UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

Form 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to _____________

Commission file number: 0-11576

HARRIS & HARRIS GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

New York	13-3119827
(State or Other Jurisdiction of	(I.R.S. Employer Identification No.)
Incorporation or Organization)

1450 Broadway, New York, New York	10018
(Address of Principal Executive Offices)	(Zip Code)

(212) 582-0900

(Registrant's Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨	Accelerated filer x
Non-accelerated filer ¨	Smaller reporting company ¨
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class	Outstanding at November 12, 2013
Common Stock, $0.01 par value per share	31,159,256 shares

Harris & Harris Group, Inc.

Form 10-Q, September 30, 2013

		Page Number
PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements		1

Consolidated Statements of Assets and Liabilities		2
Consolidated Statements of Operations		3
Consolidated Statements of Comprehensive Income (Loss)		4
Consolidated Statements of Cash Flows		5
Consolidated Statements of Changes in Net Assets		6
Consolidated Schedule of Investments		7
Notes to Consolidated Financial Statements		36
Financial Highlights		59

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		60

Background		60
Overview		60
Recent and Potential Liquidity Events From Our Portfolio as of September 30, 2013		62
Strategy for Managing Publicly Traded Positions		63
Maturity of Current Equity-Focused Venture Capital Portfolio		64
Portfolio Company Revenue		65
Growth in Ownership of Portfolio Companies		65
Level of Involvement in Our Portfolio Companies		66
Investment Objective and Strategy		67
Industry Sectors of Investment		70
Our Sources of Liquid Capital		71
Investments and Current Investment Pace		72
Current Business Environment		74
Valuation of Investments		76
Results of Operations		78
Financial Condition		87
Liquidity		88
Borrowings		90
Contractual Obligations		91
Critical Accounting Policies		91
Recent Developments – Portfolio Companies		94
Cautionary Statement Regarding Forward-Looking Statements		95

Item 3. Quantitative and Qualitative Disclosures About Market Risk		96

Item 4. Controls and Procedures		97

PART II. OTHER INFORMATION

Item 1A. Risk Factors		98

Item 6. Exhibits		101

Signatures		102

Exhibit Index		103

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

The information furnished in the accompanying consolidated financial statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim period presented.

Harris & Harris Group, Inc.^® (the "Company," "us," "our" and "we"), is an internally managed venture capital company that has elected to operate as a business development company ("BDC") under the Investment Company Act of 1940 (the "1940 Act"). Certain information and disclosures normally included in the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted as permitted by Regulation S-X and Regulation S-K. Accordingly, they do not include all information and disclosures necessary for a fair presentation of our financial position, results of operations and cash flows in conformity with GAAP. The results of operations for any interim period are not necessarily indicative of the results for the full year. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2012.

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

	September 30, 2013			December 31, 2012
	(Unaudited)
ASSETS

Investments, in portfolio securities at value:
Unaffiliated privately held companies (cost: $29,399,423 and $29,365,558, respectively)	$	29,923,729		$	24,949,756
Unaffiliated rights to milestone payments (adjusted cost basis: $3,291,750 and $3,291,750, respectively)		3,375,388			3,400,734
Unaffiliated publicly traded securities (cost: $2,790,739 and $5,070,447, respectively)		8,504,540			14,422,261
Non-controlled affiliated privately held companies (cost: $65,269,025 and $57,789,263, respectively)		51,573,574			60,792,397
Non-controlled affiliated publicly traded companies (cost: $0 and $2,000,000, respectively)		0			1,348,227
Controlled affiliated privately held companies (cost: $8,750,349 and $14,233,804, respectively)		1,006,305			3,088,816
Total, investments in private portfolio companies, rights to milestone payments and public securities at value (cost: $109,501,286 and $111,750,822, respectively)	$	94,383,536		$	108,002,191
Investments, in U.S. Treasury obligations at value (cost: $0 and $13,996,136, respectively)		0			13,998,880
Cash		13,528,468			8,379,111
Receivable from sales of investments (Note 3)		22,799,975			0
Restricted funds (Note 3)		10,028			10,015
Funds held in escrow from sales of investments at value (Note 3)		1,168,671			1,052,345
Receivable from portfolio company		4,160			23,830
Interest receivable		15,124			49,068
Prepaid expenses (Note 5)		827,016			97,410
Other assets		338,302			377,400
Total assets	$	133,075,280		$	131,990,250

