" in the SAI.

LEGAL MATTERS

With respect to matters of United States law, the validity of the shares
offered hereby will be passed on for the Fund by Snell & Smith, P.C., Houston,
Texas. Snell & Smith, P.C. from time to time also serves as counsel to the
Investment Adviser or its affiliates.

This Prospectus constitutes a part of a registration statement on Form
N-2 (together with the SAI and all the exhibits and the appendix thereto, the
"Registration Statement") filed by the Fund with the Commission under the
Securities Act and the 1940 Act. This Prospectus and the SAI do not contain all
of the information set forth in the Registration Statement. Reference is hereby
made to the Registration Statement and related exhibits for further information
with respect to the Fund and the Shares offered hereby. Statements contained
herein concerning the provisions of documents are necessarily summaries of such
documents, and each statement is qualified in its entirety by reference to the
copy of the applicable document filed with the Commission.

FINANCIAL STATEMENTS

The Fund's financial statements and schedules at December 31, 1995 and
1994 and for the three years in the period ended December 31, 1995 and the
report thereon of Arthur Andersen LLP are incorporated by reference to the
Fund's Annual Report on Form 10-K for the year ended December 31, 1995 (the
"Annual Report"), filed by the Fund with the Commission pursuant to the Exchange
Act and provided to stockholders of the Fund as part of the Fund's annual report
to stockholders. A copy of the Annual Report is being provided with this
Prospectus to all Record Date Stockholders and beneficial owners and will be
provided with the Prospectus to all transferees of Subscription Certificates
during the Subscription Period. A copy of the Annual Report, may be obtained,
without charge, upon request from Investor Relations Department, Attention Tracy
H. Cohen, Equus II Incorporated, 2929 Allen Parkway, Suite 2500, Houston, Texas
77019, telephone number (713) 529-0900.

The financial statements of the Fund as of December 31, 1995,
incorporated by reference herein and into the SAI have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report with
respect thereto, and are incorporated herein upon the authority of said firm as
experts in giving said report. Arthur Andersen LLP is expected to been retained
as the independent public accountants for the Fund for the year ending December
31, 1996. The general business address for Arthur Andersen LLP is 711 Louisiana,
Suite 1300, Houston, Texas 77002.

TABLE OF CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION

PAGE
----
Investment Objective and Policies.......................... B-2
General................................................ B-2
Investment Criteria.................................... B-2
Investment Operations.................................. B-3
Co-Investment Conditions............................... B-4
Borrowing.............................................. B-6
Management of the Fund..................................... B-7
Directors and Officers of the Fund..................... B-7
Remuneration of Directors and Officers................. B-9
Limitation of Officers' and Directors' Liability....... B-10
Investment Advisory and Administrative Arrangements.... B-11
Conflicts of Interest...................................... B-14
Determination of Net Asset Value........................... B-16
Portfolio Transactions..................................... B-17
Share Repurchases and Tender Offers........................ B-18
Tax Matters................................................ B-19
Regulation................................................. B-22
Beneficial Ownership....................................... B-25
Financial Statements....................................... B-25

GLOSSARY OF TERMS

The following is a description of the meanings of certain terms
that are used throughout the Prospectus and investors are urged to consult this
glossary if they have questions about the meaning of a defined term used herein.

TERM DEFINITION
---- ----------
Advisers Act The Investment Advisers Act of 1940, as
amended, which regulates the operations of
investment advisers.

Affiliate or Affiliated Person Any person (i) directly or indirectly owning,
controlling, or holding with power to vote,
five percent or more of the outstanding
voting securities of another person; (ii)
five percent or more of whose voting
securities are directly or indirectly owned,
controlled, or held with power to vote, by
another person; (iii) directly or indirectly
controlling, controlled by, or under common
control with, another person or; (iv) who is
an officer, director, partner or employee of
another person.

AMEX The American Stock Exchange.

Asset Coverage The ratio which the value of the total assets
of the Fund, less all liabilities and
indebtedness not represented by senior
securities, bears to the aggregate amount of
senior securities representing indebtedness
of the Fund.

Business Day Any day on which trading is conducted on the
AMEX.

Business Development Any closed-end company which elects to be
Company subject to the provisions of Sections 55
through 65 of the 1940 Act and is operated
for the purpose of making investments in
Qualifying Assets and makes available
significant managerial assistance with
respect to the issuers of such securities.

Cede Cede & Co., Inc., nominee for DTC.

Closed-End Company A management investment company which does
not offer for sale and does not have
outstanding any redeemable security of which
it is the issuer.

Code The Internal Revenue Code of 1986, as
amended.

Commission The Securities and Exchange Commission.

Common Stock The common stock, $.001 par value, of the
Fund.

Custodian Southwest Guaranty Trust Company, Houston,
Texas which will act as custodian of the
Funds securities.

DTC The Depository Trust Company.

DTC Exercised Rights Rights exercised through DTC.

ECC Equus Capital Corporation, a Delaware
corporation and the Managing General Partner
of the Partnership and the sub-adviser of the
Fund.

ECI Equus Corporation International, a Delaware
corporation and the parent of the Investment
Adviser.

Eligible Portfolio Company A Company that (i) is organized under the
laws of, and has its principal place of
business in, any state or states, (ii) is not
an investment company (except for wholly
owned small business investment corporations
licensed by the Small Business
Administration) and (iii)(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 Commission. Control is
presumed to exist where the business
development company owns more than 25% of the
outstanding voting securities of a portfolio
company.

Equity and equity-oriented The Fund invests in equity and
securities equity-oriented securities. Equity securities
consist principally of common stock and
preferred stock. Equity-oriented securities
include debt securities convertible into
common or preferred stock, or a combination
of debt and equity securities, warrants,
options and other rights to acquire such
securities or partnership interests.

EQS The symbol under which the Fund's Shares are
listed on the AMEX.

ERISA The Employee Retirement Income Security Act
of 1974, as amended, which regulates pension,
profit-sharing and other employee benefit
plans.

Exchange Act The Securities Exchange Act of 1934, as
amended.

Expiration Date May 8, 1996, unless extended by the Fund to a
date not later than May 31, 1996.

Fund Equus II Incorporated, a Delaware
corporation.

Follow-on Investment Additional funds provided to a portfolio
company when a subsequent financing is
planned, to protect the Fund's investment
when a portfolio company's cash flow does not
meet expectations or to increase the Fund's
investment in a successful portfolio company.

Information Agent MacKenzie Partners, Inc.

Interested Person Of the Fund means --

(i) any affiliated person of the Fund;

(ii) any member of the immediate family of
any natural person who is an affiliated
person of the Fund;

(iii) any interested person of any investment
adviser of or principal underwriter for the
Fund;

(iv) any person or partner or employee of any
person who at any time since the beginning of
the last two completed fiscal years of the
Fund has acted as legal counsel for the Fund;

(v) any broker or dealer registered under the
Exchange Act or any affiliated person of such
a broker or dealer; and

(vi) any natural person whom the Commission
by order shall have determined to be an
interested person by reason of having had, at
any time since the beginning of the last two
completed fiscal years of the Fund, a
material business or professional
relationship with the Fund or with the
principal executive officer of the Fund or
with any other investment company having the
same investment adviser or principal
underwriter or with the principal executive
officer of such other investment company.

PROVIDED, That no person shall be deemed to
be an interested person of the Fund solely by
reason of (aa) his being a member of its
board of directors or advisory board or an
owner of its securities, or (bb) his
membership in the immediate family of any
person specified in clause (aa).

Investment Adviser Equus Capital Management Corporation, a
Delaware corporation and the investment
adviser to the Fund.

IRA An individual retirement account.

IRS The Internal Revenue Service.

Making available significant (1) Any arrangement whereby the Fund, through
managerial assistance its directors, officers or employees, offers
to provide and, if accepted, does provide
significant guidance and counsel concerning
the management, operations, business
objectives or policies of a portfolio
company, (2) the exercise of a controlling
influence over the management or policies of
a portfolio company by the Fund acting
individually or as part of a group of which
the Fund is a member acting together which
controls such company, or (3) with respect to
SBICs, the making of loans to a portfolio
company. The Fund may satisfy the
requirements of clause (1) 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 Fund
will not satisfy the general requirement of
making available significant managerial
assistance if it only provides such
assistance indirectly through an investor
group.

Management Refers to the Investment Adviser and ECC
collectively.

Management Agreement The Management Agreement between the Fund and
the Investment Adviser.

Net Asset Value The total assets of the Fund valued with
respect to securities for which market
quotations are readily available, at their
market value, less appropriate discounts, if
applicable, and with respect to other
securities and assets, at their fair value
less all liabilities of the Fund.

Non-interested Directors Directors of the Fund who are not "interested
persons" of the Fund as defined in the 1940
Act.

1940 Act The Investment Company Act of 1940, as
amended by the Small Business Investment
Incentive Act of 1980, which regulates the
operation of investment companies and
business development companies.

Offer The Fund's issuance to Record Date
Shareholders of transferable Rights entitling
such holders to subscribe for Common Stock of
the Fund at the rate of one share of Common
Stock for each three Rights held and
entitling each Record Date Stockholder to the
Over-Subscription Privilege.

Over-Subscription Privilege The right of each holder of Rights who fully
exercised all Rights initially issued to or
purchased by him or her to subscribe, subject
to certain limitations and allotment, for any
Shares not acquired by the exercise of
Primary Subscription rights.

Portfolio Companies Companies in which the Fund has an
investment.

Primary Subscription The right of each Record Date Shareholder to
subscribe for one share of Common Stock for
each three Rights held.

Qualified Plans Any pension, profit sharing or stock bonus
plans, including a Keogh plan, subject to
ERISA.

Qualifying Assets Include (i) securities of companies that were
eligible portfolio companies at the time that
the Fund acquired their securities; (ii)
securities of companies which are actively
controlled by the Fund; (iii) securities of
bankrupt or insolvent companies that are not
otherwise eligible portfolio companies; (iv)
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; (v) securities received in
exchange for or distributed on or with
respect to any of the foregoing; and (vi)
cash items, government securities and
high-quality, short-term debt. The 1940 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.

Record Date April 10, 1996.

Record Date Stockholders Stockholders of record of the Fund on the
Record Date.

Regulations Regulations issued by the Department of Labor
providing guidance with respect to the
determination of whether the assets of the
Fund are deemed to be "plan assets" under
ERISA.

Regulated Investment Investment companies that qualify for
Company pass-through tax treatment under Subchapter M
of the Code.

Rights Transferable rights entitling the holders
thereof to subscribe for shares of Common
Stock at the rate of one share of Common
Stock for each three Rights held.

SAI The Fund's Statement of Additional
Information.

Securities Act The Securities Act of 1933, as amended.

Shares Shares of Common Stock of the Fund.

Sub-Adviser Agreement The Sub-Adviser Agreement between the
Investment Adviser and ECC in the form
attached hereto as Exhibit C.

Subscription Agent First Interstate Bank of Texas, N.A.

Subscription Certificates Certificate issued to the Record Date
Stockholders evidencing the Rights.

Subscription Period April 10, 1996 to May 8, 1996, unless
extended by the Fund.

Subscription Price $12.75 per Share.

Transfer Agent First Interstate Bank of Texas, N.A.

