A Publicly Traded Venture Capital Company Investing in Tiny Technology







     The year to date has been a time of fast-paced, substantial progress for your Company.




·       During this period, we had a successful transferable rights offering of our shares, in which we sold 2,634,614 shares of our stock, or approximately 90 percent of the shares offered, at $2.25 per share, for net proceeds of $5,751,155 after estimated expenses of $176,726.  Prior to our decision to focus on tiny technology, we had not been trying to grow the Company's capital by retaining all of our after-tax capital gains and by raising new capital.  Rather, we had been paying out to shareholders much of our capital gains, through cash dividends and repurchases of our stock.  The rights offering was initially filed on April 26 and completed as scheduled on July 26, which happened to coincide with the very worst period of this bear market.  When originally filed, the subscription price for the new shares, $2.25, was not only at a 14 percent discount to the then-most recently calculated net asset value of $2.63, but also at a 45 percent discount to the then-current closing stock price on April 25 of $4.10.  We intended that shareholders who did not choose to exercise their rights could nevertheless realize significant value for their rights by selling them.  Unfortunately, in the context of the stock market collapse, our stock price also came down during the three months between the filing date and the completion date, even though the Company's net asset value per share as of June 30 increased to $2.68.  Thus, regrettably, most of the rights that shareholders elected to sell could not be sold at high enough prices to yield substantial proceeds.  Nevertheless, given the market conditions and the fact that we used no underwriter or paid sales agents for the rights offering, in order to minimize expenses and maximize the percentage of the subscribing shareholders' money that would actually go to the Company, the fact that 90 percent of the rights were subscribed can only be interpreted as a success.  Certainly, this response to the rights offering is strong testimony to our shareholders' desire to put money to work through the Company in tiny-technology enabled investments.


            Ironically, the worsening of the bear market in 2002 has greatly benefited our Company and its long-term prospects.  We do not believe that it would have been possible for us to have accomplished nearly as much in such a short time in a bull market.  We believe that our ability to invest on attractive terms in selected tiny-technology enabled companies – companies addressing large markets, with proprietary technology and good managements – has been greatly enhanced by the bear market.  Meanwhile, as a result of the rights offering, the cash distributed by our 20-percent owned money management firm, PHZ Capital Partners, and the liquidation of one of our earlier, non-tiny tech investments, Informio, our cash and equivalents net of indebtedness have actually increased slightly during the year, from $13,449,085 on December 31, 2001 to $13,867,399 currently – in spite of operating expenses and the torrid pace at which we have been investing in tiny technology.  Highly qualified people are also more available in this economic environment, and we have been steadily interviewing candidates for our professional staff.  To date, we have extended an offer to one, Douglas W. Jamison, who will join us on September 9 as a vice-president from his previous position with the University of Utah Technology Transfer Office.  We also welcome two new directors to our Board, Kelly S. Kirkpatrick and Lori D. Pressman.


            One day the venture-capital bear market will end.  When it does, we plan to have a portfolio of leading tiny-technology enabled companies that are attractive candidates for initial public offerings or acquisition and to have built Harris & Harris Group into a significant venture-capital franchise specializing in tiny technology.


            We are very mindful that the great progress that we have made in the year to date towards building our franchise and our portfolio of leading tiny-technology enabled companies was possible only with your support as fellow shareholders.  You have never demonstrated that support more strongly than you did when you made the rights offering a success during a period in which few other public equity offerings were completed.  We thank you.


Charles E. Harris

Chairman and Chief Executive Officer


Mel P. Melsheimer

President and Chief Operating Officer


August 23, 2002


This letter may contain statements of a forward-looking nature relating to future events.  Statements contained in this letter that are forward looking statements are intended to be made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.  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 June 30, 2002)










AlphaSimplex Group, LLC






Continuum Photonics, Inc.



    Series B Convertible Preferred Stock






Experion Systems, Inc.



    Series A Convertible Preferred Stock



    Series B Convertible Preferred Stock






Exponential Business Development



    Limited partnership interest






Kriton Medical, Inc.



    Series B Convertible Preferred Stock






NanoOpto Corporation



    Series A-1 Convertible Preferred Stock






Nanopharma Corp.






Nanotechnologies, Inc.



    Series B Convertible Preferred Stock






Nantero, Inc.



    Series A Convertible Preferred Stock






NeoPhotonics Corporation



    Series D Convertible Preferred Stock






NeuroMetrix, Inc.



    Series A Convertible Preferred Stock



    Series B Convertible Preferred Stock



    Series C-2 Convertible Preferred Stock



    Series E Convertible Preferred Stock






Optiva, Inc



    Series C Convertible Preferred Stock






PHZ Capital Partners L.P.



    Limited partnership interest






Questech Corporation



    Common Stock



    Warrants at $5.00 expiring 11/15/04



    Warrants at $1.50 expiring 11/16/05






Schwoo, Inc.



    Series B Convertible Preferred Stock



    Convertible Bridge Loans



    Series B Convertible Preferred Warrants


$               0











*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 June 30, 2002 for the unaudited financial information and notes thereto.













June 30, 2002

December 31, 2001







Cash, U.S. Government Obligations and cash equivalents

   $  8,209,978


Investments, at value



Restricted funds



Interest receivable



Note receivable ($6,987, net of reserve of $6,987 at 6/30/02)



Prepaid expenses



Other assets






Total assets










Accounts payable and accrued liabilities

 $  1,332,815

    $  1,039,350

Bank loan payable



Accrued profit sharing



Deferred rent



Current income tax (receivable) liability



Deferred income tax liability



Total liabilities



Commitments and contingencies






Net assets






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;

    10,692,971 issued at 6/30/02 and 12/31/01



Additional paid in capital



Additional paid in capital - common stock warrants



Accumulated net realized gain (loss)



Accumulated unrealized appreciation of investments, net of deferred tax

     liability of  $1,540,044 at 6/30/02 and 12/31/01



Treasury stock at cost (1,828,740 shares at 6/30/02 and 12/31/01)






Net assets






Shares outstanding






Net asset value per outstanding share

$           2.68

   $           2.75







            Three Months Ended

                 Six Months Ended


June 30, 2002

June 30, 2001

 June 30, 2002

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