Overview

Equus Total Return, Inc. is a business development company which invests in equity and equity-oriented securities issued by privately-owned companies in transactions negotiated directly with such companies. The Fund made four new investments other than follow-on investments during the nine months ended September 30, 2008 and 2007.

The valuation of the Fund's investments is the most significant area of judgment impacting the financial statements. The Fund's portfolio investments are valued at estimates of fair value, with the net change in unrealized appreciation or depreciation included in the determination of net assets. Almost all of the long-term investments are in privately-held or restricted securities, the valuation of which is necessarily subjective. Actual values may differ materially from the Fund's estimated fair value. Portfolio valuations are determined quarterly by the Adviser, subject to the approval of the Board of Directors, and are based on a number of relevant factors.

Most of the Fund's portfolio companies utilize leverage, and the leverage magnifies the return on its investments. For example, if a portfolio company has a total enterprise value of $10.0 million and $7.5 million in funded indebtedness, its equity is valued at $2.5 million. If the enterprise value increases or decreases by 20%, to $12.0 million or $8.0 million, respectively, the value of the equity increases or decreases by 80%, to $4.5 million or $0.5 million, respectively. This disproportionate increase or decrease adds a level of volatility to the Fund's equity-oriented portfolio securities.

The Fund derives its cash flow from interest and dividends received and sales of securities from its investment portfolio. The Fund pays certain advisory fees to the Adviser, administrative fees to the Administrator and interest expense on its existing debt. The Fund also spends its cash on new investments, or follow-on investments which may be required by certain portfolio companies. Because the investments are illiquid, the Fund utilizes leverage to provide the required funds, and the leverage is then repaid from the sale of portfolio securities.

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

Significant Accounting Policies

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

Use of Estimates-The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Although management believes the estimates and assumptions used in preparing these interim financial statements and related notes are reasonable in light of known facts and circumstances, actual results could differ from those estimates.

Valuation of Investments-Portfolio investments are carried at fair value with the net change in unrealized appreciation or depreciation included in the determination of net assets. Valuations of portfolio securities are performed in accordance with accounting principles generally accepted in the United States of America and the financial reporting policies of the Securities and Exchange Commission ("SEC"). The applicable methods prescribed by such principles and policies are described below:

Publicly-traded portfolio securities-Investments in companies whose securities are publicly traded are valued at their quoted market price at the close of business on the valuation date, less a discount to reflect the estimated effects of restrictions on the sale of such securities ("Valuation Discount"), if applicable.

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

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

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

From time to time, portfolio companies are in default of certain covenants in their loan agreements. When the Adviser has a reasonable belief that the portfolio company will be able to restructure the loan agreements to adjust for any defaults, the portfolio company's securities continue to be valued assuming that the company is a going concern. In the event a portfolio company cannot generate adequate cash flow to meet the principal and payments on such indebtedness or is not successful in refinancing the debt upon its maturity, the Fund's investment could be reduced or eliminated through foreclosure on the portfolio company's assets or the portfolio company's reorganization or bankruptcy.

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

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

Because of the inherent uncertainty of the valuation of portfolio securities, which do not have readily ascertainable market values, amounting to $86.2 million (including no publicly traded securities) and $72.1 million (including no publicly traded securities) as of September 30, 2008 and December 31, 2007, respectively, the Fund's estimate of fair value may materially differ from the value that would have been used had a ready market existed for the securities. Appraised values do not reflect brokers' fees or other normal selling costs which might become payable on disposition of such investments.

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

Federal Income Taxes-The Fund intends to comply with the requirements of the Code necessary for us to qualify as a RIC. So long as it complies with these requirements, the Fund generally will not be subject to corporate-level federal income taxes on otherwise taxable income (including net realized capital gains) distributed to stockholders. Therefore, the Fund did not record a provision for federal income taxes in its financial statements.

Because of the nature and size of the portfolio investments, the Fund may periodically borrow funds to make qualifying investments to maintain its tax status as a RIC. During the nine months ended September 30, 2008 and 2007, the Fund borrowed such funds by utilizing a margin account with a securities brokerage firm. There is no assurance that such arrangement will be available in the future. If the Fund is unable to borrow funds to make qualifying investments, it may no longer qualify as a RIC. The Fund would then be subject to corporate income tax on its net investment income and realized capital gains, and distributions to stockholders would be subject to income tax as ordinary dividends.

