A Publicly Traded Venture Capital Company Investing in Tiny Technology







               In the third quarter, we continued to execute the plan of shifting the Company's assets into tiny-technology enabled companies, including nanotechnology, microsystems and microelectromechanical systems (MEMS), while continuing to work with and support the non-tiny-technology companies still in our portfolio.  Historically, most of our capital for investments – as well as for operating  expenses, for taxes (both on behalf of the Company itself and, in the case of deemed dividends, on behalf of our shareholders), for cash dividends and for stock repurchases – has come from the sale of private equity investments.  By our calculations, the 34 private equity investments  that we have sold over the years, not including PHZ, have generated $96,578,106 in cash, versus their cost to us of $34,897,695.


During the third quarter, we negotiated a definitive agreement to liquidate our 20 percent interest in PHZ Capital Partners, L.P., a non-tiny-tech asset management company, effective December 31, 2002.  Until December 31, 2002, the value of our interest will vary with PHZ's profitability.  At September 30, 2002, the fair value of the Company's interest in PHZ is estimated to be $6,086,271, based on the capital account value and, in light of the definitive agreement, a premium to book value as outlined in the agreement.  We had invested $720,000 in PHZ in 1995 as its seed venture capital investor.  We have confidence in PHZ's management, and PHZ has been a nice source of cash flow for us.  Over the years, it has paid out to us a total of $2,045,681 in partnership cash distributions.  Thus, we were reluctant to liquidate our interest in PHZ.  But the timing was excellent for all concerned.  PHZ's capital and assets under management have reached all-time highs, and the liquidation of our interest is expected to have no adverse effect on PHZ's business.  Our primary mission now is to invest in tiny technology, and we anticipate that, by liquidating the interest this year, we will be able to shelter the lion's share of the gross proceeds of the liquidation and retain that capital in the Company.  This anticipated high net retention of the PHZ proceeds should give us an even stronger and more liquid balance sheet at year end than we have now – even if we make more follow-on and new investments between this writing and the end of the year.


               During the first nine months of this year, we invested a total of $5,675,000 in seven tiny-technology enabled companies, made a $100,000 follow-on investment in a non-tiny-tech company and paid federal income taxes of $307,585, including $271,467 on behalf of shareholders in conjunction with our deemed dividend of $775,620 for 2001.  Nevertheless, we were able to maintain a highly liquid balance sheet, thanks to net proceeds of $5,665,970 from a transferable rights offering of common stock to shareholders and cash distributions of $888,661 from PHZ.  Our net cash and equivalents at September 30, 2002, and December 31, 2001, respectively, were $13,036,639 and $13,449,085.


               We have continued to reshape our personnel in line with our mission of building a portfolio of holdings in leading tiny-technology enabled companies that are potentially attractive candidates for initial public offerings and buyouts and building Harris & Harris Group into a significant venture-capital franchise specializing in tiny technology.  While all of the skills and relationships that have been required over the years in our traditional business of making diversified investments in early-stage, technology-based companies are still essential, we believe that successful investing in tiny technology will depend to an even greater degree on understanding of technology and intellectual property issues.  Thus, after months of interviewing candidates for our professional staff, we extended an offer to one, Douglas W. Jamison, who joined us on September 9 as a vice president, from his previous position with the University of Utah Technology Transfer Office.  Earlier in the year, two independent consultants who consult regularly for the Company joined our board as interested directors.  Lori D. Pressman trained as a physicist, worked in industry and spent some 12 years with the Technology Licensing Office of MIT, most recently as one of its two Assistant Directors.  Kelly S. Kirkpatrick, Ph.D., trained as a materials scientist, worked in academic and national research laboratories, was co-author of the National Nanotechnology Initiative report while in the White House Office of Science and Technology Policy and most recently served at Columbia University in the Office of the Executive Vice Provost as Director, Columbia Nanotechnology Initiative and Director for Research and Technology Initiatives.  Ms. Pressman conducts her business from Cambridge, Massachusetts, and Ms. Kirkpatrick conducts hers from Oakland, California -- two of the key locations for tiny-technology research and new company formation.


