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Venture Capital for Tiny Technology

THIRD QUARTER REPORT 2005

FELLOW SHAREHOLDERS:

During the quarter ended September 30, 2005, we sold 3,507,500 shares of our common stock at $11.25 per share, for net proceeds of $36,526,567 after underwriting discounts and expenses. This stock offering was co-managed by ThinkEquity Partners LLC and Punk, Ziegel & Company. Primarily as a result of this successful stock offering and continued appreciation of the stock of NeuroMetrix, Inc. (Nasdaq: NURO), of which we own 1,137,570 shares, our net assets rose during the quarter from $79,513,203 to $123,376,692, and our net asset value per share rose from $4.61 to $5.94.

Our pace of investment in tiny technology has accelerated, in concert with increases in our capital, deal flow and investment team. From August of 2001 to the date of this Letter to Shareholders, we have invested cumulatively approximately $41,270,912 in tiny technology. Of this cumulative investment in tiny technology, we have invested approximately $15,887,078 in 2005 to date. We hold pre-emptive rights to invest in future rounds of financing by our privately held portfolio companies, and we enjoy a robust deal flow. Thus, we anticipate that not only will we have ample opportunities to put our existing liquidity to work in tiny technology, but also that we will have to generate internally and/or raise externally additional capital to take full advantage of our investment opportunities.

As we trace the cumulative cost of our tiny technology investments since August of 2001, and we fit exponential and power law equations to this cumulative cost and use these equations to extrapolate our hypothetical cumulative investments in tiny technology, we see that we would have to invest cumulatively approximately another $200 to $700 million to stay on this curve for the next five years.

We suspect that it may be necessary for us to put to work that sort of capital in order to maintain our leadership position amongst venture capital investors in nanotechnology. There is only one other venture capital firm, Draper Fisher Jurvetson, that we can identify as having made approximately as many investments as we have in companies that one might label as nanotechnology-enabled companies.

Assuming that we continue to enjoy a robust deal flow, one of the biggest questions that we put to ourselves internally is, how will we finance our future investments? If we can earn high enough net returns on our existing investments, we could continue to finance our new investments in part by selling more shares of our own common stock from time to time and still produce an attractive rate of growth in our net asset value per share. But the optimal rate of growth in our net asset value per share would be produced if we could finance entirely through retained earnings continued rapid growth in our cumulative investment in tiny technology.

To achieve entirely self-financed rapid growth, we would need to experience some timely combination of acquisitions and initial public offerings of companies in our portfolio. For example, when we decide to sell our shares of NeuroMetrix, if we decide not to distribute the capital gains to shareholders, we will pay federal income taxes at the corporate rate of 35 percent on the long-term capital gains and retain the net after-tax proceeds of the sales. (At its current price of $35.66 per share as of November 11, 2005, our holding in NeuroMetrix has a market value of $40,565,746, versus our cost of $4,411,374.) When we retain rather than distribute our capital gains, so long as we continue to qualify for tax purposes as a regulated investment company under Subchapter M, our shareholders also receive cash flow from the net tax credits that you are eligible to receive as a result of our paying, in effect, taxes on your behalf. (Please see pages 12-15 of our 2004 Annual Report on Form 10-K for detail.)

If our retained earnings do not prove sufficient to finance the investments that we need to make in order to maintain our leadership position in venture capital for nanotechnology, we will however seek outside capital as we deem appropriate. We think that it is even more important to try to maintain our leadership position than it is to finance all of our growth internally, if we are forced to choose between these two alternatives.

As always, we are appreciative that, just as we are risk seeking but patient investors, so are our shareholders. We hope that all of our shareholders are ever-mindful of the many risks of our business. Early stage venture capital is risky in general; investing in advanced technology is risky in particular; and, all else being equal, small capitalization, publicly held companies like Harris & Harris Group are riskier than large capitalization publicly held companies.