Net taxable investment income and net taxable realized gains from the sales of portfolio investments are intended to be distributed at least annually, to the extent such amounts are not reserved for payment of expenses and contingencies or to make follow-on or new investments. The Fund reserves the right to retain net long-term capital gains in excess of net short-term capital losses for reinvestment or to pay contingencies and expenses. Such retained amounts, if any, will be taxable to the Fund as long-term capital gains and stockholders will be able to claim their proportionate share of the federal income taxes paid on such gains as a credit against their own federal income tax liabilities. Stockholders will also be entitled to increase the adjusted tax basis of their Fund shares by the difference between their undistributed capital gains and their tax credit.

Current Market Conditions

During the quarter ended September 30, 2008, the state of the economy in the U.S. and abroad continued to deteriorate to what many believe is a recession, which could be long-term. Banks and others in the financial services industry have continued to report significant write-downs in fair value of their assets. The failure of a number of banks and investment companies, distressed mergers and acquisitions, and the government take-over of the nation's two largest government-sponsored mortgage companies lead to the passage of the $700 billion Emergency Economic Stabilization of 2008 in early October 2008. In addition, the stock market has declined significantly, with both the S&P 500 and the NYSE (on which EQS trades), declining over 30%. These events have significantly constrained the availability of debt and equity capital for the market as a whole, and the financial services sector in particular.

These and other events have also lead to rising unemployment, deteriorating consumer confidence and a general reduction in spending by both consumers and business, adversely affecting a number of industries including those in which the Fund's portfolio companies operate. Further, consistent with other companies in the financial services sector, the Fund has been affected adversely by many of these events. Between June 30, 2008 and November 13, 2008, the closing price of the Fund's common stock has declined approximately 30% and is trading at a 55% discount.

Liquidity and Capital Resources

There are several factors that may materially affect the Fund's liquidity during the reasonably foreseeable future. The Fund views this period as the twelve month period from the date of the financial statements in this Form 10-Q, i.e., the period through
September 30, 2009.

Management is currently evaluating the impact of current market conditions on its portfolio company valuations and their ability to provide current income. Management has followed valuation techniques in a consistent manner; however, it is cognizant of current market conditions that might effect future valuations of portfolio securities. If necessary to meet the Fund's investment commitments of $8.2 million, the Fund has a secured $7.5 million revolving line of credit facility with Amegy Bank. The Fund has not yet borrowed under this facility. The Fund believes that its operating cash flow and cash on hand will be sufficient to meet operating requirements and to finance routine capital expenditures through the next twelve months.

While the Fund seeks to pay dividends on a quarterly basis, the Board of Directors has approved the payment of these dividends to be in the Fund's common stock until further notice; thus, the future dividends should not affect the Fund's liquidity.

As previously noted, the Fund may periodically borrow funds to make qualifying investments to maintain its tax status as a RIC. During the nine months ended September 30, 2008 and 2007, the Fund borrowed such funds by utilizing a margin account with a securities brokerage firm. There is no assurance that such arrangement will be available in the future.

Investors should not place undue reliance on the Fund's forward-looking statements regarding income and liabilities, which are current only as to the date hereof. The Fund undertakes no obligation to release publicly any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Results of Operations

Investment Income and Expense

Net investment loss after all expenses was $0.7 and $1.0 for the nine months ended September 30, 2008 and 2007 respectively and $0.6 and $0.3 for the three months ended September 30, 2008 and 2007, respectively. Total income from portfolio securities was $2.0 million and $2.2 million for the nine months ended September 30, 2008 and 2007 respectively and $0.3 million and $0.8 million for the three months ended September 30, 2008 and 2007 respectively. The net investment loss generated at September 30, 2008 compared to 2007, is due primarily to the decline in total income from portfolio securities for the nine months ended September 30, 2008, compared to the nine months ended September 30, 2007, along with the offering costs incurred at September 30, 2007 and declining incentive fees.

