A Publicly Traded Venture Capital Company Investing in Tiny Technology
THIRD QUARTER REPORT 2004
FELLOW SHAREHOLDERS:
In the 12 months since the close of last year's third quarter ended September 30, 2003, we have grown rapidly. Our net assets have tripled, from $24,225,912 to $76,505,012. Shares outstanding have increased from 11,498,845 to 17,248,845. Our net asset value per share (NAV) has increased from $2.11 to $4.44. Total full-time employees have increased from five to nine. The percentage of our private equity portfolio that is invested in tiny technology has increased from 56 percent to 97 percent, reflecting, among other things, the shift of NeuroMetrix, Inc., our most significant remaining non-tiny tech investment, from private to public status as a result of its initial public offering (IPO). The growth in our assets primarily reflects our two successful follow-on underwritten offerings, and secondarily reflects the successful IPO of NeuroMetrix and the sale of Nanogram Devices Corporation.
Our third quarter ended September 30, 2004, included: the closing on July 7 of the public follow-on offering of 3,450,000 shares of our common stock at $11.25 per share, underwritten by ThinkEquity Partners LLC and Punk, Ziegel & Company, Inc., for net proceeds after underwriting discounts and expenses of $36,127,675; the IPO on July 22, 2004, of NeuroMetrix, in which we were the seed investor and the second largest shareholder at the time of the IPO; the withdrawal on August 4, owing to market conditions, of the proposed IPO of another portfolio company, Nanosys, Inc.; Sandra A. Matrick, J.D., joining our firm as General Counsel, Chief Compliance Officer and Head of Human Resources; our investment of $887,500 in NanoOpto Corporation, as part of a $3.3 million round of follow-on financing; our investment of $401,536 in Optiva, Inc., as part of a $3.5 million round of follow-on financing; our investment of $75,670 in Agile Materials & Technologies, Inc., as part of a $500,000 round of follow-on financing; and our initial investment of $200,000 in Crystal IS, Inc., in its $5 million Series A Preferred round of financing.
Since the close of the third quarter, but prior to the date of this Quarterly Report to Shareholders, one of our portfolio companies, Nantero, Inc., was named by Scientific American as a business leader in the Nanotechnology and Molecular Electronics category within the Scientific American 50 -- the magazine's annual list recognizing acts of leadership in science and technology from the past year. Also Small Times magazine released its third annual performance review of the people, products and companies in micro and nanotechnology. The Small Times awards are based on accomplishments between September 1, 2003, and October 1, 2004. Molecular Imprints, Inc., won the Best of Small Tech Award: Company of the Year. Harris & Harris Group invested $2,000,000 in privately held Molecular Imprints on March 31, 2004. In addition, Norman Schumaker, Molecular Imprints' CEO, was named a runner-up for the Best of Small Tech Award: Business Leader of the Year. Thomas Rueckes of Nantero, Inc., was named a runner-up for the Best of Small Tech Award: Innovator of the Year. Harris & Harris Group has invested a total of $813,000 in privately held Nantero, in two rounds of financing, the first in 2001 and the second in 2003. In 2003, Harris & Harris Group's CEO had been named a runner-up for the Best of Small Tech Award: Business Leader of the Year. In 2002, Harris & Harris Group had been named a runner-up for the Best of Small Tech Award: Company of the Year.
Our existing tiny technology portfolio is very much in the fledgling stage, and as such will continue to evolve over time through follow-on investments, write-downs and write-offs -- and, in the event of successes, write-ups and profitable exits. It will be sometime before we have a good idea of what kind of returns we will earn from our tiny technology investments. Internally generated increases in our Company's NAV are dependent on some investments increasing in value by enough to more than offset both write-downs and write-offs and our operating expenses. Indeed, in the third quarter, the IPO of NeuroMetrix (a non-tiny technology investment) more than offset other write-downs in our portfolio. But it is to be expected that there will continue to be quarters in which NAV declines from the previous quarter, no matter how rapidly our NAV may turn out to grow in the longer term.