LIABILITIES & NET ASSETS

Accounts payable and accrued liabilities	$	1,499,238		$	1,262,202
Post retirement plan liabilities (Note 8)		851,877			1,876,447
Deferred rent		362,656			368,977
Written call options payable (premiums received:
$190,564 and $50,000, respectively) (Note 7)		127,500			42,500
Debt interest and other payable		42			3,350
Total liabilities		2,841,313			3,553,476

Net assets	$	130,233,967		$	128,436,774

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, 45,000,000 shares authorized at 9/30/13 and 12/31/12; 32,987,996 issued at 9/30/13 and 32,945,621 issued at 12/31/12		329,880			329,456
Additional paid in capital (Note 9)		214,072,112			213,194,474
Accumulated net operating and realized loss		(66,678,532	)		(77,943,238	)
Accumulated unrealized depreciation of investments		(15,054,686	)		(3,738,387	)
Accumulated other comprehensive income (Note 8)		970,724			0
Treasury stock, at cost (1,828,740 shares at 9/30/13 and 12/31/12)		(3,405,531	)		(3,405,531	)

Net assets	$	130,233,967		$	128,436,774

Shares outstanding		31,159,256			31,116,881

Net asset value per outstanding share	$	4.18		$	4.13

The accompanying unaudited notes are an integral part of these consolidated financial statements.

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended Sept. 30,						Nine Months Ended Sept. 30,
	2013			2012			2013			2012

Investment income:
Interest from:
Unaffiliated companies	$	58,363		$	64,019		$	190,209		$	185,340
Non-controlled affiliated companies		9,187			236,695			111,957			86,319
Controlled affiliated companies		28,441			44,042			72,377			111,043
Cash and U.S. Treasury obligations and other		3,115			5,213			12,148			17,910
Miscellaneous income		35,919			46,277			123,387			128,078
Total investment income		135,025			396,246			510,078			528,690

Expenses:
Salaries, benefits and stock-based compensation (Note 9)		1,305,405			1,200,902			4,065,804			5,148,293
Administration and operations		221,182			212,917			697,527			795,143
Professional fees		311,428			222,467			974,296			740,106
Rent (Note 3)		98,539			105,705			301,240			303,402
Directors’ fees and expenses		53,687			63,015			184,563			240,747
Custody fees		13,919			13,653			41,693			35,635
Depreciation		13,774			15,020			41,670			43,618
Interest and other debt expense		9,885			12,901			21,590			36,741
Total expenses		2,027,819			1,846,580			6,328,383			7,343,685

Net operating loss		(1,892,794	)		(1,450,334	)		(5,818,305	)		(6,814,995	)

Net realized gain (loss):
Realized gain (loss) from investments:
Unaffiliated companies		0			0			105,313			476,887
Non-Controlled affiliated companies		10,006,915			354			5,770,882			11,775
Publicly traded companies		2,845,191			2,695,339			11,389,252			3,366,218
Written call options		42,049			80,573			(84,713	)		458,911
Purchased put options		0			0			(72,209	)		0
U.S. Treasury obligations/other		0			(218	)		0			(218	)
Realized gain from investments		12,894,155			2,776,048			17,108,525			4,313,573

Income tax expense (Note 10)		3,343			7,161			25,514			15,236
Net realized gain from investments		12,890,812			2,768,887			17,083,011			4,298,337

Net (decrease) increase in unrealized appreciation on investments:
Change as a result of investment sales		(11,820,261	)		(3,616,482	)		(13,703,473	)		(4,287,361	)
Change on investments held		(1,604,307	)		(2,483,303	)		2,331,610			6,281,233
Change on written call options		330,388			1,111,515			55,564			527,333
Net (decrease) increase in unrealized appreciation on investments		(13,094,180	)		(4,988,270	)		(11,316,299	)		2,521,205

Net realized and unrealized (loss) gain on investments		(203,368	)		(2,219,383	)		5,766,712			6,819,542

Net (decrease) increase in net assets resulting from operations:

Total	$	(2,096,162	)	$	(3,669,717	)	$	(51,593	)	$	4,547

Per average basic and diluted outstanding share	$	(0.07	)	$	(0.12	)	$	(0.00	)	$	0.00

Average outstanding shares – basic and diluted		31,159,256			31,000,601			31,131,654			31,000,601

The accompanying unaudited notes are an integral part of these consolidated financial statements.