Interest from temporary cash investments decreased to $0.5 million for the nine months ended September 30, 2008 from $1.4 million for the nine months ended September 30, 2007, and to $0.1 million for the three months ended September 30, 2008 from $0.4 million for the three months ended September 30, 2007. The cash in temporary investments (excluding the margin account) decreased $21.9 million to $9.0 million as of September 30, 2008, and a corresponding decrease of $17.2 million for the nine months ended September, 2007, primarily due to the increase in new and follow-on investments.

The Adviser receives management fee compensation at an annual rate of 2% of the net assets of the Fund paid quarterly in arrears. Such fees increased by $0.3 million for the nine months ended September 30, 2008 and $0.2 million for the three months ended September 2008.

Incentive fees are calculated as follows: (i) 20% of the excess, if any, of the Fund's net investment income for a quarter that exceeds a quarterly hurdle rate equal to 2% (8% annualized) of the Fund's net assets, and (ii) 20% of the Fund's net realized capital gain less unrealized capital depreciation paid on an annual basis. The proceeds of any sale are compared to the fair market valuation of the Fund's portfolio companies at March 31, 2005. Incentive fee expense decreased by $1.1 million for the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007, and remained relatively unchanged the three months ended September 30, 2008 as compared to the three months ended September 30, 2007.

Professional fees remained relatively constant for the three and nine months ended September 30, 2008, as compared to the three and nine months ended September 30, 2007.

Administrative fees were unchanged for the three and nine months ended September 30, 2008 and 2007, respectively. The Fund reimburses the Administrator, ECAC, for the costs and expenses incurred in performing its obligations and providing personnel and facilities under the Administrative Agreement, provided that such reimbursements do not exceed $450,000 per year. The administrator receives $112,500 per quarter.

Realized Gains and Losses on Sales of Portfolio Securities

During the nine months ended September 30, 2008, the Fund realized net capital
gains of $1.0 million, including the following significant transactions (in
thousands):



Portfolio Company                           Industry                   Type               Realized Gain
ConGlobal Industries Holding, Inc.     Shipping products
                                       and services            Control, non-majority     $           625
RP&C International Investments LLC     Healthcare              Affiliate                             351
Various others                                                                                         1

                                                                                         $           977

During the three months ended September 30, 2008, the Fund had no realized net capital gains.

During the nine months ended September 30, 2007, the Fund realized net capital gains of $5.3 million, including the following significant transactions (in thousands):

                                                                           Realized Gain/
Portfolio Company              Industry                  Type                  (Loss)
The Drilltec             Residential building
Corporation              products                Control                  $          3,829
Champion Window          Residential building
Holdings, Inc.           products                Control                             1,403
Cedar Lodge Holdings,
Inc.                     Real Estate             Control                               608
Alenco Window            Residential building
Holdings, LLC            products                Control                               165
Equicom, Inc.            Telecommunications      Control                               136
ConGlobal Industries     Shipping products
Holding, Inc.            and services            Control, non-majority                  58
Turf Grass Holdings,     Residential building
Inc.                     products                Control                              (960 )
Various others                                                                          19

                                                                          $          5,258

During the three months ended September 30, 2007, the Fund realized net capital gains of $0.1 million, including the following significant transactions (in thousands):

                                                                             Realized Gain/
Portfolio Company                  Industry                 Type                 (Loss)
Equicom, Inc.                 Telecommunications     Control                             136
The Drilltec Corporation      Real Estate            Control                              82
Cedar Lodge Holdings, Inc.    Residential
                              building products      Control                $           (120 )
Various others                                                                             8

                                                                            $            106

Changes in Unrealized Appreciation/Depreciation of Portfolio Securities

Net unrealized appreciation on investments decreased by $4.1 million during the nine months ended September 30, 2008, from a net unrealized appreciation of $16.8 million to a net unrealized appreciation of $12.7 million. The decrease in appreciation was primarily a result of the decline in estimated fair market value of Creekstone Florida Holdings, LLC, resulting from a decline in the real estate market.

Net unrealized appreciation on investments decreased by $8.0 million during the nine months ended September 30, 2007, from a net unrealized appreciation of $9.3 million to a net unrealized appreciation of $1.3 million. Such decrease in appreciation resulted from a transfer of $3.6 million in net unrealized appreciation to net realized appreciation for sale of The Drilltec Corporation. The decrease in appreciation was also a result of the decline in estimated fair market values of ConGlobal Industries Holding, Inc. and Pallet One, resulting from a decline in operations for the period.

