A Publicly Traded Venture Capital Company Investing in Tiny Technology
FIRST QUARTER REPORT 2004
FELLOW SHAREHOLDERS:
Since our follow-on offering of 2,300,000 shares of our common stock at $8.00 per share closed on December 30, 2003, there have been many milestones, including the sale of one of our tiny technology portfolio companies, the filings for initial public offerings by two of our portfolio companies (one of which is a tiny technology investment), and we have made 11 investments -- four new tiny technology investments and seven follow-on investments (of which two were in non-tiny technology companies). Altogether, we have invested this year $8,761,654 of the $16,631,962 in net proceeds that we realized from the December 30, 2003, follow-on offering. Our Board of Directors named Douglas W. Jamison as our next President, Chief Operating Officer and Chief Financial Officer, we hired two new investment professionals, and we opened our first branch office, in Los Angeles. We have a strong deal flow, in response to which we have filed a shelf registration of seven million shares of our unissued stock. After the effective date, if and when some or all of these shares are offered, they will be offered only by means of a prospectus, at prices and terms to be set forth in one or more supplements to the prospectus.
On March 16, 2004, we announced that NanoGram Devices Corporation had been sold to publicly held Wilson Greatbatch Technologies, Inc., for cash, in a transaction that yielded gross proceeds to Harris & Harris Group of $2,750,000 on our investment of $813,210. We had invested in privately held NanoGram Devices in early 2003, as a spinoff from NeoPhotonics Corporation, in which we had earlier invested. Other investors in NanoGram Devices, which was formed to develop and commercialize specialized power sources for medical devices and other medical equipment, based on patented, laser-based nanomaterial synthesis technology, included Venrock Associates, Nth Power Technologies, Bay Partners, Rockport Capital Partners and SBV Venture Partners. The sale of NanoGram Devices was a reminder that the life cycle of a venture capital investment does not necessarily coincide with the product development and sales cycle of the underlying portfolio company, as NanoGram Devices was acquired before it had time to ship its first product.
On April 22, 2004, one of our tiny technology portfolio companies, Nanosys, Inc., filed an S-1 registration statement to sell shares of common stock. The proposed offering is to be underwritten by Merrill Lynch & Co., Lehman Brothers, CIBC World Markets and Needham & Company, Inc. We own a 1.55 percent fully diluted interest in Nanosys, Inc., for which we paid $1.5 million in April 2003.
On May 13, 2004, one of our portfolio companies that pre-dated our exclusive investment focus on tiny technology, NEUROMetrix, Inc., filed an S-1 registration statement to sell shares of common stock. The proposed offering is to be underwritten by Punk, Ziegel & Company, L.P. In 1996, we were the seed investor, with a $210,000 investment, in NEUROMetrix, a spinoff from the Harvard-M.I.T. Division of Health Sciences and Technology. In early 2004, as part of a $10 million round of private venture capital financing in NEUROMetrix, we invested an additional $1,750,000 in NEUROMetrix, bringing our cumulative investment in NEUROMetrix to $4,411,382. NEUROMetrix is our largest investment, and we are its second largest shareholder, with a 12.42 percent fully diluted interest prior to the offering. Other investors include Whitney & Co., Delphi Ventures, BancBoston Ventures, Commonwealth Capital Ventures, the Massachusetts Institute of Technology and Lighthouse Capital Partners. At March 31, 2004, the valuation of our investment in NEUROMetrix constituted 16 percent of our net assets or 87 percent of the valuation of all of our non-tiny technology investments.
On January 14, 2004, we announced that our Board of Directors had named Douglas W. Jamison as President, Chief Operating Officer and Chief Financial Officer effective January 1, 2005, upon the previously announced, scheduled retirement of Mel P. Melsheimer, who continues in those positions through December 31, 2004. Mr. Jamison is currently a Vice President of the Company. He joined us in September 2002 from the University of Utah Technology Transfer Office, where he managed a portfolio of intellectual property in chemistry, physics and the engineering sciences. He is a graduate of Dartmouth College (B.A., 1992) and the University of Utah (M.S., 1999). He is a member of the Scientific Advisory Board of Chlorogen, Inc., in which our Company has an investment. His professional societies include the Association of University Technology Managers, for which he serves on its Survey Statistics and Metrics Committee, the American Association for the Advancement of Science and the Institute of Electrical and Electronics Engineers. He is a member of the Advisory Board, Massachusetts Technology Collaborative Nanotechnology Venture Forum, and of the Advisory Board, Nanotechnology Law & Business (Journal for Attorneys, Entrepreneurs and Investors Involved in Small Scale Technologies).
On January 15, 2004, we announced that Daniel V. Leff had agreed to join us as Executive Vice President and, along with Messrs. Harris, Melsheimer and Jamison, as one of our four Managing Directors. Mr. Leff had most recently served as Senior Associate with Sevin Rosen Funds, prior to which he worked for Redpoint Ventures and in engineering, marketing and strategic investment positions with Intel Corporation. He received his Ph.D. degree from UCLA's Department of Chemistry and Biochemistry, where his thesis advisor was Professor James R. Heath (recipient of the 2000 Feynman Prize in Nanotechnology). Mr. Leff also received an M.B.A. degree from The Anderson School at UCLA and a B.S. degree in Chemistry from the University of California, Berkeley. He has opened our first branch office, in Los Angeles.
On March 29, 2004, we hired Daniel B. Wolfe as a Vice President, effective upon the completion of his Ph.D. program at Harvard University, where he has been a member of Professor George M. Whitesides' lab since September 1999. Mr. Wolfe is an NSF Predoctoral Fellow, conducting research in the areas of unconventional micro/nanofabrication, photonics, microfluidics, self-assembly and surface chemistry. He was graduated from Rice University with a B.A. degree in Chemistry in 1999, where he conducted independent research under Professor Naomi Halas in the areas of polymer chemistry and colloidal particle synthesis. Since October 2002, he has served as a consultant to Nanosys, Inc. He was a co-founder in 2000 and President of Scientific Venture Assessments, Inc., a consulting firm founded to provide expert scientific analysis of prospective investments. He is scheduled to assume his duties with us in July of this year.
Our new tiny technology investments this year to date include NeoPhotonics Corporation, in which we had previously invested $1 million, which we had written off completely before divesting of our interest. In this new financing of NeoPhotonics of more than $40 million led by Oak Investment Partners and Institutional Value Partners, we invested $2 million. The other largest investors in this new round included Draper Fisher Jurvetson (DFJ), ATA Ventures, Rockport Capital Partners, Ventana Global Capital, Linkmore Limited and Alps Information Technology Fund. NeoPhotonics is a developer and manufacturer of silica integrated optical modules and systems for telecom, datacom, FTTP, CATV and other markets.
Our new tiny technology holdings in 2004 include a $2,000,000 investment in Molecular Imprints, Inc., which develops and manufactures nano-lithography systems for high resolution and for three-dimensional pattern replication. After our investment, Molecular Imprints announced that it had been awarded a $36 million National Institute of Standards and Technology (NIST) Advanced Technology Program (ATP) in conjunction with KLA-Tencor, Motorola, Photonics and the University of Texas at Austin. This program will assist Molecular Imprints in building the infrastructure for its advanced semiconducting applications. We joined an investor group that includes DFJ, Alloy Ventures, Motorola and KLA-Tencor.
Another of our new 2004 tiny technology investments is in Starfire Systems, Inc., a privately held company headquartered in Malta, New York, near Albany. This is our first investment in the Albany area, where we anticipate being active in the future because of the formidable plant and personnel being assembled by not-for-profit Albany NanoTech and the availability of a leading nanotechnology center of excellence at Rensselaer Polytechnic Institute in nearby Troy, New York. We invested $250,000 initially in Starfire Systems. As part of our purchase agreement, we may, under certain circumstances, expand this investment within the next few months to as much as $1 million. We are the first institutional investor in Starfire Systems, which offers a family of patented silicon carbide forming polymers for the manufacture of advanced ceramic materials applications.
Our last tiny technology investment in 2004 through the date of this letter is a new tiny technology investment that has closed but has not yet been announced. The enabling nanotechnology solution for this new company is licensed from another Harris & Harris Group portfolio company. We invested $1 million in this new company and joined three other venture capital firms that led this first round of financing.
We continue to be recognized as a leading venture capital firm in our chosen space, tiny technology. In its inaugural issue, Nanotechnology Law & Business named us as one of the top 10 nanotech venture capital firms that are most active in nanotechnology, in an article entitled, "Top Ten Nanotech VCs." Our Chief Executive Officer was named eighth of "Nanotech's Power Elite: 2004," in the Forbes/Wolfe Nanotech Report survey in its March 2004, Volume 3, Number 3, issue. And we were listed as tied for third among the most active venture capital firms investing in small technology, in the May/June 2004 issue of Smalltimes (although according to our data, we might actually be even closer to the top, especially with respect to nanotechnology deals per se).
In summary, we are hard at work building our portfolio companies, our portfolio and our firm. We see ourselves as a tiny company with a big opportunity -- and a lot of work to do. And, as always, we hope that our shareholders fully appreciate how risky our business truly is and are fully prepared for the inevitable write-offs in our portfolio and other setbacks that are part of the business of early stage venture capital dedicated to new technology.
Charles E. Harris	Mel P. Melsheimer	Daniel V. Leff	Douglas W. Jamison
Chairman and CEO/	President & COO/	Executive Vice President/	Vice President/
Managing Director	Managing Director	Managing Director	Managing Director
June 1, 2004
This letter may contain statements of a forward-looking nature relating to future events. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. These statements reflect the Company's current beliefs, and a number of important factors could cause actual results to differ materially from those expressed in this letter. Please see the Company's Annual Report on Form 10-K and recent Prospectus filed with the Securities and Exchange Commission for a more detailed discussion of the risks and uncertainties associated with the Company’s business, including but not limited to the risks and uncertainties associated with venture capital investing and other significant factors that could affect the Company's actual results. Except as otherwise required by Federal securities laws, Harris & Harris Group, Inc. undertakes no obligation to update or revise these forward-looking statements to reflect new events or uncertainties.
Unaudited Schedule of Investments*
(As of March 31, 2004)