Since 2001, we have invested in a total of 19 tiny technology companies. Since initial investment in these 19 companies, our average and median holding periods, respectively, have been only 1.6 and 1.7 years. In other words, it is too soon for us to have a concrete idea of how well or poorly we are going to do with these 19 investments. Over the years, we have sold all of our interest in 38 venture capital investments. We invested a total of $40,094,851 in cash in those deals, and we received back a total of $108,159,142 from them. But in spite of our good overall returns on those investments, we lost money on 21 of 38. Losses on early stage, high technology venture capital investments tend to be realized before offsetting gains on such investments, if any, materialize. The lemons tend to ripen faster than the plums. Thus, successful early stage, high technology venture capital funds tend to follow a "J curve" configuration in valuation over the life of the fund. Of course, unsuccessful funds also tend to lose value in the early stages as well as in the late stages. So far, of the 19 tiny technology investments that we have made since 2001, one went bankrupt, another five have been written down in value, one has been acquired at 3.4 times our cost and another has been written up in value.
Meanwhile, our deal flow remains robust, and we are actively working on new tiny technology investments, as well as working on our existing portfolio. From our point of view, the environment for making tiny technology investments, particularly nanotechnology investments, continues to be favorable. According to Small Times, during the first three quarters of this year, investors have put only $122 million into privately held nanotechnology companies. This rate of investment in 2004 is behind the pace of 2003, which resulted in $301 million being invested in privately held nanotechnology companies in 2003 as a whole. Because our rate of investment is growing, we have been gaining market share this year amongst venture capital investors in nanotechnology.
Printing and mailing our Quarterly Reports to Shareholders three times a year is currently costing us some $30,000 a year. We are considering not printing and mailing them in the future. Instead, we would simply post our Quarterly Report to Shareholders on our website, www.TinyTechVC.com, immediately after putting out a press release each quarter notifying investors that our Quarterly Report to Shareholders is now available on our website. If you would strongly prefer that we continue to print and mail the Quarterly Report to Shareholders, please let us know by emailing us at Admin@TinyTechVC.com. As always, we appreciate your support.
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
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 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 September 30, 2004)
		Shares/
		Principal		Value
	Investment
	Agile Materials & Technologies, Inc
	Series A Convertible Preferred Stock		3,732,736	$      110,700
	Convertible Bridge Note		$ 301,273	310,650
				421,350
	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
	Crystal IS, Inc.
	Series A Convertible Preferred		5,482	199,983
	CSwitch, Inc.
	Series A Convertible Preferred Stock		1,000,000	1,000,000
	Experion Systems, Inc.
	Series A Convertible Preferred Stock		294,118	0
	Series B Convertible Preferred Stock		35,294	0
	Series C Convertible Preferred Stock		222,184	0
	Series D Convertible Preferred Stock		64,501	363,786
				363,786
	Exponential Business Development Company
	Limited Partnership Interest		--	0
	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-1 Convertible Preferred Stock		267,857	47,567
	Series B Convertible Preferred Stock		3,819,935	1,625,000
				1,672,567
	Nanopharma Corp.
	Series A Convertible Preferred Stock		684,516	700,000
	Subordinated Convertible Bridge Note		$150,000	153,370
				853,370
	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.
	Common Stock		1,137,570	9,998,103
	Optiva, Inc.
	Series C Convertible Preferred Stock		1,249,999	625,000
	Secured Convertible Bridge Note		401,536	408,752
				1,033,752
	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
				250,000
	Total			$27,089,249
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*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 10-Q for the quarter ended September 30, 2004 for the unaudited financial information and notes thereto.

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

ASSETS

September 30, 2004	December 31, 2003
(Unaudited)

Cash, U.S. Government Obligations and cash equivalents	$51,815,346	$27,546,060
Investments, at value	27,089,249	15,106,576
Restricted funds	1,393,093	1,212,078
Interest receivable	184,325	450</s