Dividends

On February 19, 2008, the Fund revised its managed distribution policy to pay 10% of the Fund's market value based on the 2007 year-end closing price of $6.31. In accordance with this revised policy, the Fund announced the declaration of a third quarter dividend of $0.158 per share on August 7, 2008. A dividend in the amount of $1.4 million was paid on September 29, 2008 to shareholders of record as of August 25, 2008. The dividend was payable in shares of common stock or in cash by specific election of the shareholders, and such election was made by September 22, 2008. The Fund paid $0.7 million in cash and issued 103,702 additional shares at an effective price of $6.62 per share. A dividend in the amount of $1.3 million was paid on June 30, 2008, to shareholders of record as of May 27, 2008. The dividend was payable in shares of common stock or in cash by specific election of the shareholders, and such election was made by June 23, 2008. The Fund paid $0.7 million in cash, and issued 84,727 additional shares of its common stock at an effective price of $7.04 per share. A dividend in the amount of $1.3 million was paid on March 31, 2008 to shareholders of record as of February 29, 2008. The dividend was payable in shares of common stock or in cash by specific election of the shareholders, and such election was made by March 24, 2008. The Fund paid $0.7 million in cash, and issued 95,023 additional shares of its common stock at an effective price of $6.71 per share. The classification of these dividends as between ordinary income, capital gain and return of capital will not be known until December 31, 2008, since any purchase or sale of a portfolio company during the remainder of the year will affect the classification.

The Fund announced the declaration of a $0.125 dividend payable on September 24, 2007, to shareholders of record as of the close of business on August 21, 2007. The Fund paid $502,172 in cash and issued 73,069 additional shares of common stock at $7.85 per share on September 24, 2007, in payment of such dividend. The Fund paid a $0.125 dividend for shareholders of record as of May 21, 2007. The Fund paid $0.6 million in cash and issued 48,930 additional shares of common stock at $8.81 per share on June 25, 2007, in payment of such dividend. The Fund paid a $0.125 dividend for shareholders of record as of the close of business on February 26, 2007 on March 30, 2007. The Fund paid $0.6 million in cash and issued 52,650 additional shares of common stock at $8.63 per share, in payment of such dividend.

Portfolio Investments

The following table includes significant new and follow-on investments during
the nine months ended September 30, 2008 (in thousands):



                                              New                Follow-On
    Portfolio Company                  Cash      Noncash      Cash      Noncash     Total
    Infinia Corporation               $    -    $      -    $  5,000   $      -    $  5,000
    Riptide Entertainment, LLC             -           -       4,600          -       4,600
    1848 Capital Partners LLC           3,000          -          -           -       3,000
    London Bridge Entertainment LLC     2,500          -          -           -       2,500
    Trulite, Inc.                       1,500          -          -           -       1,500
    Nickent Golf, Inc.                     -           -       1,000         184      1,184
    Metic Solutions, PLC                1,000          -          -           -       1,000
    HealthSpac, LLC                        -           -         208          -         208
    Various others                         -           -          -          174        174

                                      $ 8,000   $      -    $ 10,808   $     358   $ 19,166

The following table includes significant new and follow-on investments during the nine months ended September 30, 2007 (in thousands):

                                                New                 Follow-On
 Portfolio Company                        Cash      Noncash     Cash      Noncash     Total
 Nickent Golf, Inc                      $  8,000   $      -    $ 2,000   $      -    $ 10,000
 Equus Media Development Company, LLC      5,000          -         -           -       5,000
 Riptide Entertainment, LLC                   -           -      3,835          -       3,835
 Infinia Corporation                       3,000          -         -           -       3,000
 RP&C International Investments LLC           -           -      2,009          -       2,009
 HealthSpac, LLC                              -           -        525          -         525
 ConGlobal Industries Holdings, Inc.          -           -         -          273        273
 Equus Media Finance Company, LLC            100          -         -           -         100
 Various others                               -           -         -          208        208

                                        $ 16,100   $      -    $ 8,369   $     481   $ 24,950

Subsequent Events

On November 10, 2008, the Fund announced a dividend of $0.158 per share for the fourth quarter of 2008. The dividend will be payable on December 22, 2008 in shares of common stock.