UBTI Unrelated business taxable income under
Section 511 of the Code

NO DEALER, SALESMAN, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUND OR THE FUND'S INVESTMENT ADVISERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR
DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE FACTS AS SET FORTH IN THE PROSPECTUS OR IN THE
AFFAIRS OF THE FUND SINCE THE DATE HEREOF. HOWEVER, IF ANY MATERIAL CHANGE
OCCURS WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS
WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY.

-----------------

TABLE OF CONTENTS

PAGE
----
Prospectus Summary............................................ 2
Fee Table .................................................... 6
Available Information......................................... 6
Selected Financial Data....................................... 7
Management's Discussion and Analysis
of Financial Condition and
Results of Operation........................................ 8
Market for Common Stock and Net Asset
Value Information........................................... 13
The Offer .................................................... 14
Use of Proceeds .............................................. 23
Risk Factors and Special Considerations....................... 24
The Fund ..................................................... 29
Investment Objectives and Policies............................ 29
Management of the Fund ....................................... 39
Description of Common Stock................................... 43
Tax Matters .................................................. 44
Legal Matters ................................................ 45
Further Information .......................................... 45
Financial Statements.......................................... 46
Table of Contents of Statement of
Additional Information .................................... 46
Glossary of Terms............................................. 47

1,046,191

Shares of Common Stock

EQUUS II
INCORPORATED

Issuable Upon Exercise of
Transfereable Rights to
Subscribe for Such
Shares of Common Stock

-------------
PROSPECTUS
-------------

April 10, 1996
<PAGE>
EQUUS II INCORPORATED

PART B
STATEMENT OF ADDITIONAL INFORMATION

APRIL 10, 1996

Equus II Incorporated (the "Fund") is a non-diversified, closed-end
management investment company that has elected to be a business development
company. The Fund's investment objective is 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 medium-sized companies that
intend to acquire other businesses including through leveraged buyouts. Equus
Capital Management Corporation (the "Investment Adviser") serves as the Fund's
investment adviser. Equus Capital Corporation (the "Sub-Adviser") serves as a
secondary investment adviser to the Fund. The Investment Adviser and the
Sub-Adviser are referred to herein collectively as "Management."

This Statement of Additional Information ("SAI"), which is not a
prospectus, supplements and should be read in conjunction with the Prospectus of
the Fund dated April 10, 1996 (the "Prospectus"). This SAI does not include all
information that a prospective investor should consider before purchasing shares
of the Fund, and investors should obtain and read the Prospectus prior to
purchasing shares. To obtain a copy of the Fund's Prospectus, without charge,
please write to the Fund at 2929 Allen Parkway, Suite 2500, Houston, Texas 77019
or call (713) 529-0900. This SAI incorporates by reference the entire
Prospectus.
TABLE OF CONTENTS
PAGE
----
Investment Objective and Policies............................ B-2
General.................................................... B-2
Investment Criteria........................................ B-2
Investment Operations...................................... B-3
Co-Investment Conditions................................... B-4
Borrowing.................................................. B-6
Management of the Fund....................................... B-7
Directors and Officers of the Fund......................... B-7
Remuneration of Directors and Officers..................... B-9
Limitation of Officers' and Directors' Liability........... B-10
Investment Advisory and Administrative Arrangements........ B-11
Conflicts of Interest........................................ B-14
Determination of Net Asset Value............................. B-16
Portfolio Transactions....................................... B-17
Share Repurchases and Tender Offers.......................... B-18
Tax Matters.................................................. B-19
Regulation................................................... B-22
Beneficial Ownership......................................... B-25
Financial Statements......................................... B-25

The Prospectus and this SAI omit certain of the information contained
in the Registration Statement on Form N-2 filed with the Securities and Exchange
Commission (the "Commission"), Washington, D.C. The Registration Statement may
be obtained from the Commission upon payment of the fee prescribed, or inspected
at the Commission's office at no charge.

This SAI incorporates documents by reference that are not presented
herein. These documents are available, without charge, upon request from
Investor Relations Department, Attention: Tracy Cohen, Equus II Incorporated,
2929 Allen Parkway, Suite 2500, Houston, Texas 77019, telephone number (713)
529-0900.

This Statement of Additional Information is dated April 10, 1996.

INVESTMENT OBJECTIVE AND POLICIES

THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN CONJUNCTION
WITH THE SECTIONS IN THE FUND'S PROSPECTUS ENTITLED "INVESTMENT OBJECTIVE AND
POLICIES."

GENERAL

The Fund's investment objective is 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 and subsequently disposing of such investments. The Fund seeks to
invest primarily in medium-sized companies located in the United States that
intend to acquire other businesses including through leveraged buyouts. The
Fund's investments in portfolio companies consist principally of equity
securities such as common and preferred stock, but may 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, as amended (the "Investment Company
Act"). The Fund will not withdraw such election or change its objective of
seeking capital appreciation by investing in equity and equity-oriented
securities issued by privately-owned companies in transactions negotiated
directly with such companies including investing in leveraged buyout and
recapitalization investments unless, in either case, such action is authorized
by the vote of a majority of the Shares of the Fund. ALL OTHER INVESTMENT
POLICIES AND PRACTICES OF THE FUND MAY BE CHANGED WITHOUT A VOTE OF
STOCKHOLDERS.

As a business development company, the Fund is limited in its choice of
investments under the Investment Company Act. The Fund will not purchase any
securities on margin (except for the use of short-term credit necessary for the
clearance of transactions), make short sales of securities, purchase or sell
commodities or commodity contracts, write put or call options, purchase or sell
real estate (except in connection with portfolio investments) or real estate
mortgage loans, lend its portfolio securities to any other person or enter into
repurchase agreements with respect to its portfolio securities. See
"Regulation."

INVESTMENT CRITERIA

Prospective investments will be evaluated by the Investment Adviser
based upon criteria that may be modified from time to time. The criteria that is
currently used by the Investment Adviser in determining whether to make an
investment in a prospective portfolio company include:

(1) The presence or availability of competent management;

(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

B-2

(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 generally consist of the
following activities:

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

EVALUATING INVESTMENT OPPORTUNITIES. Prior to committing funds to an
investment opportunity, investigation and research are conducted to assess the
prospects and risks of the potential investment. See "Investment Criteria"
above.

STRUCTURING INVESTMENTS. The terms of the Fund's investments typically
will be negotiated directly with the prospective portfolio company or its
affiliates. The Investment Adviser 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 Investment
Adviser 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 on its investment.

SELECTION AND FINANCING. The Investment Adviser, subject to the
approval of the Board of Directors, has responsibility for selecting the
investments that the Fund ultimately will make. The Sub-Adviser is responsible
for arranging any financing for the Fund.

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 exercise significant influence and provide 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 market for the securities of the
portfolio company. In connection with their service as directors of portfolio
companies, officers and directors of the Fund, the Investment Adviser, and the
Sub-Adviser may receive and retain directors' fees or reimbursement for expenses
incurred. When necessary, the Investment Adviser, on behalf of the Fund, may
also assign staff professionals with financial or management expertise to assist
portfolio company management on specific problems.

DISPOSITION OF INVESTMENTS. The method and timing of the disposition of
the Fund's portfolio investments will be critical to the realization of capital
appreciation. The Investment Adviser expects to dispose of the Fund's portfolio
investments through a variety of transactions, including sales of portfolio

B-3

companies to third parties, sales of portfolio securities in underwritten public
offerings, public sales of such securities pursuant to exemptions from
registration requirements 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 stockholders. Sales of such
securities by the stockholders may be subject to legal or practical
restrictions. 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, will seek to obtain registration rights
at the expense of the portfolio company. The Fund bears the cost of disposing of
an investment to the extent not paid by the portfolio company.

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, or corporate bonds rated at least A) 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. See
"Regulation" below.

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 implement fully 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.

CO-INVESTMENT CONDITIONS

The Fund has co-invested in certain portfolio companies with Equus
Capital Partners, L.P., a Delaware limited partnership ("ECP"). The Fund
obtained an order from the Securities and Exchange Commission (the "Commission")
exempting the Fund from certain prohibitions contained in the Investment Company
Act relating to co-investments by the Fund and ECP. Under the terms of the
exemptive order issued by the Commission, the following conditions must be met
in order for the Fund to invest with ECP or any other affiliates (the Fund and
ECP are each referred to below as a "Fund, the Directors of the Fund and the
Independent General Partners of ECP are referred to below as "Independent
Directors," and any person affiliated with the Fund, ECP, the Investment
Adviser, or the Sub-Adviser is referred to below as an "Equus Affiliate"):

1. Before a co-investment transaction is effected, the Investment
Adviser must make an initial determination on behalf of each
Fund regarding investment suitability. The Investment Adviser
must then make a written investment presentation regarding the
proposed co-investment to the Independent Directors of each
Fund that has funds available for

B-4

investment setting forth the identity of each Fund and Equus
Affiliate that proposes to co-invest with the Fund
(collectively, including each Fund, the "Co-Investor").

2. The Independent Directors of each Fund must review the
Investment Adviser's initial determination and, prior to
committing to a co-investment, a majority of the Independent
Directors of each Fund must conclude that:

(a) the terms of the transaction, including the
consideration to be paid, are reasonable and fair to
the limited partners or stockholders, as the case may
be (hereinafter collectively referred to as
"Shareholders"), and the Fund and do not involve
overreaching of the Shareholders or the Fund on the
part of any person concerned;

(b) the transaction is consistent with the interests of
the Shareholders of the Fund and is consistent with
the investment objectives and policies of the Fund;
and

(c) the investment by one or more of the other
Co-Investors would not disadvantage the Fund in
making such investment, maintaining its investment
position, or disposing of such investment, and that
participation by the Fund would not be on a basis
different from or less advantageous than that of
other Co-Investors.

3. Each Fund that has funds available for investment will be
entitled to purchase a portion of each co-investment
transaction equal to the ratio of that Fund's net assets to
the total assets of all Funds that have determined to
participate in the co-investment transaction. A Fund may
decline to purchase the security, or to purchase less than
its full allocation, if a majority of its Independent
Directors determine that such action is in the best
interests of the Fund, it is reasonable and fair to the
Shareholders and the Fund, and does not involve overreaching
of the Shareholders and the Fund on the part of any person
concerned. If a Fund declines to participate in a
co-investment transaction or determines to participate to a
lesser extent than its full allocation, the other Funds may
acquire any amount declined. Equus Affiliates other than the
Funds will be permitted to invest only to the extent that
the total investment opportunity exceeds the amount that the
Funds determine to invest.

4. If a Fund engages in a co-investment transaction: (a) each
Co-Investor will acquire securities of each class acquired by
any other Co-Investor; (b) the ratio of the amount of
securities of a class acquired by each Co-Investor to the
amount of the securities of such class acquired by all
Co-Investors will be the same for every class acquired; and
(c) the terms of the purchase, including price, settlement
date, registration rights (if any), and any other rights
provided to the purchasers of such investments, will be the
same for each Co-Investor.

5. If any Co-Investor determines to make a follow-on investment
in any issuer whose securities were purchased in a
co-investment transaction, notice of the proposed Follow-On
Investment will be given to each Fund that participated in the
original co-investment transaction at the earliest practical
time. Follow-on investments will be reviewed, approved,
allocated, and disposed of in the same manner as prescribed
for initial co-investments.