Charles E. Harris Douglas W. Jamison

Chairman and Chief Executive Officer President and Chief Operating Officer

Managing Director Managing Director

Daniel V. Leff Alexei A. Andreev

Executive Vice President Executive Vice President

Managing Director Managing Director

November 18, 2005

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 press release. Please see the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2004, 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. The reference to the website www.TinyTechVC.com has been provided as a convenience, and the information contained on such website is not incorporated by reference into this letter.

Unaudited Schedule of Investments*

(As of September 30, 2005)

Shares/

Principal

Value

Investment

AlphaSimplex Group, LLC

Limited Liability Company Interest

$ 125,000

Cambrios Technologies Corporation

Series B Convertible Preferred Stock

1,294,025

Chlorogen, Inc.

Series A Convertible Preferred Stock

4,478,038

785,000

Crystal IS, Inc.

Series A Convertible Preferred Stock

274,100

199,983

CSwitch, Inc.

Series A Convertible Preferred Stock

1,000,000

eLite Optoelectronics Inc.

Series B Convertible Preferred Stock

1,861,504

1,000,000

Experion Systems, Inc.

Series A Convertible Preferred Stock

187,500

Series B Convertible Preferred Stock

22,500

Series C Convertible Preferred Stock

222,184

Series D Convertible Preferred Stock

64,501

Exponential Business Development Company

Limited Partnership Interest

Heartware, Inc.

Series A-2 Non-Voting Preferred Stock

47,620

Kereos, Inc.

Series B Convertible Preferred Stock

349,092

960,000

Molecular Imprints, Inc.

Series B Convertible Preferred Stock

1,333,333

2,000,000

Series C Convertible Preferred Stock

1,250,000

2,500,000

4,500,000

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

Nanomix, Inc.

Series C Convertible Preferred Stock

9,779,181

2,500,000

NanoOpto Corporation

Series A-1 Convertible Preferred Stock

267,857

32,490

Series B Convertible Preferred Stock

3,819,935

1,110,073

Series C Convertible Preferred Stock

1,932,789

842,503

Warrants at $0.4359 expiring 03/15/10

193,279

1,985,066

Nanopharma Corp.

Series A Convertible Preferred Stock

684,516

136,903

Secured Convertible Bridge Note with 25 % Warrants

$733,000

733,000

869,903

Nanosys, Inc.

Series C Convertible Preferred Stock

803,428

1,500,000

Nantero, Inc.

Series A Convertible Preferred Stock

345,070

1,046,908

Series B Convertible Preferred Stock

207,051

628,172

Series C Convertible Preferred Stock

188,315

571,329

2,246,409

NeoPhotonics Corporation

Common Stock

716,195

67,736

Series 1 Convertible Preferred Stock

1,831,256

2,014,677

Series 2 Convertible Preferred Stock

741,898

878,120

Warrants at $0.15 expiring 01/26/10

16,364

164

Warrants at $0.15 expiring 12/05/10

14,063

140

2,960,837

NeuroMetrix, Inc.

Common Stock

1,137,570

33,865,459

Nextreme Thermal Solutions, Inc.

Series A Convertible Preferred Stock

500,000

Optiva, Inc.

Series C Convertible Preferred Stock

1,249,999

Secured Convertible Bridge Note with 50% Preferred

Stock Warrant coverage

$150,000

75,000

Polatis, Inc.

Series A-1 Convertible Preferred Stock

16,775

47,828

Series A-2 Convertible Preferred Stock

71,611

204,172

252,000

Questech Corporation

Common Stock

646,954

724,588

Warrants at $1.50 expiring 11/16/05

1,250

Warrants at $1.50 expiring 08/03/06

8,500

Warrants at $1.50 expiring 11/21/07

3,750

Warrants at $1.50 expiring 11/19/08

5,000

Warrants at $1.50 expiring 11/19/09

5,000

724,588

Solazyme, Inc.

Convertible Promissory Note

$310,000

310,000

Starfire Systems, Inc.

Common Stock

375,000

150,000

Series A-1 Convertible Preferred Stock

600,000

750,000

Zia Laser, Inc.