               After the close of the third quarter, we also elected Charles E. Ramsey to the Board of Directors as a disinterested director.  An active private equity investor, Mr. Ramsey is a retired founder and principal of Ramsey/Beirne Associates, Inc., an executive search firm that specialized in recruiting top officers for high technology companies, many of which were backed by venture capital.  When he was active in the search business, Mr. Ramsey was quite helpful to certain of the companies in which we invested.  We look forward to his contributions to the Board, both in general and in particular with respect to the Company's recruitment, personnel and compensation matters.


               While we look forward to the direction and contributions of the new board members, we will greatly miss the guidance of Harry E. Ekblom, who retired from the Board effective with this year's annual meeting of shareholders.  Mr. Ekblom, the retired Chairman and Chief Executive Officer of European American Bank, had been on the board since 1984.


               In summary, we have made significant progress in the year to date, as we have moved to increase the Company's financial and intellectual capacity and to link the Company's destiny to tiny technology.  We believe in the future economic importance of tiny technology, and we are enthusiastically committed to our mission of building a significant venture-capital franchise in tiny technology.  But we are mindful that we are in an adverse economic and capital markets environment and that the technologies in which we are investing are very new and very risky.  We and our shareholders should be fully prepared to have at least as high a ratio of money-losing to money-making private equity investments as we have had historically.  In spite of our good overall financial returns from our closed-out private equity investments, according to our calculations, only 16 of our 35 closed-out private equity investments have been profitable -- even if one includes PHZ (which will not be closed out until the end of this year).


               We were honored on November 11, 2002, to be informed by Small Times Media that Harris & Harris Group had been named a finalist for the 2002 Small Times Magazine Best of Small Tech Company Award.  Small Timesâ magazine created the Best of Small Tech Awards to recognize the best people, products and companies in nanotechnology, MEMS and microsystems.  A complete list of winners and finalists can be found in the November/December issue of Small Timesâ magazine and online at www.smalltimes.com.


                “Small tech will make our lives easier by making products smaller, faster, cheaper and more efficient,” said Steve Crosby, vice president and managing editor of Small Times Media. “We expect this year’s Small Times Magazine Best of Small Tech Award winners and finalists to have a tremendous impact on the future.”


               The recipients of the Small Times Magazine Best of Small Tech Awards, along with the finalists, were selected by nominations and applications submitted by companies and individuals. Small Times Media news staff and an industry panel of experts reviewed the applicants and selected one winner and four finalists in each category, except lifetime achievement in which a winner was selected. The team considered accomplishments between October 1st, 2001 and October 1st, 2002.  Small Times Media LLC is the leading source of business news about the small tech industry, which includes nanotechnology, MEMS and microsystems.  The company offers full news coverage through its bimonthly magazine, Small Timesâ, daily Web site, www.smalltimes.com, and a weekly e-newsletter, Small Times Directä.  Free subscriptions are available to qualified individuals by visiting smalltimes.com.  Small Times Media is headquartered in Ann Arbor, Mich. 


Charles E. Harris                                                                                            Mel P. Melsheimer

Chairman and Chief Executive Officer                                                             President and Chief Operating Officer


November 18, 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 September 30, 2002)















Agile Materials & Technologies, Inc.




    Series A Convertible Preferred Stock








AlphaSimplex Group, LLC




    LLC Units








Continuum Photonics, Inc.




    Series B Convertible Preferred Stock








Experion Systems, Inc.




    Series A Convertible Preferred Stock




    Series B Convertible Preferred Stock








Exponential Business Development Company




    Limited partnership interest








Kriton Medical, Inc.




    Series B Convertible Preferred Stock








NanoOpto Corporation




    Series A-1 Convertible Preferred Stock








Nanopharma Corp.




    Series A Convertible Preferred Stock








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




    Series B Convertible Preferred Warrants













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








September 30, 2002

December 31, 2001










Cash, U.S. Government Obligations and cash equivalents


$             25,944,862


Investments, at value




Restricted funds




Interest receivable




Note receivable ($3,987, net of reserve of $3,987 at 9/30/02)




Prepaid expenses




Other assets








Total assets














Accounts payable and accrued liabilities

$  1,507,600

$  1,039,350


Bank loan payable




Accrued profit sharing




Deferred rent




Current income tax liability




Deferred income tax liability




Total liabilities








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; 13,327,585     issued at 9/30/02 and 10,692,971 issued at 12/31/01