INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Equus II Incorporated:
We have examined management's assertion about Equus II Incorporated's (the
"Company's") compliance with the requirements of subsections (b) and (c) of Rule
17f-2 under the Investment Company Act of 1940 ("the Act") as of December 31,
1998, included in the accompanying Management Statement Regarding Compliance
with Certain Provisions of the Investment Company Act of 1940. Management is
responsible for the Company's compliance with those requirements. Our
responsibility is to express an opinion on management's assertion about the
Company's compliance based on our examination.
Our examination was made in accordance with standards established by the
American Institute of Certified Public Accountants and, accordingly, included
examining, on a test basis, evidence about the Company's compliance with those
requirements and performing such other procedures as we considered necessary in
the circumstances. Included among our procedures were the following tests
performed as of December 31, 1998:
o Count and inspection of all securities located in the vault of
NationsBank N.A., in Houston, Texas;
o Confirmation of all securities hypothecated, pledged, placed in escrow,
or out for transfer with brokers, pledgees and/or transfer agents;
o Reconciliation of all such securities to the books and records of the
Company and the Custodian.
We believe that our examination provides a reasonable basis for our opinion. Our
examination does not provide a legal determination on the Company's compliance
with specified requirements.
In our opinion, management's assertion that Equus II Incorporated was in
compliance with the requirements of subsections (b) and (c) of Rule 17f-2 of the
Investment Company Act of 1940 as of December 31, 1998, with respect to
securities reflected in the investment account of the Company is fairly stated,
in all material respects.
This report is intended solely for the information and use of management of
Equus II Incorporated and the Securities and Exchange Commission and should not
be used for any other purpose.
ARTHUR ANDERSEN LLP
Houston, Texas
December 31, 1998
<PAGE>
MANAGEMENT STATEMENT REGARDING COMPLIANCE WITH CERTAIN PROVISIONS OF THE
INVESTMENT COMPANY ACT OF 1940
We, as members of management of Equus II Incorporated (the "Company"), are
responsible for complying with the requirements of subsections (b) and (c) Rule
17f-2, "Custody of Investments by Registered Management Investment Companies,"
of the Investment Company Act of 1940. We are also responsible for establishing
and maintaining effective internal controls over compliance with those
requirements. We have performed an evaluation of the Company's compliance with
the requirements of subsections (b) and (c) of Rule 17f-2 as of December 31,
1998 and from October 22, 1998 through December 31, 1998.
Based on this evaluation, we assert that the Company was in compliance with the
requirements of subsections (b) and (c) of Rule 17f-2 of the Investment Company
Act of 1940 as of December 31, 1998 and from October 22, 1998 through December
31, 1998, with respect to securities reflected in the investment account of the
Company.
Equus II Incorporated
By: /s/ NOLAN LEHMANN
Nolan Lehmann, President