6. If any Co-Investor elects to sell, exchange, or otherwise
dispose of any interest in a security purchased in a
co-investment transaction, notice of the proposed disposition
will be given to each Fund holding such security at the
earliest practical time. The Investment Adviser will provide a
written recommendation to the Independent Directors of each
Fund concerning the

B-5

proposed disposition. Each such Fund will participate in the
disposition at the same time as the other Co-Investors, on a
proportionate basis, and on the same terms and conditions;
provided that a required majority of the Independent Directors
may decide that a Fund will not participate in the proposed
disposition or will dispose of less than its proportionate
interest if they determine that such action is in the best
interest of such Fund, is reasonable and fair to the
Shareholders and such Fund, and does not involve overreaching
of the Shareholders of such Fund on the part of any person
concerned.

BORROWING

The Fund may borrow funds to facilitate the making of new or follow-on
investments, to maintain its pass-through tax status as a regulated investment
company under Subchapter M of the Code or to pay contingencies and expenses. The
Fund may also commit to invest funds in a portfolio company beyond its initial
investment or guarantee the obligations of a portfolio company. The Fund is
permitted under the Investment Company Act to borrow funds in an amount not to
exceed one-half of its total assets (including investments made with borrowed
money) (an asset coverage ratio of 200%). This may be done either through the
issuance of debt securities or by obtaining loans from commercial banks or other
sources. If the Fund borrows through the issuance of a "senior security
representing indebtedness" (as defined in the Investment Company Act),
distributions to stockholders or the repurchase of shares is prohibited unless
the Fund's asset coverage ratio is 200% at the time of the distribution or
repurchase. See "Regulation" in the SAI. The amount and nature of any borrowings
will depend on a number of factors over which neither the Fund nor the
Investment Adviser has control, including general economic conditions,
conditions in the financial markets, and the impact of the financing on the tax
treatment of the stockholders.

Loans obtained or debt securities issued by the Fund may provide for
interest payable at a floating rate (for example, linked to prime or commercial
rates) or a fixed rate on funds drawn down and a standby commitment fee applied
to any portion of the lending commitment not drawn down. The Fund also expects
that, as a condition to lending, lenders to the Fund may place restrictions on
the Fund, which may include reserve requirements or operating restrictions, and
may limit the ability of Management to control investments or their refinancing
and the ability of the Fund to make distributions to stockholders.

The use of leverage could have the effect of magnifying any capital
gains or losses. 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 involuntarily liquidated.

Although the use of leverage entails certain risks, it also enables the
Fund to better control the timing of its purchases and sales of investments by
increasing the Fund's liquidity.

There can be no assurance that the Fund will borrow when considered
desirable. The Fund may not be able to arrange debt financing on terms
acceptable to the Board of Directors, or the Board of Directors may believe
borrowings are not in the Fund's best interest. If the Fund were unable to
obtain debt financing, the Fund might be required to sell a portfolio investment
at an inopportune time, or to forego the purchase of an attractive potential or
follow-on investment, due to a short-term liquidity problem. In either case, the
value of the Fund's investment portfolio, and of the Fund's common stock, could
be adversely affected.

B-6

MANAGEMENT OF THE FUND

Overall responsibility for management and supervision of the Fund rests
with its Board of Directors. The Board of Directors approves all significant
agreements between the Fund and the companies that furnish the Fund with
services, including agreements with the Investment Adviser, the Fund's custodian
and the Fund's transfer agent. The Independent Directors supervise the
management arrangements for the Fund, the custody arrangements with respect to
portfolio securities, the selection of independent accountants, fidelity bonding
and any transactions with affiliates. The day-to-day operations of the Fund are
delegated to the Investment Adviser.

The names and business addresses of the Directors and principal
officers of the Fund are set forth in the following table, together with the
information as to their principal business occupations during the past five
years and, in the case of the Directors, their positions with certain other
organizations and companies. Each Director who is an "interested person" of the
Fund, as defined in the Investment Company Act, is indicated by an asterisk.

DIRECTORS AND OFFICERS OF THE FUND

POSITION(S)
HELD PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE WITH REGISTRANT DURING PAST 5 YEARS
- --------------------- --------------- -------------------
Sam P. Douglass* Chairman of the Chairman and Chief Executive
2929 Allen Parkway Board and Chief Officer of the Investment
Suite 2500 Executive Officer Adviser and the Sub-Adviser.
Houston, Texas 77019
Age 63

Nolan Lehmann* President and President and a director of
2929 Allen Parkway Director the Investment Adviser and
Suite 2500 the Sub-Adviser.
Houston, Texas 77019
Age 51

Gregory J. Flanagan Director Senior Vice President of
6655 1st Park Ten Alexander & Alexander, Inc.
Park Terrace Bldg., Suite 100 since March 1990. President
San Antonio, Texas 782313 of Bank of Oklahoma, N.A. from
Age 50 September 1986 to February
1990.

Robert L. Knauss Director Chairman and Chief Executive
1990 Post Oak, Suite 1630 Officer of Baltic
Houston, Texas 77056 International USA, Inc. since
Age 64 January 1994. Dean and
Distinguished Professor
University of Houston Law
Center from 1981 to 1993.

B-7

John W. Storms Director Managing General Partner of
1980 Post Oak Blvd. Storms & Critz, Certified
Suite 2110 Public Accountants.
Houston, Texas 77056
Age 51

Dr. Francis D. Tuggle Director Dean of Kogod College of
4400 Massachusetts Business Administration at The
Avenue, N.W. American University since July
Washington, D.C. 20016 1990. Professor of Management
Age 53 at Jesse H. Jones Graduate
School of Administration at
Rice University from 1981 to
1990.

Dr. Edward E. Williams* Director Professor and Director of
13231 Champions Forest Dr. Entrepreneurship Program of
Suite 110 the Jesse H. Jones Graduate
Houston, Texas School of Administration of
Age 50 Rice University.

Gary R. Petersen Director Partner of EnCap Investments,
1100 Louisiana, Suite 3150 L.C.
Houston, Texas 77002
Age 49

Gary L. Forbes Vice President Vice President of the
2929 Allen Parkway Investment Adviser and
Suite 2500 Sub-Adviser since November
Houston, Texas 77019 1991. President of Coal &
Age 52 Timber, Inc. during 1991.
Vice President and Chief
Financial Officer of Elders
Resources North America, Inc.
from 1988 to 1991.

Randall B. Hale Vice President Vice President of the
2929 Allen Parkway Investment Adviser and the
Suite 2500 Sub-Adviser since November
Houston, Texas 77019 1992. Certified Public
Age 33 Accountant with Arthur
Andersen LLP from June 1985 to
October 1992.

Patrick M. Cahill Vice President Controller of the Investment
2929 Allen Parkway Treasurer Adviser and the Sub-Adviser
Suite 2500 since May 1987. Vice President
Houston, Texas 77019 of the Sub-Adviser since March
Age 35 1996.

Tracy H. Cohen Vice President Investor Relations Manager
2929 Allen Parkway Secretary of the Investment Adviser and
Suite 2500 Vice President of the
Houston, Texas 77019 Sub-Adviser since April 1995.
Age 29 From September 1990 to April
1995, she was employed by
Arthur Andersen LLP.

B-8

* "Interested person" of the Fund, as defined in the Investment Company Act.
Messrs. Douglass and Lehmann are "interested persons" of the Fund as a result of
their employment as officers of the Fund and the Investment Adviser.

REMUNERATION OF DIRECTORS AND OFFICERS

As compensation for services rendered to the Fund, each director who is
not an officer of the Fund receives an annual fee of $20,000 paid quarterly in
arrears, a fee of $2,000 for each meeting of the Board of Directors attended in
person, a fee of $1,000 for participation in each telephonic meeting of the
Board of Directors and 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. The disinterested directors will not receive any additional
compensation from the Fund or its portfolio companies for any additional
services rendered. Officers and directors of the Fund who are affiliated with
the Investment Adviser serve as directors of certain portfolio companies and in
such capacities may receive and retain directors' fees and other compensation
from portfolio companies. The Fund currently has no bonus, profit-sharing,
pension, or retirement plans, but in the future may establish a stock option
plan.

B-9

The following table shows certain compensation information for the
Directors of the Fund for the fiscal year ended December 31, 1995. None of the
Fund's executive officers and Directors who are also officers or directors of
the Investment Adviser received any compensation from the Fund for such period.

Total Compensation
Aggregate From Registrant and
Compensation From Fund Complex Paid
Name of Person, Position Fund to Directors
- ----------------------------- ----------------- ---------------------
Gregory J. Flanagan, Director $34,500 $34,500
Robert L. Knauss, Director 31,000 31,000
Gary R. Petersen, Director 30,000 30,000
John W. Storms, Director 34,500 34,500
Francis D. Tuggle, Director 33,000 33,000
Edward E. Williams, Director 33,500 33,500
Nolan Lehmann, President and
Director 0 0
Sam P. Douglass, Chairman of the
Board and Chief Executive Officer 0 0

The Fund does not currently maintain any pension or retirement plans for its
officers and directors.

LIMITATION OF OFFICERS' AND DIRECTORS' LIABILITY

The Restated Certificate of Incorporation and the By-Laws of the Fund
provide that the Fund, subject to the limitations of the Investment Company Act
will indemnify its Directors, officers, employees, or agents against liabilities
and expenses incurred in connection with litigation in which they may be
involved because of their offices with the Fund, to the fullest extent permitted
by law except that such indemnity shall not protect any such person against any
liability to the Fund or its stockholders to which such person would otherwise
be subject by reason of willful misfeasance, bad faith, negligence, or breach of
fiduciary duty in the performance of his duty to the Fund. In addition, the
Restated Certificate of Incorporation of the Fund provides that the Fund's
Directors will not be liable to the Fund and its stockholders for money damages,
except in limited instances. However, nothing in the Restated Certificate of
Incorporation or the By-Laws protects or indemnifies a Director, officer,
employee, or agent of the Fund against any liability to which such person would
otherwise be subject for any breach of the Director's duty of loyalty to the
Fund or its stockholders, for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, or for any
transaction from which the Director derived an improper personal benefit. In
addition, indemnification is not permitted for any act or omission committed in
bad faith and opposed to the best interests of the Fund or, with respect to any
criminal proceeding, if the person had reasonable cause to believe that the act
or omission was unlawful.

INVESTMENT ADVISORY AND ADMINISTRATIVE ARRANGEMENTS

Equus Capital Management Corporation (the "Investment Adviser") manages
the investments and business of the Fund pursuant to a Management Agreement (the
"Management Agreement"). Under the terms

B-10

of the Management Agreement the Investment Adviser provides, or arranges 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. Such management and administrative services include, without
limitation, providing the Fund with office space, equipment, facilities and
supplies and clerical services; keeping and maintaining the books and records of
the Fund, and handling communications and correspondence with stockholders;
preparing accounting, management and other reports; and providing such other
managerial and administrative services as may be reasonably requested by the
Fund to identify, evaluate, structure, monitor and dispose of its investments.
The Investment Adviser also manages the Fund's cash and short-term, interest
bearing investments. In return for its services and the expenses which the
Investment Adviser assumes under the Management Agreement, the Fund pays the
Investment Adviser, 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 fees are payable quarterly in arrears. The Investment Adviser
earned management fees from the Fund of $1,237,775, $1,212,457, and $1,243,559
for the years ended December 31, 1995, 1994, and 1993. The management fees
charged by the Investment Adviser are higher than the fee paid by most
investment companies.

