A Publicly Traded Venture Capital Company Investing in Tiny Technology
SIX MONTHS' REPORT 2004
FELLOW SHAREHOLDERS:
Our Company is the strongest it has ever been. In making this self-assessment, we are taking into account our position (within both the venture capital and the nanotechnology communities), our management team, our deal flow and our financial capacity.
Our position as a leading investor in privately held, tiny-technology enabled companies, particularly those working at the nanoscale, is more and more established as time goes by. We began making new investments exclusively in tiny-technology companies in early 2001. Since then: We have been one of the most active venture capital firms in tiny technology, having made 16 such investments. We have been hiring personnel appropriate for our task. No one who has been offered a job at our Company has turned it down, and other than through retirement, we have had no turnover of employees. We have a well-qualified, hard-working team. Our deal flow has never been more robust. So far this year, we have seen on the order of 200 business opportunities. Finally, our financial capacity has never been greater. We have more cash and equivalents (over $52 million at this writing), and a higher ratio of cash and equivalents to total assets, than we have ever had.
In summary, we have the positioning, the people, the deal flow and the capital that we believe we need in order to maintain, over at least the near term, our position as one of the leading investors in tiny technology--especially nanotechnology--venture capital opportunities. Longer term, in order to maintain our relative position, we will have to increase both our employee roster and our capital base, as we expect nanotechnology in particular to become one of the most active and capital intensive recipients of venture capital funding. Ideally, at some point we would like not to raise additional capital, but rather to finance our growth internally, as we are permitted to pay a 35 percent corporate income tax and retain 65 percent of our net realized long-term capital gains with a comparable credit for our shareholders against their taxes. (Shareholders should read the section of our Annual Report entitled, "Subchapter M Status," to understand the tax benefits for which they are eligible when we pay income taxes on realized long-term capital gains.)
Our management team has been augmented by four new hires this year: Daniel V. Leff, Ph.D., Daniel B. Wolfe, Ph.D., Sandra A. Matrick, J.D., and Jody Paprin. Daniel Leff serves us as an Executive Vice President and, as a Managing Director, as one of our four decision-makers with respect to our investments. He has opened our first branch office, in Los Angeles, one of the centers of research university activity in nanotechnology. Daniel Wolfe serves us as a Vice President and part of our investment team. Sandra Matrick serves us as General Counsel, Chief Compliance Officer and Head of Human Resources. She is in charge of keeping us abreast of the growing compliance responsibilities incumbent on publicly-held companies in general and on publicly-held investment companies in particular. Jody Paprin will be joining us shortly as a highly experienced administrative assistant. She will help ensure that our administrative infrastructure is sufficient to support our growth.
Events during the quarter included a follow-on offering of 3,450,000 of our common shares, underwritten by Think Equity Partners LLC and Punk, Ziegel & Company, which was priced on June 30, 2004. This oversubscribed offering was purchased at $11.25 per share, primarily by institutional investors. In addition to augmenting our capital, we are hopeful that this offering will broaden our institutional investor base, a process that has been underway since December of 2003, when Punk, Ziegel & Company underwrote a 2,300,000 share offering of our shares at $8.00 a share, an offering that also was oversubscribed and purchased primarily by institutional investors.
In spite of a weak environment for initial public offerings (IPOs) in the context of a deteriorating stock market, our largest portfolio holding, NeuroMetrix, Inc. (Nasdaq: NURO), had a successful IPO of 3,450,000 shares of common stock at $8.00 per share. Punk, Ziegel & Company and WR Hambrecht & Co. managed this oversubscribed underwriting, which was priced on July 22, 2004. NeuroMetrix was the last of our significant, non-tiny technology holdings. Now that NeuroMetrix is publicly held, approximately 94 percent of our private equity portfolio is invested in tiny technology. The fact that NeuroMetrix is now publicly held adds to our eventual ability to finance our growth internally: we own 1,137,570 shares of NURO. Although we do not anticipate at this time that, even after our lock-up expires in January of 2005, we will be in a hurry to sell our interest in NeuroMetrix, this holding will eventually provide us with additional financial resources for tiny technology investments. In the six months ended June 30, NeuroMetrix's revenues increased by 97 percent to $7,326,282, and its gross margin on sales increased from 70 percent to 72.7 percent. One of the primary benefits of our status as a publicly held venture capital company is that we have permanent capital and can be a very patient investor, even after a portfolio company completes an IPO.