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

	Three Months Ended Sept. 30,						Nine Months Ended Sept. 30,
	2013			2012			2013			2012

Net (decrease) increase resulting from operations	$	(2,096,162	)	$	(3,669,717	)	$	(51,593	)	$	4,547

Other comprehensive income:

Prior service cost (Note 8)		0			0			1,101,338			0
Amortization of prior service cost		(43,538	)		0			(130,614	)		0

Other comprehensive (loss) income		(43,538	)		0			970,724			0

Comprehensive income (loss)	$	(2,139,700	)	$	(3,669,717	)	$	919,131		$	4,547

The accompanying unaudited notes are an integral part of these consolidated financial statements.

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended			Nine Months Ended
	September 30, 2013			September 30, 2012
Cash flows used in operating activities:
Net (decrease) increase in net assets resulting from operations	$	(51,593	)	$	4,547
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by (used in) operating activities:
Net realized gain and unrealized depreciation on investments		(5,792,226	)		(6,834,778	)
Depreciation of fixed assets, amortization of premium or discount on U.S. government securities, and bridge note interest		(172,361	)		(168,346	)
Stock-based compensation expense		939,979			2,457,423
Purchase of U.S. government securities		(115,598,392	)		(9,999,356	)
Sale of U.S. government securities		129,599,974			0
Purchase of affiliated portfolio companies		(10,200,939	)		(8,242,326	)
Purchase of unaffiliated portfolio companies		(818,880	)		(1,575,514	)
Principal payments received on debt investments		726,059			331,264
Proceeds from sale of investments		29,290,630			5,062,210
Proceeds from call option premiums		1,027,127			2,654,935
Payments for put and call option purchases		(403,863	)		(1,367,364	)

Changes in assets and liabilities:
Restricted funds		(13	)		(497,979	)
Receivable from funds held in escrow from sales of investments		(116,326	)		0
Receivable from portfolio company		19,670			(11,957	)
Receivable from unsettled trades		(22,799,975	)		(64,185	)
Interest receivable		33,944			165
Income tax receivable		0			7,161
Prepaid expenses		(729,606	)		253,623
Other assets		1,337			(525	)
Post retirement plan liabilities		33,230			157,532
Accounts payable and accrued liabilities		233,728			66,458
Deferred rent		(6,321	)		(1,980	)

Net cash provided by (used in) operating activities		5,215,183			(17,768,992	)

Cash flows from investing activities:
Purchase of fixed assets		(3,909	)		(15,516	)
Net cash used in investing activities		(3,909	)		(15,516	)

Cash flows from financing activities:
Acquisition of vested restricted stock for payment of withholdings		(61,917	)		0
Proceeds from drawdown of credit facility		0			500,000

Net cash (used in) provided by financing activities		(61,917	)		500,000

Net increase (decrease) in cash	$	5,149,357		$	(17,284,508	)

Cash at beginning of the period		8,379,111			33,841,394
Cash at end of the period	$	13,528,468		$	16,556,886

Supplemental disclosures of cash flow information:
Income taxes paid	$	25,514		$	8,075
Interest paid	$	0		$	21,158

The accompanying unaudited notes are an integral part of these consolidated financial statements.

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

	Nine Months Ended			Year Ended
	September 30, 2013			December 31, 2012
	(Unaudited)
Changes in net assets from operations:

Net operating loss	$	(5,818,305	)	$	(8,803,343	)
Net realized gain on investments		17,083,011			2,406,433
Net decrease in unrealized appreciation on investments as a result of sales		(13,703,473	)		(1,427,730	)
Net increase (decrease) in unrealized appreciation on investments held		2,331,610			(12,049,760	)
Net increase (decrease) in unrealized appreciation on written call options		55,564			(112,500	)

Net (decrease) in net assets resulting from operations		(51,593	)		(19,986,900	)