Under the Management Agreement, the Fund is obligated to bear all costs
and expenses directly allocable and identifiable to the Fund or its businesses
or investments, including, but not limited to, all expenses with respect to
investments or dispositions thereof, acquisitions of portfolio companies,
dispositions of portfolio companies, expenses of registering the shares under
federal and state securities laws, costs of printing proxies and other expenses
related to meetings of stockholders, litigation expenses, costs of third party
evaluations or appraisals of the Fund or its actual investments, fees of
transfer agents and custodians, legal fees, fees of independent public
accountants, expenses of printing or distributing reports to stockholders,
securities holders and regulatory bodies, federal, state and local taxes, and
other costs and expenses directly allocable and identifiable to the Fund or its
business or investments.

In addition to the management fee, the Fund has agreed to pay the
Investment Adviser quarterly and at the final dissolution or liquidation of the
Fund if the Fund is dissolved on a date other than the end of a fiscal quarter,
an incentive fee in an amount equal to (i) 20% of the net realized capital gains
less unrealized capital depreciation of the Fund and its
predecessors-in-interest on a cumulative basis from October 23, 1987 (November
14, 1984, in the case of certain investments held by Equus Investments
Incorporated), through the end of each fiscal quarter, less (ii) the aggregate
amount of the incentive fee payments and special allocation distributions to the
Investment Adviser or the Sub-Adviser in prior periods. If the amount of the
incentive fee in any fiscal quarter is a negative number, or cumulative net
realized capital gains less unrealized capital depreciation at the end of any
fiscal quarter is less than such amount calculated at the end of the previous
quarter , the Investment Adviser will be required to repay to the Fund all or a
portion of the incentive fee previously paid. No management incentive fees were
paid for the years ended December 31, 1995 and 1994 and deferred management
incentive fees of $4,295,335 have been accrued by the Fund at December 31, 1995,
on gross unrealized appreciation of portfolio securities. The deferred incentive
fees will not be paid until such unrealized appreciation is realized.

The Management Agreements also provide for indemnification by the Fund
of the Investment Adviser and its officers and directors from any threatened,
pending or completed action to the extent that the activities giving rise to
such action were performed in good faith either on behalf of the Fund or in
furtherance of the interests of the Fund and in a manner reasonably believed by
such person to be within the scope of the

B-11

authority conferred by the Management Agreement or by law, so long as such
person's conduct did not constitute bad faith, negligence, misconduct or any
breach of fiduciary duty owed to the Fund. In the absence of a determination by
a court that the person seeking indemnification is not liable by reason of
disabling conduct, such indemnification may be authorized by a reasonable
determination, based upon a review of the facts, by the disinterested Directors
or by independent counsel in a written opinion. Indemnification is limited by
Section 17(i) of the Investment Company Act.

Pursuant to its terms, the Management Agreement will continue in effect
from year to year provided such continuation 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
Agreements may be terminated at any time, without the payment of any penalty, by
the Board of Directors of the Fund or a vote of the holders of a majority of the
Fund's shares on 60 days' written notice to the Investment Adviser, and
terminates automatically in the event of its "assignment" (as defined in the
Investment Company Act).

INVESTMENT ADVISER

The Investment Adviser was organized as a Delaware corporation on
September 27, 1983 and maintains its offices at 2929 Allen Parkway, Suite 2500,
Houston, Texas 77019. The Investment Adviser's sole activity is to perform
management, administrative and investment advisory services for the Sub-Adviser,
the Fund, ECP, and other investment partnerships or corporations to be formed by
the Sub-Adviser. The Investment Adviser is a registered investment adviser under
the Investment Advisers Act of 1940 (the "Advisers Act").

The directors and officers of the Investment Adviser are: Sam P.
Douglass, Chairman of the Board and Chief Executive Officer; Nolan Lehmann,
President and director; Gary L. Forbes, Vice President; Randall B. Hale, Vice
President and director; Paula T. Douglass, director; and S. Preston Douglass,
director. There is no family relationship between any Independent Director of
the Fund and any director or officer of the Investment Adviser. Paula T.
Douglass is the wife of Sam P. Douglass and S. Preston Douglass, Jr. is the son
of Sam P. Douglass.

The business address of Messrs. Douglass, Lehmann, Tucker, Forbes, and
Hale and Ms. Douglass is 2929 Allen Parkway, Suite 2500, Houston, Texas 77019.
The business address of Mr. S. Preston Douglass, Jr. is 820 Main Street, Suite
100, Kerrville, Texas 78028.

For biographical information on Messrs. Douglass, Lehmann, Tucker,
Forbes, and Hale, please refer to "Management of the Fund -- Investment Adviser"
in the Prospectus.

Paula T. Douglass, age 43, has been a director of the Management
Company since July 1993. Since July 1991, she has been Chairman and CEO of DOVA
Production and Entertainment Company. From September 1989 to September 1990 she
was employed as an attorney by Fulbright & Jaworski LLP. Since December 1978,
she has been a director of Equus Corporation International ("ECI") and is
Chairman and a director of Iwerks Entertainment, Inc. She is a licensed
attorney.

S. Preston Douglass, Jr. age 33, has been a director of the Management
Company since July 1993. He is a partner in the law firm of Wallace, Mosty,
Machann, Jackson & Williams, Kerrville, Texas where he began in January 1989. He
was a prosecutor in the 216th Judicial District in Kerrville, Texas from
December 1987 to December 1988. He is a licensed attorney and former President
of the Kerr County Bar Association. He currently serves as President of the Hill
Country Court Appointed Special Advocates. He is

B-12

also a member of the Board of the Hill Country YMCA, MO-Ranch Presbyterian
Assembly, and the Kerrville Public School Foundation.

As a result of its stock ownership in the Investment Adviser, ECI has
80% voting control of the Investment Adviser. ECI is a privately owned
corporation engaged in a variety of investment activities. ECI is owned by
certain trusts for the benefit of Mr. Douglass and members of his family.

SUB-ADVISER AGREEMENT

The Investment Adviser has entered into a Sub-Adviser Agreement (the
"Sub-Adviser Agreement") with the Sub-Adviser pursuant to which the Sub-Adviser
provides certain investment advisory services for the Fund. The Sub-Adviser
Agreement provides that the Sub-Adviser is responsible for approving the Fund's
quarterly net asset valuations and arranging any necessary financing for the
Fund. In return for its services, the Investment Adviser has agreed to pay the
Sub-Adviser quarterly and at the final dissolution or liquidation of the Fund,
if the Fund is dissolved on a date other than the end of a fiscal quarter, an
incentive fee in an amount equal to (i) ten percent of the net realized capital
gains less unrealized capital depreciation of the Fund on a cumulative basis
from October 23, 1987 (November 14, 1984, in the case of certain investments
held by Equus Investments Incorporated), through the end of each fiscal quarter,
less (ii) the aggregate amount of the incentive fee payments and special
incentive allocation distributions to the Sub-Adviser in prior periods. If the
amount of the incentive fee in any period is a negative number, or cumulative
net realized capital gains less unrealized capital depreciation at the end of
any fiscal quarter is less than such amount calculated at the end of the
previous fiscal quarter, the Sub-Adviser will be required to repay to the
Investment Adviser all or a portion of the incentive fee previously paid. No
fees have been paid to date under the Sub-Adviser Agreement.

The Sub-Adviser Agreement also provides for indemnification by the Fund
of the Sub-Adviser and its officers and directors from any threatened, pending
or completed action to the extent that the activities giving rise to such action
were performed in good faith either on behalf of the Fund or in furtherance of
the interests of the Fund and in a manner reasonably believed by such person to
be within the scope of the authority conferred by the Sub-Adviser Agreement or
by law, so long as such person's conduct did not constitute bad faith,
negligence, misconduct or any breach of fiduciary duty owed to the Fund. In the
absence of a determination by a court that the person seeking indemnification is
not liable by reason of disabling conduct, such indemnification may be
authorized by a reasonable determination, based upon a review of the facts, by
the disinterested Directors or by independent counsel in a written opinion.
Indemnification is limited by Section 17(i) of the Investment Company Act.

Pursuant to its terms, the Sub-Adviser Agreement will continue in
effect from year to year 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 Sub-Adviser
Agreement may be terminated at any time, without the payment of any penalty, by
the Board of Directors of the Fund or a vote of holders of a majority of the
Fund's shares on 60 days' written notice to the Sub-Adviser, and would
automatically terminate in the event of its "assignment" (as defined in the
Investment Company Act).

THE SUB-ADVISER

The Sub-Adviser is a corporation organized under the laws of the State
of Delaware in September 1983. The Sub-Adviser was organized to serve as
managing general partner of the Partnership and other similar partnerships and
is a registered investment adviser under the Advisers Act.

B-13

The directors and officers of the Sub-Adviser and their principal
occupations are respectively as follows: Sam P. Douglass, Chairman of the Board
and a director; Nolan Lehmann, President and a director; Gary L. Forbes, Vice
President; Randall B. Hale, Vice President and director; Patrick M. Cahill, Vice
President and Treasurer; Tracy H. Cohen, Vice President and Secretary; Paula T.
Douglass, director; and S. Preston Douglass, director. The business address of
Messrs. Douglass, Lehmann, Tucker, Forbes, Hale, and Cahill and of Ms. Cohen and
Douglass is 2929 Allen Parkway, Suite 2500, Houston, Texas 77019. The business
address of Mr. S. Preston Douglass, Jr. is 820 Main Street, Suite 100,
Kerrville, Texas 78028.

There is no family relationship between any disinterested Director of
the Fund or director or officer of the Sub-Adviser.

As a result of its stock ownership in the Sub-Adviser, the Investment
Adviser has 100% voting control of the Sub-Adviser. As a result of its stock
ownership in the Investment Adviser, ECI has 80% voting control of the
Investment Adviser. ECI has its principal offices at 2929 Allen Parkway, 25th
Floor, Houston, Texas 77019.

CONFLICTS OF INTEREST

The Investment Adviser, the Sub-Adviser and their affiliates may be
subject to various conflicts of interest in connection with their relationships
and transactions with the Fund. The contractual and other arrangements between
the Fund and the Investment Adviser, the Sub-Adviser and their affiliates have
not been established by arms-length negotiations. Such conflicts of interest may
include:

TRANSACTIONS WITH THE FUND AND PORTFOLIO COMPANIES. The Investment
Adviser, the Sub-Adviser and their affiliates may perform various services for
the Fund and its portfolio companies. In consideration for such services, such
persons may receive various fees, commissions and reimbursements to the extent
permitted under applicable law. Depending upon Management's influence and
control with respect to portfolio companies, the selection of such persons to
perform such services for portfolio companies may not be a disinterested
decision and the terms and conditions for the performance of such services, and
the amounts and terms of such compensation, may not be determined in
arm's-length negotiations.

The Investment Company Act contains restrictions as to certain
transactions among the Fund, Management, and their affiliates. See "Regulation."
Generally, transactions involving the Fund and Management, or certain of their
affiliates must receive the prior approval of the Commission or Board of
Directors. There can be no assurance that such prior approval of the Commission
will be obtained.

The Investment Adviser and the Sub-Adviser provide services to other
investors, including other investment partnerships or corporations and other
business development companies organized by the Sub-Adviser, the Investment
Adviser or their affiliates. The Fund has no contractual or other right to such
services prior to any such other investors.