New and follow-on investments since the beginning of the second quarter totaled $4,026,499. Altogether, of the $16,631,962, net of expenses and commissions, that we garnered from our follow-on offering of shares last December, we have to date invested or used for operating expenses all but some $3.5 million.
Our new investments since the beginning of the second quarter include a $250,000 investment in privately-held Starfire Systems, Inc., and a $1,000,000 investment in CSwitch Corporation. Starfire Systems offers a family of patented silicon carbide forming polymers for the manufacture of advanced ceramic materials applications. Starfire Systems has targeted applications in aerospace, power generation and microelectronics. Harris & Harris Group is the first venture capital firm to invest in Starfire Systems. Privately held CSwitch is developing next-generation system-on-a-chip (SOC) solutions for a wide range of communications-based platforms. CSwitch raised $11 million in first-round financing from a group of investors that includes ATA Ventures (www.ataventures.com), Bay Partners (www.baypartners.com) and Charles River Ventures (www.charlesriverventures.com), as well as Harris & Harris Group.
Our follow-on investments since the beginning of the second quarter include $150,000 in Nanopharma Corp., $225,372 in Agile Materials & Technologies, Inc., $1,000,000 in NanoGram Corporation, $401,536 in Optiva, Inc. and $887,500 in NanoOpto Corporation.
We are pleased that our stock is now much more widely held by institutional investors. The commencement of the trading of listed options of our shares on the CBOE probably has added to the liquidity of the market in our shares on Nasdaq as well. Our Company's growing stock market capitalization was reflected in our recent inclusion in the Russell 2000 index, an index that includes the smallest 2000 securities in the Russell 3000.
The steady decline of technology stocks since February of this year has not excepted the price of our common stock, and market conditions were cited by one of our portfolio companies, Nanosys, Inc., when it recently withdrew its IPO. But it is an ill wind that blows no good. If we had to chose between an open IPO window now or one in two or three years, when we are likely to be more fully invested and to have more companies in our portfolio that are potential IPOs, we would certainly choose the latter timing. It would be nice if the IPO window were open all of the time, but realistically, as we all know, the capital markets do not operate that way. In the meantime, we thank our shareholders for their support as we build our Company and our portfolio of tiny technology companies. We are trying to be in the best position that we can be when the IPO window does open more widely.
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
August 24, 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.

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Unaudited Schedule of Investments*
(As of June 30, 2004)
			Shares/
			Principal		Value
	Investment
	Agile Materials & Technologies, Inc
	Series A Convertible Preferred Stock	3,732,736		$     110,700
	Convertible Bridge Note	$225,603		229,173
				339,873
	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	2,689,103		839,000
				1,615,119
	CSwitch, Inc.
	Series A Convertible Preferred Stock	1,000,000		1,000,000
	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 Company
	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 I Convertible Preferred Stock	63,210		21,672
	Series II Convertible Preferred Stock	1,250,904		1,000,723
				1,022,395
	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
	Subordinated Convertible Bridge Note	$150,000		151,479
				851,479
	Nanosys, Inc.
	Series C Convertible Preferred Stock	803,428		1,500,000
	Nanotechnologies, Inc.
	Series B Convertible Preferred Stock	1,538,837		553,982
	Series C Convertible Preferred Stock	235,720		84,859
				638,841
	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	60,580		9,105
	Series 1 Convertible Preferred Stock	1,831,256		2,014,677
	Warrants at $0.15 expiring 3/12/11	30,426		304
				2,024,086
	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		625,000
	Questech Corporation
	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
	Starfire Systems, Inc.
	Common Stock	125,000		50,000
	Series A-1 Convertible Preferred Stock	200,000		200,000