Changes in net assets from capital stock transactions:

Acquisition of vested restricted stock awards to pay required employee withholding		(61,917	)		(203,676	)
Stock-based compensation expense		939,979			2,928,943

Net increase in net assets resulting from capital stock transactions		878,062			2,725,267

Changes in net assets from accumulated other comprehensive income:

Other comprehensive income		970,724			0

Net increase in net assets resulting from accumulated other comprehensive income		970,724			0

Net increase (decrease) in net assets		1,797,193			(17,261,633	)

Net Assets:

Beginning of the period		128,436,774			145,698,407

End of the period	$	130,233,967		$	128,436,774

The accompanying unaudited notes are an integral part of these consolidated financial statements.

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2013

(Unaudited)

	Method of	Primary			Shares/
	Valuation (1)	Industry (2)	Cost		Principal		Value
Investments in Unaffiliated Companies (3) – 32.1% of net assets at value

Private Placement Portfolio (Illiquid) (4) – 23.0% of net assets at value

Bridgelux, Inc. (5)(8)(10)		Energy
Manufacturing high-power light emitting diodes (LEDs) and arrays
Series B Convertible Preferred Stock	(M)		$	1,000,000		1,861,504	$	1,494,464
Series C Convertible Preferred Stock	(M)			1,352,196		2,130,699		1,898,508
Series D Convertible Preferred Stock	(M)			1,371,622		999,999		1,284,225
Series E Convertible Preferred Stock	(M)			672,599		440,334		654,788
Series E-1 Convertible Preferred Stock	(M)			386,073		399,579		480,234
Warrants for Series C Convertible Preferred Stock expiring 12/31/14	( I )			168,270		163,900		74,724
Warrants for Series D Convertible Preferred Stock expiring 8/26/14	( I )			88,531		124,999		54,831
Warrants for Series D Convertible Preferred Stock expiring 3/10/15	( I )			40,012		41,666		23,512
Warrants for Series E Convertible Preferred Stock expiring 12/31/17	( I )			93,969		170,823		193,148
Warrants for Common Stock expiring 6/1/16	( I )			72,668		132,100		3,482
Warrants for Common Stock expiring 8/9/18	( I )			148,409		171,183		19,552
Warrants for Common Stock expiring 10/21/18	( I )			18,816		84,846		6,054
				5,413,165				6,187,522

Cambrios Technologies Corporation (5)(8)(9)(10)		Electronics
Developing nanowire-enabled electronic materials for the display industry
Series B Convertible Preferred Stock	(M)			1,294,025		1,294,025		1,165,383
Series C Convertible Preferred Stock	(M)			1,300,000		1,300,000		1,170,764
Series D Convertible Preferred Stock	(M)			515,756		515,756		773,634
Series D-2 Convertible Preferred Stock	(M)			92,400		92,400		92,400
Series D-4 Convertible Preferred Stock	(M)			216,168		216,168		216,168
				3,418,349				3,418,349

Cobalt Technologies, Inc. (5)(8)(9)(11)		Energy
Developing processes for making bio-butanol through biomass fermentation
Series C-1 Convertible Preferred Stock	(M)			749,998		352,112		939,188
Series D-1 Convertible Preferred Stock	(M)			122,070		48,828		141,538
Series E-1 Convertible Preferred Stock	(M)			114,938		46,089		112,843
Warrants for Series E-1 Pref. Stock expiring on 10/9/22	( I )			2,781		1,407		3,097
Warrants for Series E-1 Pref. Stock expiring on 3/11/23	( I )			5,355		2,707		6,013
				995,142				1,202,679

The accompanying unaudited notes are an integral part of these consolidated financial statements.

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2013

(Unaudited)

	Method of	Primary			Shares/
	Valuation (1)	Industry (2)	Cost		Principal		Value
Investments in Unaffiliated Companies (3) – 32.1% of net assets at value (Cont.)

Private Placement Portfolio (Illiquid) (4) – 23.0% of net assets at value (Cont.)