CONFLICTS AS TO INVESTMENT OPPORTUNITIES. Affiliates of the Investment
Adviser and the Sub-Adviser may make private equity investments for their own
account and may be in competition with the Fund for such investments. In
addition, the Investment Adviser may serve as investment adviser of other
private or public limited partnerships or corporations which will have
investment objectives identical with or similar to those of the Fund. Although
the Investment Adviser and the Sub-Adviser are obligated to use their best
efforts to provide the Fund with continuing and suitable investment
opportunities consistent with its investment objective and policies, the
Investment Adviser and Sub-Adviser are not required to present to the Fund any
particular
B-14

investment opportunity that has come to their attention, even if such
opportunity is within the investment objective and policies of the Fund.
Accordingly, the Fund may not be given the opportunity to participate in certain
investments made by affiliates of the Investment Adviser and the Sub-Adviser. In
addition, if the Fund rejects an investment opportunity for any reason, the
Investment Adviser, the Sub-Adviser and its affiliates would be permitted to
accept it. Within 10 days after the end of each fiscal year of the Fund, the
Investment Adviser and the Sub-Adviser will furnish the Board of Directors of
the Fund with information on a confidential basis as to any investments made by
Investment Adviser, the Sub-Adviser or their affiliates for the previous fiscal
year. Management will endeavor to resolve conflicts with respect to investment
opportunities in a manner deemed equitable to all to the extent possible under
the prevailing facts and circumstances.

JOINT INVESTMENTS IN PORTFOLIO COMPANIES. Management and its Affiliates
may participate with the Fund as co-investors in portfolio companies. Such
participation will be required to be on a basis which, in the judgment of the
Board of Directors, is not more advantageous to such other persons than the
basis upon which the Fund participates in such joint investments, and will
require the prior approval of the Board of Directors. In some instances, prior
approval of the Commission of such joint investments may be required.
There can be no assurance that such approval will be obtained.

TIMING OF DISPOSITION OF INVESTMENTS. The Investment Adviser and the
Sub-Adviser receive incentive compensation measured by the net realized capital
gains of the Fund. The interests of the Sub-Adviser and the Investment Adviser
may conflict with the interests of the stockholders with respect to the timing
of the disposition of the Fund investments. However, the acts of Management are
subject to supervision by the Board of Directors.

ALLOCATION OF MANAGEMENT TIME AND SERVICES. The Fund does not have
independent management or employees and relies on the Investment Adviser, the
Sub-Adviser, and their affiliates for management and administration of the Fund
and its assets. Management believes that it and its affiliates have or can
attract sufficient personnel to discharge all of their responsibilities to the
Fund. Conflicts of interest may arise in allocating management, time, services
or functions between the Fund and other entities for which Management and its
affiliates may provide similar services. The officers and directors of the
Investment Adviser and the Sub-Adviser and their affiliates will devote such
time to the affairs of the Fund as they, in their sole discretion, determine to
be necessary for the conduct of the business of the Fund.

OTHER RELATIONSHIPS WITH PORTFOLIO COMPANIES. Management and their
affiliates may have other relationships on an on-going basis with portfolio
companies in which the Fund has invested. Such relationships could influence
Management to take actions, or forbear from taking actions, which an independent
investment adviser might not take or forbear from taking.

LACK OF SEPARATE REPRESENTATION. The Board of Directors of the Fund,
the Investment Adviser and the Sub-Adviser are represented by the same legal
counsel. Separate counsel will be retained by the Board of Directors for the
Fund in connection with any dispute which may arise between the Fund, the
Investment Adviser, the Sub-Adviser or any of their affiliates.

DETERMINATION OF NET ASSET VALUE

Net asset value per share is determined each quarter by dividing the
value of the net assets of the Fund in dollars (the value of its assets less its
liabilities) on the last day of the quarter by the total number of shares
outstanding. The Sub-Adviser performs the valuations 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

B-15

done in accordance with recommended accounting and reporting principles and
practices and the financial reporting policies of the Commission. The applicable
methods prescribed by such principles and policies are described below.

The fair market value of investments for which no market exists
(including most investments made by the Fund) are 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 being valued by the
Sub-Adviser would be the amount which the Fund might reasonably expect to
receive for it upon its current sale. There is a range of values that are
reasonable for such investments at any particular time. Generally, pursuant to
procedures established by the Board of Directors, the fair value of each
investment initially is based upon its original cost to the Fund. 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.

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 is used only with respect to completed
transactions or firm offers made by sophisticated, independent investors.
Securities with legal, contractual or practical restrictions on transfer may be
valued at a discount from their value determined by the foregoing methods to
reflect such restrictions. The Fund investments for which market quotations are
readily available and which are freely transferable are valued as follows: (i)
securities traded on a securities exchange or the Nasdaq National Market will be
valued at the closing price on the date of valuation and (ii) securities traded
in the over-the-counter market will be valued at the average of the closing bid
and asked prices on the date of valuation. The fair value 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 issuers. Certificates
of deposit purchased by the Fund are valued at their face value, plus interest
accrued to the date of valuation. For securities that are in a class of public
securities but are restricted from free trading (such as Rule 144 stock),
valuation is set by applying an estimated discount to the closing sales or bid
price to reflect the illiquidity caused by such restrictions.

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 Sub-Adviser's methodology of valuation or to conduct an independent
valuation.

Shares of closed-end investment companies frequently trade at a
discount to net asset value, but in certain instances have traded above net
asset value. The Fund's shares have traded at a discount to net asset value
since inception of trading on the American Stock Exchange. It is not possible to
predict whether the Shares will trade at, above or below net asset value.

PORTFOLIO TRANSACTIONS

Although the Fund invests primarily in securities issued in private
transactions, to the extent permitted by law and consistent with its investment
objectives and policies, it may from time to time make investments in publicly
traded securities. In addition, a portfolio company in which the Fund invests
may "go public" subsequent to the Fund's investment by registering its
securities under the Securities Act of 1933 and/or the

B-16

Securities Exchange Act of 1934. The Investment Adviser will make purchases and
sales of publicly traded securities in the manner it deems most beneficial to
the Fund, taking into account such factors as price (including the applicable
brokerage commission or dealer spread), size of order, difficulty of execution,
operational facilities of the brokerage firm involved and the firm's risk in
positioning a block of securities. Although the Investment Adviser will seek
competitive commission rates, it will not necessarily pay the lowest commission
or spread available. Transactions in securities of the companies in which the
Fund may invest may involve specialized services on the part of the broker or
dealer and entail higher commissions or spreads than those available for
transactions involving more widely traded securities of more established
companies.

The Fund has no obligation to deal with any broker in execution of
transactions for its portfolio securities.

Transactions in listed equity securities may be effected on the New
York Stock Exchange and the American Stock Exchange and will involve the payment
of negotiated brokerage commissions. Transactions in the over-the-counter market
(including the Nasdaq National Market and Small-Cap Market) are typically
principal transactions with dealers and the costs of such transactions involve
dealer spreads rather than brokerage commissions. When possible, the Fund will
deal directly with the dealers who make a market in the securities involved
except in those circumstances where better prices and execution are available
elsewhere. Under the Investment Company Act, the Sub-Adviser and the Investment
Adviser and their affiliates generally are prohibited from dealing with the Fund
as a principal in the purchase and sale of securities unless they receive an
appropriate exemptive order from the Commission.

The aggregate amount of brokerage commissions paid by the Fund during
the three years ended December 31, 1995, were $4,831, $0, and $0, respectively.
No brokerage commissions were paid during such period to any broker that: (1) is
an affiliated person of the Fund, (2) is an affiliated person of an affiliated
person of the Fund, or (3) has an affiliated person that is an affiliated person
of the Fund, the Investment Adviser, or the Sub-Adviser.

Subject to obtaining the best price and execution, brokers who provide
supplemental research, market and statistical information to the Investment
Adviser or its affiliates may receive orders for transactions by the Fund. The
term "research, market and statistical information" includes advice as to the
value of securities, and advisability of investing in, purchasing or selling
securities, the availability of securities or purchasers or sellers of
securities, furnishing analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts. Information so received will be in addition to and not in lieu of
the services required to be performed by the Investment Adviser under the
Management Agreement and the expenses of the Investment Adviser will not
necessarily be reduced as a result of the receipt of such supplemental
information. Such information may be useful to the Investment Adviser and its
affiliates in providing services to clients other than the Fund, and not all
such information is used by the Investment Adviser in connection with the Fund.
Conversely, such information provided to the Investment Adviser and its
affiliates by brokers and dealers through whom other clients of the Investment
Adviser and its affiliates effect securities transactions may be useful to the
Investment Adviser in providing services to the Fund.

Although investment decisions for the Fund are made independently from
those of the other accounts managed by the Investment Adviser and its
affiliates, investments of the kind made by the Fund may also be made by certain
other accounts. When the same securities are purchased for or sold by the Fund
and any of such other accounts, it is the policy of the Investment Adviser and
its affiliates to allocate such purchases and sales in the manner deemed fair
and equitable to all of the accounts, including the Fund.

B-17

Portfolio Turnover

Because private equity investments generally require relatively long
periods of time to reach maturity, the rate of turnover of the Fund's
investments in portfolio companies is low. The short-term securities in which
the Fund invests have a high rate of turnover.

SHARE REPURCHASES AND TENDER OFFERS

The Fund is a closed-end business development company and, as such,
stockholders have no right to present their shares to the Fund for redemption.
Shares of closed-end companies generally sell at market prices varying from
their net asset value, frequently at a discount from net asset value, but in
some cases at a premium over net asset value. 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) in
order to attempt to reduce or eliminate any discount or to increase the net
asset value of its shares, or both. The Fund's Board of Directors at any time,
however, may decide that the Fund should not make share repurchases. Repurchased
shares will be retired thereby reducing the common stock issued and outstanding
and capital in excess of par. The Fund may borrow money to finance share
repurchases, subject to compliance with the Investment Company Act, discussed
under "Investment Objective and Policies -- Borrowing".

There can be no assurance that repurchases will eliminate or reduce the
discount from net asset value on the Fund's price per share. The market price of
the shares of the Fund is determined by, among other things, the relative demand
for and supply of such shares in the market, the Fund's investment performance,
the Fund's dividends and yield and investor perception of the Fund's overall
attractiveness as an investment as compared with other investment alternatives.
Nevertheless, the fact that the Fund's shares may be the subject of repurchases
from time to time may enhance its attractiveness to investors and thus reduce
the spread between market price and net asset value that may otherwise exist.

Although the Board of Directors of the Fund believes that share
repurchases generally would have a favorable effect on the market price of the
Fund's shares, it should be recognized that an acquisition of shares by the Fund
will decrease the total assets of the Fund and therefore may increase the Fund's
expense ratio. Furthermore, if the Fund borrows to finance share repurchases or
tender offers, interest on that borrowing will reduce the Fund's net investment
income. If the Fund must liquidate investments to finance a share repurchase,
such liquidation might be at a time when independent investment judgment might
not dictate such action. Such liquidation could also affect the Fund's status as
a regulated investment company.
See "Tax Matters."

