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 did not make any new investments other than follow-on investments during the six months ended June 30, 2009 and made one new investment other than follow-on investments during the six months ended June 30, 2008.

The valuation of the Fund's investments is the most significant area of judgment impacting the financial statements. The Fund's portfolio securities 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 management, 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 general and administrative expenses 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.

On June 12, 2009, the Fund and its Board of Directors announced plans to "internalize" Fund management. The Fund's investment advisory agreement with the Adviser terminated June 30, 2009. The Fund now directly employs its management team and incurs the costs and expenses associated with Fund operations. There is no outside investment advisory organization providing services to the Fund under a fee-based advisory agreement, or an administrative organization charging the Fund for services rendered.

Current Market Conditions

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 led to the passage of the $700 billion Emergency Economic Stabilization Act in early October 2008. In addition, the stock market has declined significantly, with the S&P 500 and the NYSE (on which EQS trades) declining 28% and 32% respectively between June 30, 2008 and June 30, 2009. As the recession deepened, unemployment rose and consumer confidence declined, which led to significant reductions in spending by both consumers and businesses. 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 led 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 adversely affected by many of these events. Between June 30, 2008 and June 30, 2009, the closing price of the Fund's common stock has declined approximately 53% and is trading at a 60% discount.

Liquidity and Capital Resources

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 six months ended June 30, 2009 and 2008, 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.

The Fund has the ability to borrow funds and issue forms of senior securities representing indebtedness or stock, such as preferred stock, subject to certain restrictions. Net taxable investment income and net taxable realized gains from the sales of portfolio investments are intended to be distributed at least annually, to the extent such amounts are not reserved for payment of expenses and contingencies or to make follow-on or new investments. Pursuant to the restrictions in the existing line of credit, the Fund is not allowed to incur additional indebtedness unless approved by the lender.

The Fund reserves the right to retain net long-term capital gains in excess of net short-term capital losses for reinvestment or to pay contingencies and expenses. Such retained amounts, if any, will be taxable to the Fund as long-term capital gains and stockholders will be able to claim their proportionate share of the federal income taxes paid 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 loss after all expenses was $0.4 million and $0.1 million for the six months ended June 30, 2009 and 2008, respectively, and $0.3 million and $0.5 million for the three months ended June 30, 2009 and 2008, respectively. Total income from portfolio securities was $1.6 million and $1.7 million for the six months ended June 30, 2009 and 2008, respectively, and $0.7 million and $0.6 million for the three months ended June 30, 2009 and 2008 respectively. The net investment loss generated at June 30, 2008 compared to 2009 is due primarily to the decline in interest and dividend income of $0.4 million for the six months ended June 30, 2008, compared to $0.04 million for the six months ended June 30, 2009.

The cash in temporary investments (excluding the margin account) decreased from $18.3 million as of June 30, 2008 to $6.7 million as of June 30, 2009, primarily due to the increase in new and follow-on investments. Interest earned on these investments also declined sharply.

The former Adviser received management fee compensation at an annual rate of 2% of the net assets of the Fund paid quarterly in arrears. Such fees amounted to $0.7 million and $1.0 million for the six months ended June 30, 2009 and 2008 respectively, and $0.4 million and $0.5 million for the three months ended June 30, 2009 and 2008. The decline in management fees is due to the overall decline in the net assets for the corresponding periods.

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 was $0 for the three and six months ended June 30, 2009 as compared to the $0.1 million for the six months ended June 30, 2008, and $0.09 million for the three months ended June 30, 2008, as net realized capital gains were $0 during the 2009 periods.

Professional fees increased to $0.6 million for the six months ended June 30, 2009 from $0.4 million for the six months ended June 30, 2008 and to $0.3 million for the three months ended June 30, 2009 from $0.2 million for the three months ended June 30, 2008.

Administrative fees were unchanged for the three and six months ended June 30, 2009 and 2008, respectively. The Fund reimbursed 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 did not exceed $450,000 per year. The administrator received $112,500 per quarter.

Realized Gains and Losses on Sales of Portfolio Securities

During the six months ended June 30, 2009, the Fund realized net capital losses of $0.03 million from the sale of U.S. Treasury Bills.