Ensemble Therapeutics Corporation (5)(8)(9)(12)		Life Sciences
Developing DNA-Programmed Chemistry^TMfor the discovery of new classes of therapeutics
Series B Convertible Preferred Stock	(M)		$	2,000,000		1,449,275	$	96,376
Secured Convertible Bridge Note, 8%, acquired 9/11/08	(M)			351,522	$	250,211		1,610,680
Secured Convertible Bridge Note, 8%, acquired 12/10/09	(M)			63,782	$	48,868		309,706
Secured Convertible Bridge Note, 8%, acquired 1/25/12	(M)			124,180	$	109,400		674,724
Secured Convertible Bridge Note, 8%, acquired 3/28/13	(M)			76,637	$	73,598		447,010
Secured Convertible Bridge Note, 8%, acquired 6/24/13	(M)			26,326	$	25,759		155,957
Secured Convertible Bridge Note, 8%, acquired 7/8/13	(M)			14,249	$	13,983		84,621
				2,656,696				3,379,074

GEO Semiconductor Inc. (5)		Electronics
Developing programmable, high-performance video and geometry processing solutions
Participation Agreement with Montage Capital relating to the following assets:
Warrants for Series A Pref. Stock expiring on 9/17/17	( I )			66,684		100,000		79,839
Warrants for Series A-1 Pref. Stock expiring on 6/30/18	( I )			23,566		34,500		31,145
Loan and Security Agreement with GEO Semiconductor relating to the following assets:
Warrants for Series A Pref. Stock expiring on 3/1/18	( I )			7,512		10,000		7,778
Warrants for Series A-1 Pref. Stock expiring on 6/29/18	( I )			7,546		10,000		8,249
				105,308				127,011

Mersana Therapeutics, Inc. (5)(8)(9)(10)(13)		Life Sciences
Developing treatments for cancer based on novel drug delivery polymers
Series A-1 Convertible Preferred Stock	(M)			443,038		411,630		443,038
Common Stock	(M)			3,875,395		350,539		108,667
				4,318,433				551,705

Molecular Imprints, Inc. (5)(8)(10)(14)		Electronics
Manufacturing nanoimprint lithography capital equipment
Series B Convertible Preferred Stock	(M)			2,000,000		1,333,333		1,185,536
Series C Convertible Preferred Stock	(M)			2,406,595		1,285,071		1,523,498
Non-Convertible Bridge Note	( I )			0	$	0		3,790,474
				4,406,595				6,499,508

The accompanying unaudited notes are an integral part of these consolidated financial statements.

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2013

(Unaudited)

	Method of	Primary			Shares/
	Valuation (1)	Industry (2)	Cost		Principal		Value
Investments in Unaffiliated Companies (3) – 32.1% of net assets at value (Cont.)

Private Placement Portfolio (Illiquid) (4) – 23.0% of net assets at value (Cont.)

Nanosys, Inc. (5)(8)		Energy
Developing inorganic nanowires and quantum dots for use in LED-backlit devices
Series C Convertible Preferred Stock	(M)		$	1,500,000		803,428	$	185,868
Series D Convertible Preferred Stock	(M)			3,000,003		1,016,950		2,818,283
Series E Convertible Preferred Stock	(M)			496,573		433,688		699,741
Unsecured Convertible Bridge Note, 4%, acquired 7/16/12	(M)			45,944	$	43,821		249,819
				5,042,520				3,953,711

Nano Terra, Inc. (5)(9)		Energy
Developing surface chemistry and nano-manufacturing solutions
Senior secured debt, 12.0%, maturing on 12/1/15	( I )			768,785	$	804,188		789,300
Warrants for Series A-2 Pref. Stock expiring on 2/22/21	( I )			69,168		446,248		64,874
Warrants for Series C Pref. Stock expiring on 11/15/22	( I )			35,403		241,662		34,646
				873,356				888,820

Nantero, Inc. (5)(8)(9)(10)		Electronics
Developing a high-density, nonvolatile, random access memory chip, enabled by carbon nanotubes
Series A Convertible Preferred Stock	(M)			489,999		345,070		1,349,224
Series B Convertible Preferred Stock	(M)			323,000		207,051		809,569
Series C Convertible Preferred Stock	(M)			571,329		188,315		736,312
Series D Convertible Preferred Stock	(M)			139,075		35,569		139,075
				1,523,403				3,034,180

OHSO Clean, Inc. (5)(15)		Life Sciences
Developing natural, hypoallergenic household cleaning products enabled by nanotechnology-enabled formulations of thyme oil
Participation Agreement with Montage Capital relating to the following assets:
Senior secured debt, 13.00%, maturing on 3/31/15	( I )			554,714	$	653,760		611,570
Warrants for Series C Pref. Stock expiring on 3/30/22	( I )			91,742		1,109,333		69,600
				646,456				681,170

Total Unaffiliated Private Placement Portfolio (cost: $29,399,423)							$	29,923,729

The accompanying unaudited notes are an integral part of these consolidated financial statements.