It is the present policy of the Board of Directors of the Fund, which
may be changed by the Board of Directors at any time without notice to
stockholders, not to effect share repurchases or accept tenders if (1) such
transactions, if consummated, would (a) result in the delisting of the Fund's
shares from any exchange on which the shares are listed or quoted, or (b)
disqualify the Fund as a regulated investment company under the Code (which
would make the Fund a taxable entity, causing the Fund's income to be taxed at
the corporate level in addition to the taxation of stockholders who receive
dividends and distributions from the Fund); (2) the Fund would not be able to
liquidate portfolio securities in a manner that is orderly and consistent with
the Fund's investment objective and policies in order to purchase shares
tendered; or (3) there is, in the judgment of the Board of Directors, any (a)
legal action or proceeding instituted or threatened challenging such
transactions or otherwise materially adversely affecting the Fund, (b)
suspension of or
B-18

limitation on prices for trading securities generally on the New York Stock
Exchange, the American Stock Exchange, or the Nasdaq Stock Market, (c)
declaration of a banking moratorium by Federal or state authorities or any
suspension of payment by banks in the United States or the State of Texas, (d)
material limitation imposed by Federal or state authorities on the extension of
credit by lending institutions, (e) commencement of war, armed hostilities or
other international or national calamity directly or indirectly involving the
United States or other countries in which the Fund invests, which is material to
the Fund, or (f) other events or conditions that would have a material adverse
effect on the Fund or its stockholders if shares tendered were purchased. The
Fund's Board of Directors may modify these conditions in light of circumstances
existing at the time.

Each tender offer for the Fund's shares, if any, will be made and
stockholders notified in accordance with requirements of the Exchange Act and
the Investment Company Act, either by publication or mailing or both. Each
offering document will contain such information as is prescribed by such laws
and the rules land regulations promulgated thereunder.

The Fund will not specify a record date for the tender offer which will
not permit a stockholder of record on the effective date of the tender offer to
tender his shares. Each person tendering shares will pay to the Fund a
reasonable service charge to help defray certain costs, including the processing
of tender forms, effecting payment, postage and handling. Any such service
charge will be paid directly by the tendering stockholder and will not be
deducted from the proceeds of the purchase. The Fund's transfer agent will
receive the fee as an offset to these costs. The Fund expects the cost to the
Funds of effecting a tender offer will exceed the aggregate of all service
charges received from those who tender their shares. Costs associated with a
tender will be charged against capital. During the pendency of any tender offer,
stockholders may ascertain the net asset value of the Fund's shares by calling a
telephone number as provided in any tender offer materials.

TAX MATTERS

The Fund intends to continue to qualify for and elect to be treated as
a "regulated investment company" under Subchapter M of the Code. If the Fund
qualifies as a regulated investment company and distributes to stockholders in a
timely manner at least 90% of its "investment company taxable income" each year,
it will not be subject to federal income tax on the portion of its taxable
income and gains it distributes to stockholders. In addition, if the Fund
distributes in a timely manner 98% of its net capital gain income for each
one-year period ending on October 31 and 98% of its investment company taxable
income for each calendar year (as well as any portion of the respective 2%
balances not distributed in the previous year), it will not be subjected to the
4% nondeductible federal excise tax on certain undistributed income of regulated
investment companies.

Under the Investment Company Act, the Fund is not permitted to make
distributions to stockholders unless it meets certain asset coverage
requirements. See "Regulation". If the Fund is unable to make the required
distributions, it may fail to qualify as a regulated investment company, or be
subjected to a nondeductible 4% excise tax.

For any period during which the Fund qualifies as a regulated
investment company for tax purposes, distributions to stockholders of the Fund's
ordinary income (including dividends, interest and original issue discount) and
any net short-term capital gain generally will be taxable as ordinary income to
stockholders to the extent of the Fund's current or accumulated earnings and
profits. To the extent that the Fund's distributions are not taxable to
stockholders as ordinary income or capital gains, they will be treated as a
return of capital and will reduce the stockholder's basis in his shares and, to
the extent that they exceed his

B-19

basis, will be treated as a gain from the sale of his shares as discussed below.
Distributions which are taxable to stockholders as ordinary income will
constitute dividends for federal income tax purposes. Distributions received by
corporate stockholders will be subject to the 70% dividend received deduction
(i) if,and to the extent that such distributions are made out of dividend income
of the Fund and (ii) the requisite holding period set forth in Sections 246 and
246A of the Code is satisfied. The dividends-received deduction is currently
70%.

Sections 246 and 246A of the Code contain limitations on the
eligibility of dividends for the dividends-received deduction for corporations
in addition to the limitations discussed. Depending upon the corporate
stockholder's circumstances (including whether it has a 45-day holding period
for its shares and whether its shares are debt financed), these limitations may
be applicable to dividends received by the corporate stockholder that would
otherwise qualify for the dividends-received deduction under the principles
discussed above. Accordingly, stockholders should consult their own tax advisers
in this regard.

Stockholders who are not subject to tax on their income will not be
required to pay tax on amounts distributed to them.

Investors should be careful to consider the tax implications of buying
shares just prior to a distribution. Even if the price of the shares includes
the amount of the forthcoming distribution, the stockholder will be taxed upon
receipt of the distribution and will not be entitled to offset the distribution
against tax basis in the shares. So long as the Fund is a regulated investment
company, the investment fees and expenses incurred by the Fund will reduce the
Fund's income and will not be deemed to be distributed to stockholders or
subject to the limitation on miscellaneous itemized deductions imposed on
individual stockholders.

Distribution of the Fund's net capital gain (designated by the Fund as
capital gain dividends) will be taxable to stockholders as long-term capital
gain regardless of the stockholder's holding period in his Shares.

Capital losses realized by the Fund may offset the Fund's capital gains
but not its ordinary income. Stockholders are not entitled to include any
portion of a net capital loss for a Fund tax year on their individual returns.
Net capital losses may be carried over by the Fund to the next eight years as
short-term capital losses. However, such losses may not reduce the earnings and
profits realized by the Fund in a carryover year. Rather, they reduce the Fund's
accumulated earnings and profits at the start of the year and the amount of
dividends distributed out of current year earnings and profits that may be
designated as capital gain dividends.

The Fund may be required to withhold 20% of all taxable distributions
payable to stockholders who fail to provide the Fund with their correct taxpayer
identification number or to make required certifications, or regarding whom the
Fund has been notified by the IRS that they are subject to backup withholding.
Backup withholding is not an additional tax and any amounts withheld may be
credited against a stockholder's United States Federal Income tax liability.

Federal withholding taxes at a 30% rate (or a lesser rate established
by treaty) may apply to distributions to stockholders that are nonresident
aliens or foreign partnerships, trusts or corporations. Foreign investors should
consult their tax advisers with respect to the possible United States federal,
state and local and foreign tax consequences of an investment in the Fund.

B-20

particular situation. Stockholders are advised to consult their own tax advisers
with respect to the particular tax consequences to them of an investment in the
Fund.

If the Fund acquires debt obligations that were originally issued at a
discount, or that bear stated interest rates that do not call for payments at
fixed rates (or certain "qualified variable rates") at regular intervals over
the life of the obligation, it will be required to include in income each year a
portion of the "original issue discount" that accrues over the life of the
obligation regardless of whether the income is received by the Fund and to make
distributions accordingly. In this event, the Fund may borrow funds or sell its
investments to meet these distribution requirements. See "Investment Objective
and Policies --Borrowing."

Any dividend declared by the Fund in October, November or December of
any calendar year, payable to stockholders of record on a specified date in any
such month and actually paid before February 1 of the following year, will be
treated as if it were received on December 31 of the previous year.

Pursuant to Section 852(b)(3) of the Code, the Fund may elect to retain
and pay income tax on net long-term capital gains it receives during a tax year.
If the Fund elects to retain any long-term capital gains, stockholders must
include in their income as long-term capital gains their proportionate share of
such undistributed long term capital gains as designated by the Fund. The Fund
is required to give each stockholder written notice within 60 days of the close
of its taxable year designating the amount of any undistributed capital gains.
Each stockholder is deemed to have paid his share of the income taxes paid by
the Fund on the undistributed long-term capital gain, which can be credited or
refunded to the stockholder. The basis of each stockholder's Shares is increased
by the difference between the undistributed long-term capital gains and their
tax credit or refund. Any undistributed long-term capital gains retained by the
Fund on which income tax is paid by the Fund under Section 852(b)(3) of the Code
are treated as a distributed amount for purposes of determining the amounts
subject to the 4% excise tax. Qualified Plans (including IRAs), certain trusts
and other organizations or persons who are not subject to federal income tax on
capital gains will be entitled to a refund of their pro rata share of such taxes
paid by the Fund upon filing appropriate returns or claims for refund with the
proper tax authorities. Although Qualified Plans and IRAs are not taxable on
capital gains derived from the Fund, distributions to beneficiaries from such
entities will be taxable at ordinary income rates regardless of the character of
income when received by the Qualified Plan or IRA.

In order to qualify as a regulated investment company for federal
income tax purposes, among other things the Fund must (a) derive at least 90% of
its gross income from dividends, interest, payments with respect to securities
loans, gains from the sale of stock or securities, certain foreign currency
gains, or other income derived with respect to its business of investing in such
stock, securities or currencies; (b) derive less than 30% of its gross income
from the sale of stock or securities held for less than 3 months; and (c)
diversify its holdings so that, at the end of each quarter, (i) at least 50% of
the value of the Fund's assets consists of cash, government securities and other
securities if such other securities of any one issuer do not represent more than
5% of the Fund's assets or 10% of the outstanding voting securities of the
issuer and (ii) no more than 25% of the value of the Fund's assets are invested
in the securities of 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, similar or related trades or businesses. The foregoing
diversification requirements may affect the size and type of investments that
the Fund will make. The appreciation of a group of investments could distort the
Fund's overall diversification. In this event, the Fund may borrow to make
qualifying investments (i.e. in cash, certificates of deposit or government
securities) or sell certain of its investments.

The Fund may receive or be deemed to receive certain income that would
not constitute the type of income that would satisfy the 90% test described in
clause (a) in the preceding paragraph. If more than

B-21

10%of the Fund's gross income arose from these sources, the Fund could become
ineligible for taxation as a regulated investment company in that year. In
addition, if the Fund were to sell participations in its loans, it could be
deemed to have disposed of a security held for less than three months. If as a
result of such sales, at least 30% of the Fund's income were derived from the
sale of stock or securities held for less than three months, the Fund could
become ineligible for taxation as a regulated investment company in that year.

If, in any taxable year, the Fund fails to qualify to be treated as a
regulated investment company for federal tax purposes, the Fund will be taxed in
the same manner as an ordinary corporation regardless of whether it distributes
its income to its stockholders. In addition, if the Fund fails to qualify as a
regulated investment company, distributions to stockholders will generally be
taxable as ordinary dividends to the extent of the Fund's current or accumulated
earnings and profits, regardless of whether the distributions are designated as
"capital gain dividends" by the Fund.

In order to requalify as a regulated investment company in subsequent
years, the Fund would be required to first pay out its earnings and profits from
the year of disqualification. In addition, the IRS has announced that it will
issue regulations providing that a corporation that seeks to qualify for
treatment as a regulated investment company that has not previously qualified to
be so taxed (or that has so qualified and subsequently failed to requalify for a
period exceeding a year) must recognize the net unrealized appreciation in its
assets of the end of the taxable year prior to the taxable year in which it
seeks to qualify as a regulated investment company. The IRS has announced,
however, that these regulations will not apply to any entity that has previously
qualified to be taxed as a regulated investment company that seeks to requalify
as a regulated investment company in the taxable year immediately following the
year in which it failed to so qualify.