	Shares/
	Principal	Value
Investment
Agile Materials & Technologies, Inc
Series A Convertible Preferred Stock	3,732,736	$ 110,700
Convertible Bridge Note	$75,901	76,584
		187,284
AlphaSimplex Group, LLC
Limited Liability Company interest	--	125,000
Chlorogen, Inc.
Series A Convertible Preferred	4,478,038	785,000
Continuum Photonics, Inc.
Series B Convertible Preferred Stock	2,000,000	776,119
Series C Convertible Preferred Stock	2,368,590	739,000
		1,515,119
Experion Systems, Inc.
Series A Convertible Preferred Stock	294,118	262,406
Series B Convertible Preferred Stock	35,294	31,226
Series C Convertible Preferred Stock	222,184	417,706
Series D Convertible Preferred Stock	64,501	121, 262
		832,600
Exponential Business Development
Limited partnership interest	--	25,000
Heartware, Inc.
Series A-2 Non-Voting Preferred Stock	47,620	0
Molecular Imprints, Inc.
Series B Convertible Preferred Stock	1,333,333	2,000,000
NanoGram Corporation
Series 1 Convertible Preferred Stock	63,210	21,672
NanoOpto Corporation
Series A-1Convertible Preferred Stock	267,857	47,567
Series B Convertible Preferred Stock	1,733,664	737,500
		785,067
Nanopharma Corp.
Series A Convertible Preferred Stock	684,516	700,000
Nanosys, Inc.
Series C Convertible Preferred Stock	803,428	1,500,000
Nanotechnologies, Inc
Series B Convertible Preferred Stock	1,538,837	1,107,963
Series C Convertible Preferred Stock	235,720	169,718
		1,277,681
Nantero, Inc
Series A Convertible Preferred Stock	345,070	538,309
Series B Convertible Preferred Stock	207,051	323,000
		861,309
NeoPhotonics Corporation
Common Stock	56,250	8,438
Series 1 Convertible Preferred Stock	1,821,155	2,003,721
Warrants at $0.15 expiring 3/12/11	28,636	286
		2,012,445
NeuroMetrix, Inc.
Series A Convertible Preferred Stock	875,000	1,312,500
Series B Convertible Preferred Stock	625,000	937,500
Series C-2 Convertible Preferred Stock	1,148,100	1,722,150
Series E Convertible Preferred Stock	499,996	749,994
Series E-1 Convertible Preferred Stock	1,402,187	2,103,282
		6,825,426
Optiva, Inc.
Series C Convertible Preferred Stock	1,249,999	1,250,000
Questech
Common Stock	646,954	724,588
Warrants at $5.00 expiring 10/25/04	1,966	0
Warrants at $1.50 expiring 11/16/05	1,250	0
Warrants at $1.50 expiring 08/03/06	8,500	0
Warrants at $1.50 expiring 11/21/07	3,750	0
Warrants at $1.50 expiring 11/19/08	5,000	0
		724,588
Total		$21,428,191