During the three months ended June 30, 2009, the Fund realized net capital losses of $0.01 million from the sale of U.S. Treasury Bills.

During the six months ended June 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
JL Madre Equipment, LLC                Shipping products
                                       and services            Control, non-majority     $           625
RP&C International Investments LLC     Healthcare              Affiliate                             351
Alenco Window Holdings, LLC            Residential
                                       building products       Control                                 2

                                                                                         $           978

During the three months ended June 30, 2008, the Fund realized net capital gains of $0.6 million from the sale of JL Madre Equipment, LLC.

Changes in Unrealized Appreciation/Depreciation of Portfolio Securities

Net unrealized depreciation on investments increased by $5.0 million during the six months ended June 30, 2009, from a net unrealized depreciation of $3.0 million to a net unrealized depreciation of $8.0 million. Such increase in depreciation resulted primarily from the decrease in estimated fair market value of Infinia Corporation, Spectrum Management, Inc., Sovereign Business Forms, Inc. and Metic Group plc, resulting primarily from a decrease in operations for the period.

Net unrealized appreciation on investments increased by $0.3 million during the six months ended June 30, 2008, from a net unrealized appreciation of $16.8 million to a net unrealized appreciation of $17.1 million. Such increase in appreciation resulted primarily from the increase in estimated fair market values of ConGlobal Industries Holding, Inc., due to an increase in operations for the period, and the increase in fair market value of Sovereign Business Forms, Inc, resulting from improved operations. These increases were partially offset by the decrease in fair market value of Spectrum Management, LLC, resulting from declining sales.

Dividends

On March 24, 2009, the Fund announced that it suspended its managed distribution policy and payment of quarterly distributions for an indefinite period, following the distribution of the first quarter dividend, paid on March 30, 2009. As originally implemented, the policy provided for quarterly dividends at an annualized rate equal to 10% of the Fund's market value per share as at the end of the preceding calendar year. The Fund will continue to pay out net investment income and/or realized capital gains, if any, on an annual basis as required under the Investment Company Act of 1940.

On February 27, 2009, the Fund announced the declaration of a first quarter dividend of $0.1075 per share in accordance with the Fund's revised managed distribution policy, pursuant to which it intends to pay quarterly dividends at an annualized rate equal to 10% of the Fund's market value based on the 2008 year-end closing price of $4.30. A dividend in the amount of $0.9 million was payable on March 30, 2009 to shareholders of record as of March 9, 2009. The Fund issued 296,528 additional shares of its common stock at an effective price of $3.10 per share and paid $2,000 in cash for fractional shares. The classification of this dividend as between ordinary income, capital gain and return of capital will not be known until December 31, 2009, since any purchase or sale of a portfolio company during the remainder of the year will affect the classification.

The Fund paid a $0.158 dividend for shareholders of record as of the close of business on February 29, 2008 on March 31, 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, in payment of such dividend.

Portfolio Investments

The following table includes significant new and follow-on investments during
the six months ended June 30, 2009 (in thousands):



                                                    New              Follow-On
  Portfolio Company                          Cash     Noncash    Cash     Noncash     Total
  Nickent Golf, Inc.                         $  -    $      -    $ 370   $      -    $   370
  Riptide Entertainment, LLC                    -           -      350          -        350
  1848 Capital Partners LLC                     -           -       -          312       312
  Big Apple Entertainment Partners LLC          -           -       -           76        76
  ConGlobal Industries Holdings, Inc.           -           -       -           57        57
  London Bridge Entertainment Partners Ltd      -           -       -          101       101

                                             $  -    $      -    $ 720   $     546   $ 1,266

The following table includes significant new and follow-on investments during the six months ended June 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
      Nickent Golf, Inc.                -           -       1,000         122      1,122
      HealthSpac, LLC                   -           -          81                     81
      Various others                    -           -          -          150        150

                                   $ 3,000   $      -    $ 10,681   $     272   $ 13,953

Subsequent Events

Management performed an evaluation of the Fund's activity through August 14, 2009, the date the financial statements were issued, noting the following subsequent events:

On July 1, 2009, the Fund sold U.S. Treasury bills for $41.0 million and repaid the margin loan.