A stockholder may recognize taxable gain or loss if he sells, exchanges
or redeems his shares. Except in the case of dealers and financial institutions,
any gain or loss arising from (or, in the case of distributions in excess of
earnings and profits, treated as arising from) the sale, exchange or redemption
of shares generally will be treated as a long-term capital gain or loss, if the
stockholder has held his shares for more than one year. However, any capital
loss arising from the sale, exchange or redemption of shares held for 6 months
or less will be treated as a long-term capital loss to the extent of the amount
of capital gain dividends received; for this purpose, the special rules of
Section 246(c)(3) and (4) of the Code generally apply in determining the holding
period of shares.

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 upon or capital appreciation of the funds or any portion of the
funds of the investment company. However, the Investment Advisers Act does
permit the payment of compensation based on capital gains 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
in order to provide for incentive compensation to the Investment Adviser and the
Sub-Adviser based on the capital appreciation of the Fund's investments.

By electing to be treated as a business development company, the Fund
is subject to various provisions of the Investment Company Act. 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 security holders.
The Fund's Certificate of Incorporation requires the approval of a majority of
the Fund's outstanding voting securities for the Fund to change the nature of
its business so as to cease to be a business development

B-22

company. The following is a brief description of the Investment Company Act, and
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 (i) is organized under the laws of, and has
its principal place of business in, any state or states, (ii) is not an
investment company (except for wholly owned small business investment
corporations licensed by the Small Business Administration) ("SBICs") and
(iii)(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 Commission. 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 (1) 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, business objectives or policies of a
portfolio company, (2) 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, or
(3) with respect to SBICs, the making of loans to a portfolio company. A
business development company may satisfy the requirements of clause (1) 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 consist of qualifying
assets. Qualifying Assets include (i) securities of companies that were eligible
portfolio companies at the time that the Fund acquired their securities; (ii)
securities of companies which are actively controlled by the Fund; (iii)
securities of bankrupt or insolvent companies that are not otherwise eligible
portfolio companies; (iv) 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; (v) securities received in exchange for or
distributed on or with respect to any of the foregoing; and (vi) cash items,
government securities and high-quality, short-term debt. See "Investment
Objective and Policies." 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

B-23

margin, except such short-term credits as are necessary for the clearance of
portfolio transactions, or 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
securities senior to the Shares if its asset coverage, as defined in the
Investment Company Act, is at least 200% after the issuance of the debt or the
senior securities. In addition, while senior stock or publicly distributable
debt is outstanding, provision must be made to prohibit any distribution to
stockholders or the repurchase of any Shares unless the asset converge ratio is
at least 200% at the time of the distribution or repurchase.

The Fund may not sell its securities at a price that is below the
prevailing net asset value per share without the approval of the policy by
security holders holding a majority of the shares issued by the Fund, including
a majority of shares held by nonaffiliated security holders except in connection
with an offering to its stockholders (including a rights offering), upon
conversion of a convertible security, or upon exercise of certain warrants. In
addition, the Fund may repurchase its shares, subject to the restrictions of the
Investment Company Act.

Many of the transactions involving the Fund and its affiliates (as well
as affiliates of such affiliates) which were prohibited without the prior
approval of the Commission under the Investment Company Act prior to its
amendment by the Small Business Investment Incentive Act of 1980 now require the
prior approval of a majority of the disinterested Directors and a majority of
the Directors having no financial interest in the transactions. However, certain
transactions involving closely affiliated persons of the Fund, including its
investment advisers, still require the prior approval of the Commission. In
general (a) any person who owns, controls or holds with power to vote more than
5% of the outstanding Shares, (b) any director, executive officer or general
partner of such person 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 Directors and, in some situations, the prior
approval of the Commission, 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 Directors, the Investment Company Act generally
does not restrict transactions between the Fund and its portfolio companies.

The Fund, the Sub-Adviser, and the Investment Adviser have received an
order from the Commission exempting the Fund from certain prohibitions contained
in the Investment Company Act relating to investments by the Fund in
transactions in which ECP or certain affiliates of the Sub-Adviser are also
participants. Under the terms of the order, investments in companies in which an
affiliate is also an investor either must meet certain guidelines or be approved
in advance by a majority of the disinterested Directors. See "Investment
Objective and Policies -- Co-Investment Opportunities" above.

B-24

BENEFICIAL OWNERSHIP

The only person known to the Fund who may be deemed to be a beneficial
owner of 5% or more of shares of the Fund's Common Stock because they possessed
or shared voting or investment power with respect to shares of the Fund's Common
Stock is Wachovia Corporation, 301 North Main Street, Winston Salem, North
Carolina 27150, which has reported that it beneficially owns 170,000 shares of
Common Stock or 5.4% of the outstanding shares of Common Stock of the Fund. As
of February 29, 1996, the officers and Directors of the Fund, as a group,
beneficially owned 53,057 shares of the Fund, representing approximately 1.7% of
the Fund's outstanding shares.

FINANCIAL STATEMENTS

The Fund's financial statements and schedules at December 31, 1995 and
1994 and for the three years ended December 31, 1995 and the report thereon by
Arthur Andersen LLP are incorporated by reference to the Fund's Annual Report on
Form 10-K for the year ended December 31, 1995, filed by the Fund with the
Commission pursuant to the Exchange Act. The Fund will furnish, without charge,
a copy of the foregoing documents upon request from Investor Relations
Department, Equus II Incorporated, 2929 Allen Parkway, Suite 2500, Houston,
Texas 77019, telephone number (713) 529-0900.

B-25
<PAGE>
EQUUS II INCORPORATED

PART C

OTHER INFORMATION

Item 24. Financial Statements and Exhibits

(1) Financial Statements for the fiscal year ended December 31, 1995*

Report of Independent Public Accountants

Balance Sheets at December 31, 1995 and 1994

Statements of Operations for the years ended December 31, 1995, 1994
and 1993

Statements of Changes in Net Assets for the years ended December 31,
1995, 1994 and 1993

Statements of Cash Flows for the years ended December 31, 1995, 1994
and 1993

Supplemental Information-Selected Per Share Data and Ratios for the
five years ended December 31, 1995

Schedule of Portfolio Securities at December 31, 1995

Schedule of Portfolio Securities at December 31, 1994

Notes to Financial Statements

* Incorporated by reference to the Fund's Annual Report on Form 10-K
for the year ended December 31, 1995, filed on March 1, 1996 (EDGAR
Accession No. 0000890566-96-000122).

(2) Exhibits

(a)(1) -- Restated Certificate of Incorporation [Incorporated by reference to
Exhibit 3(a) to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1991]

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

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

(d)(1) -- Specimen certificate for Common Stock, par value $.001 per share
[Incorporated by reference to Exhibit 4 to the Registrant's
Registration Statement on Form N-14, file No. 33-42621]

(2) -- Form of Subscription Certificate+

(3) -- Form of Notice of Guaranteed Delivery+

(4) -- Form of DTC Participant Oversubscription Exercise Form+

(5) -- Form of Beneficial Owner Instruction and Exercise Form+

(6) -- Form of Nominee Subscription Rights Exercise Form Certificate+

(7) -- Form of Rights Agent Agreement+

(e) -- Not applicable

(f) -- Not applicable

(g)(1) -- Form of Management Agreement between the Fund and Equus Capital
Management Corporation. [Incorporated by reference to Exhibit 6(c)
to Registrant's Registration Statement on Form N-14, file number
33-60118]

(2) -- Form of Sub-Adviser Agreement between Equus Capital Management
Corporation and Equus Capital Corporation. [Incorporated by
reference to Exhibit 5(c) to the Registrant's Registration Statement
on Form N-14, file number 33-42621]

(h) -- Not applicable

(i) -- Not applicable

(j) -- Form of Safekeeping Agreement between the Fund and Southwest
Guaranty Trust Company [Incorporated by reference to Exhibit 6 to
the Registrant's Registration Statement on Form N-14, file number
33-42621]

(k) -- Not applicable

(l) -- Opinion and consent of Snell & Smith, P.C.++

(m) -- Not applicable

(n) -- Consent of Arthur Andersen LLP++

(o) -- Annual Report on Form 10-K for the year ended December 31, 1995++

(p) -- Not applicable

(q) -- Not applicable

(r) -- Financial Data Schedule++

+ Filed with Pref-Effect Amendment No. 1.

++ Filed with original Registration Statement.

C-2

Item 25. Marketing Arrangements

Not applicable

Item 26. Other Expenses of Issuance and Distribution

The following table sets forth the estimated expenses to be incurred
in connection with the Offer described in this Registration Statement:

Registration fees $ 4,509
American Stock Exchange listing fee 20,924
Printing (other than stock certificates) 12,000*
Fees and expenses of qualification under
state securities laws (including fees of counsel) 7,500*
Auditing fees and expenses 7,500*
Legal fees and expenses 35,000*
Subscription Agent's fees and expenses 100,000*
Information Agent 15,000*
Postage 5,000*
Miscellaneous 12,567
--------
Total $220,000*

* Estimated

Item 27. Persons Controlled by or Under Common Control with Registrant

None.

Item 28. Number of Holders of Securities

Common Stock, par value $.001 per share: 2,128 record holders as of
February 16, 1996.

Item 29. Indemnification

Section 145 of the General Corporation Law of the State of Delaware
provides as follows:

(a) A corporation shall have power to indemnify any person who
was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that he
is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests
of the corporation, and,

C-3

with respect to any criminal action or proceeding, had no reasonable
cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction,
or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith
and in a manner which he reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that
his conduct was unlawful.

(b) A corporation shall have power to indemnify any person who
was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of
the corporation to procure a judgment in its favor by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as
a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation and except that
no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable
to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability
but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which
the Court of Chancery or such other court shall deem proper.

(c) To the extent that a director, officer, employee or agent
of a corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in subsections
(a) and (b), or in defense of any claim, issue or matter therein, he
shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith.

(d) Any indemnification under subsections (a) and (b) (unless
ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper
in the circumstances because he has met the applicable standard of
conduct set forth in subsections (a) and (b). Such determination shall
be made (1) by the board of directors by a majority vote of a quorum
consisting of directors who were not parties to such action, suit or
proceeding, or (2) if such a quorum is not obtainable, or, even if
obtainable a quorum of disinterested directors so directs, by
independent legal counsel in a written opinion, or (3) by the
stockholders.

(e) Expenses (including attorneys' fees) incurred by an
officer or director in defending any civil, criminal, administrative,
or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit
or proceeding upon receipt of an undertaking by or on behalf of such
director or officer to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by the
corporation as authorized in this Section. Such expenses (including
attorneys' fees) incurred by other employees and agents may be so paid
upon such terms and conditions, if any, as the board of directors
deems appropriate.

(f) The indemnification and advancement of expenses provided
by, or granted pursuant to, the other subsections of this section
shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled
under any by-law,

C-4

agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action
in another capacity while holding such office.

(g) A corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against him and incurred by
him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him
against such liability under the provisions of this section.

(h) For purposes of this Section, references to "the
corporation" shall include, in addition to the resulting corporation,
any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its
separate existence had continued, would have had power and authority
to indemnify its directors, officers, and employees or agents, so that
any person who is or was a director, officer, employee or agent of
such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under the provisions of
this Section with respect to the resulting or surviving corporation as
he would have with respect to such constituent corporation if its
separate existence had continued.

