A Publicly Traded Venture Capital Company Investing in Tiny Technology












            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)



















Agile Materials & Technologies, Inc





      Series A Convertible Preferred Stock


$      110,700



      Convertible Bridge Note

$ 301,273









AlphaSimplex Group, LLC





      Limited Liability Company Interest










Chlorogen, Inc.





      Series A Convertible Preferred










Continuum Photonics, Inc.





      Series B Convertible Preferred Stock





      Series C Convertible Preferred Stock










Crystal IS, Inc.





      Series A Convertible Preferred










CSwitch, Inc.





      Series A Convertible Preferred Stock










Experion Systems, Inc.





      Series A Convertible Preferred Stock





      Series B Convertible Preferred Stock





      Series C Convertible Preferred Stock





      Series D Convertible Preferred Stock










Exponential Business Development Company





      Limited Partnership Interest










Heartware, Inc.





      Series A-2 Non-Voting Preferred Stock










Molecular Imprints, Inc.





      Series B Convertible Preferred Stock










NanoGram Corporation





      Series I Convertible Preferred Stock





      Series II Convertible Preferred Stock










NanoOpto Corporation





      Series A-1 Convertible Preferred Stock





      Series B Convertible Preferred Stock










Nanopharma Corp.





      Series A Convertible Preferred Stock





      Subordinated Convertible Bridge Note










Nanosys, Inc.





      Series C Convertible Preferred Stock










Nanotechnologies, Inc.





      Series B Convertible Preferred Stock





      Series C Convertible Preferred Stock










Nantero, Inc.





      Series A Convertible Preferred Stock





      Series B Convertible Preferred Stock















NeoPhotonics Corporation





      Common Stock





      Series 1 Convertible Preferred Stock





      Warrants at $0.15 expiring 3/12/11










NeuroMetrix, Inc.





      Common Stock










Optiva, Inc.





      Series C Convertible Preferred Stock





      Secured Convertible Bridge Note










Questech Corporation





      Common Stock





      Warrants at $5.00 expiring 10/25/04





      Warrants at $1.50 expiring 11/16/05





      Warrants at $1.50 expiring 08/03/06





      Warrants at $1.50 expiring 11/21/07





      Warrants at $1.50 expiring 11/19/08










Starfire Systems, Inc.





      Common Stock





      Series A-1 Convertible Preferred Stock
















*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.





September 30, 2004

December 31, 2003






Cash, U.S. Government Obligations and cash equivalents



Investments, at value



Restricted funds



Interest receivable