*Selected quarterly financial information. The information contained herein does not include the full unaudited quarterly financial information. Please see the Company's report on Form 10Q for the quarter ended March 31, 2004 for the unaudited financial information and notes thereto.

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES*
ASSETS
	March 31, 2004		December 31, 2003
	(Unaudited)		(Audited)
Cash, U.S. Government Obligations and cash equivalents	$  32,003,077	$  27,546,060
Investments, at value	21,428,191	15,106,576
Restricted funds	1,330,645	1,212,078
Interest receivable	20,565	450
Income tax receivable	11,035	17,375
Prepaid expenses	79,165	6,841
Other assets, net of reserve of $255,486 at 3/31/04	232,903	225,748
Total assets	$  55,105,581	$  44,115,128

LIABILITIES & NET ASSETS

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Accounts payable and accrued liabilities	$  2,311,831	$2,723,398
Payable to broker for unsettled trade	10,583,080	0
Deferred rent	38,073	39,648
Deferred income tax liability	669,344	669,344
Total liabilities	13,602,328	3,432,390
Net assets	$41,503,253	$40,682,738
Net assets are comprised of:
Preferred stock, $0.10 par value, 2,000,000 shares authorized; none issued	$           0	$           0
Common stock, $0.01 par value, 25,000,000 shares authorized;15,627,585 issued at
3/31/04 and 12/31/03	156,276	156,276
Additional paid in capital	49,564,475	49,564,475
Accumulated net realized gain (loss)	(2,374,119)	(2,410,847)
Accumulated unrealized appreciation of investments, net of deferred tax liability of $844,918
at 3/31/04 and 12/31/03	(2,437,848)	(3,221,635)
Treasury stock, at cost (1,828,740 shares at 3/31/04 and 12/31/03)	(3,405,531)	(3,405,531)