(i) For purposes of this Section, references to "other
enterprises" shall include employee benefit plans; references to
"fines" shall include any excise taxes assessed on a person with
respect to an employee benefit plan; and references to "serving at the
request of the corporation" shall include any service as a director,
officer, employee or agent of the corporation which imposes duties on,
or involves services by, such director, officer, employee, or agent
with respect to an employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have
acted in a manner "not opposed to the best interests of the
corporation" as referred to in this Section.

(j) The indemnification and advancement of expenses provided
by, or granted pursuant to, this section shall, unless otherwise
provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such a
person.

Article Eleventh of the Registrant's Certificate of Incorporation
filed as Exhibit 1 provides as follows:

ELEVENTH: A. Subject to any limitation imposed pursuant to
the 1940 Act, the Corporation shall indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the
right of the Corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, par- tnership, joint
venture, trust or other enterprise, against expenses (including
attorneys' fees), judg- ments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such
action, suit, or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests
of the Corporation, and with respect to any criminal

C-5

action or proceeding, had no reasonable cause to believe his conduct
was unlawful, except that (i) no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable for bad faith, negligence, willful
misconduct or breach of fiduciary duty in the performance of his duty
to the Corporation unless and only to the extent the Court of Chancery
or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper, and (ii) no such
person shall be entitled to indemnification in connection with any
lawsuit in which the violation of any federal or state securities laws
is alleged unless (a) if such person is successful in defending
against such lawsuit, a court approves indemnification for the costs
of such defense or (b) if the lawsuit is settled, a court approves the
settlement and finds that indemnification for the settlement costs and
expenses related to the lawsuit should be made. The satisfaction of
any indemnification hereunder shall be limited to Corporation assets.
The termination of any action, suit or proceeding by judgment, order,
settlement or conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person
did not act in good faith and in a manner which he reasonably believed
to be in or not opposed to the best interests of the Corporation, and
with respect to any criminal action or proceeding, had reasonable
cause to believe that his conduct was unlawful.

B. Subject to any limitation imposed by the 1940 Act, the
Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that he is or was a
director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense
or settlement of such action or suit if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best
interests of the Corporation and except that no indemnification shall
be made in respect of any claim, issue or matter as to which such
person shall have been adjudged to be liable for bad faith,
negligence, willful misconduct or breach of fiduciary duty in the
performance of his duty to the Corporation unless and only to the
extent that the Court of Chancery or the court in which such action or
suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the
case, such person is fairly and reasonably entitled to indemnity for
such expenses which the Court of Chancery or such other court shall
deem proper.

C. To the extent that a director, officer, employee or agent
of the Corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in subsections A
and B, or in defense of any claim, issue or matter therein, he shall
be indemnified against expenses (including attorneys' fees) actually
and reasonably incurred by such person in connection therewith.

D. Any indemnification under subsection A and B (unless
ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that
indemnification of the officer, director, employee or agent, is proper
in the circumstances because he has met the applicable standard of
conduct set forth in subsections A and B. Such determination shall be
made (1) by the Board of Directors by a majority vote of a quorum
consisting of directors who were not parties to such action, suit or
proceeding, or (2) if such quorum is not obtainable, or

C-6

even if obtainable a quorum of disinterested directors so directs, by
independent legal counsel in a written opinion, or (3) by the
stockholders.

E. Expenses incurred by an officer or director in defending a
civil or criminal action, suit or proceeding shall be paid by the
Corporation in advance of the final disposition of such action, suit
or proceeding as authorized by the Board of Directors in the specific
case upon receipt of an undertaking by or on behalf of the director or
officer to repay such amount unless it shall ultimately be determined
that he is entitled to be indemnified by the Corporation as authorized
in Section 145 of The General Corporation Law of Delaware provided
that at least one of the following conditions precedent has occurred
in the specific case: (1) the officer or director has provided
security for his undertaking; (2) the Corporation is insured against
losses arising by reason of any lawful advances; or (3) a majority of
a quorum of the disinterested non-party directors of the Corporation
or an independent legal counsel in a written opinion shall determine,
based upon a review of readily available facts, that there is reason
to believe that such officer or director ultimately will be found
entitled to indemnification. Such expenses incurred by other employees
and agents may be so paid upon such terms and conditions, if any, as
the Board of Directors deems appropriate.

F. The indemnification and advancement of expenses provided by
this Article shall not be deemed exclusive of any other rights to
which those seeking indemnification or advancement of expenses may be
entitled under any by-law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding
such office, and shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of
the heirs, executors and administrators of such a person. The
Corporation shall be permitted to enter into contracts directly with
its officers and directors providing the maximum indemnity and relief
from liability permitted under Delaware law.

G. The Corporation may purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him and incurred by him in any
such capacity, or arising out of his status as such, whether or not
the Corporation would have the power to indemnify him against such
liability under the provisions of this Article; provided, however,
that the Corporation may not purchase and maintain insurance that will
protect or purport to protect any person against any liability for
willful misfeasance, bad faith, gross negligence or reckless disregard
of duty.

H. For purposes of this Article, references to "other
enterprises" shall include employee benefit plans; references to
"fines" shall include any excise taxes assessed on a person with
respect to any employee benefit plan; and references to "serving at
the request of the Corporation" shall include any service as a
director, officer, employee or agent of the Corporation which imposes
duties on, or involves services by, such director, officer, employee,
or agent with respect to an employee benefit plan, its participants,
or beneficiaries; and a person who acted in good faith and in a manner
he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have
acted in a manner "not opposed to the best interests of the
Corporation" as referred to in this Article.

I. No provision of this Certificate of Incorporation
shall be effective to protect or purport to protect any director or
officer of the Corporation against any liability to the Corporation

C-7

or its security holders to which he would otherwise be subject by
reason of willful misfeasance, bad faith, negligence or reckless
disregard of the duties involved in the conduct of his office.

Sections 8 and 9 of the Management Agreement between the Registrant
and Equus Capital Management Corporation provide as follows:

8. LIABILITY OF THE MANAGEMENT COMPANY. The Management
Company, its officers, directors, employees, agents and affiliates
(collectively, "Affiliates") shall not be liable to the Fund, or any
stockholder of the Fund, for any error of judgment or mistake of law
or any loss or damage with respect to any investment of the Fund or
arising from any act or omission of the Management Company or any of
the Affiliates in the performance of its obligations hereunder, unless
such loss or damage is the result of bad faith, negligence, misconduct
or any breach of fiduciary duty, disregard of any duties or
obligations owed to the Fund by the Management Company or such
Affiliates by reason of this Agreement or any relation created hereby.

9. INDEMNIFICATION OF THE MANAGEMENT COMPANY. The Fund shall
indemnify and hold harmless, to the extent permitted by law, the
Management Company and any of its affiliates, who was or is a party or
is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding whether civil, criminal,
administrative or investigative (including any action by or in the
right of the Fund), by reason of any acts or omissions or alleged acts
or omissions arising out of the activities of such person, if such
activities were performed in good faith either on behalf of the Fund
or in furtherance of the interest of the Fund, and in a manner
reasonably believed by such person to be within the scope of the
authority conferred by this Agreement or by law against losses,
damages or expenses for which such person has not otherwise been
reimbursed (including, but not limited to, accountants' and attorneys'
fees, judgments, fines and amounts paid in settlement) actually and
reasonably incurred by such person in connection with such action,
suit or proceeding, so long as such conduct did not constitute bad
faith, negligence, misconduct or any other breach of fiduciary duty
with respect to such acts or omissions and, with respect to any
criminal action or proceedings, had no reasonable cause to believe his
conduct was unlawful. The satisfaction of any indemnification and any
holding harmless hereunder shall be from and limited to Fund assets.
Notwithstanding the foregoing, absent a court determination that the
person seeking indemnification was not liable by reason of "disabling
conduct" within the meaning of Section 17(h) of the Act, the decision
by the Fund to indemnify such person shall be based upon the
reasonable determination, after review of the facts, of the non-party
Directors of the Fund, or of independent legal counsel in a written
opinion that such person was not liable by reason of such disabling
conduct.

Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Act"), may be permitted to Directors,
officers and controlling persons of the Fund, pursuant to the foregoing
provisions or otherwise, the Fund has been advised that in the opinion of the
Securities and Exchange Commission (the "Commission") such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Fund of expenses incurred or paid by a Director, officer
or controlling person of the Fund in the successful defense of any action, suit
or proceeding) is asserted by such Director, officer or controlling person in
connection with the securities being registered, the Fund will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.

Item 30. Business and Other Connections of Investment Adviser

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Registrant is fulfilling the requirement of this Item 30 to provide a
list of the officers and directors of its investment advisers, together with
information as to any other business, profession, vocation or employment of a
substantial nature engaged in by that entity or those of its officers and
directors during the past two years, by incorporating by reference the
information contained in the Form ADVs filed with the Commission pursuant to the
Investment Advisers Act of 1940 by Equus Capital Management Corporation and
Equus Capital Corporation (SEC File Nos. 801-21468 and 801-21467).

Item 31. Location of Accounts and Records

Equus Capital Management Corporation
2929 Allen Parkway, Suite 2500
Houston, Texas 77019

(with respect to its services as Investment Adviser)

First Interstate Bank of Texas, N.A.
1000 Louisiana, Suite 700
Houston, Texas 77002

(with respect to its services as transfer agent, dividend disbursing agent and
registrar)

Southwest Guaranty Trust Company
2121 Sage Road, Suite 150,
Houston, Texas 77056.

(with respect to its services as custodian)

Item 32. Management Services

Not applicable.

Item 33. Undertakings

(a) Registrant undertakes to suspend offering its shares until it
amends its prospectus contained herein if (1) subsequent to the effective date
of its Registration Statement, the net asset value per share declines more than
10 percent from its net asset value per share as of the effective date of this
Registration Statement, or (2) the net asset value per share increases to an
amount greater than its net proceeds as stated in the prospectus contained
herein.

(b) Registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:

(i) to include any prospectus required by Section 10(a)(3) of the Act;

C-9

(ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective Registration Statement; or

(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.

(2) That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

(d) Registrant hereby undertakes to send by first class mail or other
means designed to ensure equally prompt delivery, within two business days of
receipt of a written or oral request, a Statement of Additional Information.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and/or the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Houston, State of Texas, on the 9th day of April,
1996.

EQUUS II INCORPORATED

By: /s/ NOLAN LEHMANN
Nolan Lehmann, President

C-10

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated and on the dates indicated.

SIGNATURE TITLE DATE
--------- ----- ----
GREGORY J. FLANAGAN* Director April 9, 1996
(Gregory J. Flanagan)

ROBERT L. KNAUSS* Director April 9, 1996
(Robert L. Knauss)

GARY J. PETERSEN* Director April 9, 1996
(Gary R. Petersen)

JOHN W. STORMS* Director April 9, 1996
(John W. Storms)

FRANCIS D. TUGGLE* Director April 9, 1996
(Francis D. Tuggle)

EDWARD E. WILLIAMS* Director April 9, 1996
(Edward E. Williams)

NOLAN LEHMANN President and Director April 9, 1996
(Nolan Lehmann) (principal financial and
accounting officer)

SAM P. DOUGLASS* Chairman of the Board and April 9, 1996
(Sam P. Douglass) Chief Executive Officer
(principal executive officer)

* By: NOLAN LEHMANN
(Nolan Lehmann)
Agent and Attorney-in-Fact
C-11