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2013

(Unaudited)

	Method of	Primary			Shares/
	Valuation (1)	Industry (2)	Cost		Principal		Value
Rights to Milestone Payments (Illiquid) (6) – 2.6% of net assets at value

Amgen, Inc. (8)(10)		Life Sciences
Rights to Milestone Payments from Acquisition of BioVex Group, Inc.	( I )		$	3,291,750	$	3,291,750	$	3,375,388

Laird Technologies, Inc. (8)(10)		Energy
Rights to Milestone Payments from Merger & Acquisition of Nextreme Thermal Solutions, Inc.	( I )			0		0		0

Total Unaffiliated Rights to Milestone Payments (cost: $3,291,750)							$	3,375,388

Publicly Traded Portfolio (7) – 6.5% of net assets at value

Solazyme, Inc. (5)(10)(16)		Energy
Developing algal biodiesel, industrial chemicals and specialty ingredients using synthetic biology
Common Stock	(M)		$	590,739		250,000	$	2,696,250

Champions Oncology, Inc. (5)(10)(17)		Life Sciences
Developing its TumorGraft^TM platform for personalized medicine and drug development
Common Stock	(M)			2,199,600		3,293,190		5,763,082
Warrants for Common Stock expiring 1/29/18	( I )			400		40,000		45,208
				2,200,000				5,808,290

Total Unaffiliated Publicly Traded Portfolio (cost: $2,790,739)							$	8,504,540

Total Investments in Unaffiliated Companies (cost: $35,481,912)							$	41,803,657

The accompanying unaudited notes are an integral part of these consolidated financial statements.

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2013

(Unaudited)

	Method of	Primary			Shares/
	Valuation (1)	Industry (2)	Cost		Principal		Value
Investments in Non-Controlled Affiliated Companies (3) – 39.6% of net assets at value

Private Placement Portfolio (Illiquid) (18) – 39.6% of net assets at value

ABSMaterials, Inc. (5)(8)(9)		Energy
Developing nano-structured absorbent materials for environmental remediation
Series A Convertible Preferred Stock	(M)		$	435,000		390,000	$	487,500
Unsecured Convertible Bridge Note, 8%, acquired 10/1/12	(M)			216,000	$	200,000		251,294
				651,000				738,794

Adesto Technologies Corporation (5)(8)(19)		Electronics
Developing low-power, high-performance memory devices
Series A Convertible Preferred Stock	(M)			2,200,000		6,547,619		1,386,954
Series B Convertible Preferred Stock	(M)			2,200,000		5,952,381		1,260,868
Series C Convertible Preferred Stock	(M)			1,485,531		2,122,187		449,534
Series D Convertible Preferred Stock	(M)			1,393,147		1,466,470		1,042,222
Series D-1 Convertible Preferred Stock	(M)			703,740		987,706		561,092
Series E Convertible Preferred Stock	(M)			2,499,999		3,508,771		9,966,238
				10,482,417				14,666,908

AgBiome, LLC (formerly AgInnovation, LLC) (5)(8)(9)(10)(20)		Life Sciences
Providing early stage research and discovery for agriculture and utilizing the crop microbiome to identify products that reduce risk and improve yield
Series A-1 Convertible Preferred Stock	(M)			2,000,000		2,000,000		2,476,378
Series A-2 Convertible Preferred Stock	(M)			260,870		208,696		284,492
				2,260,870				2,760,870

Contour Energy Systems, Inc. (5)(8)(9)(10)		Energy
Developing batteries using nano-structured materials
Series A Convertible Preferred Stock	(M)			2,009,995		2,565,798		10,474
Series B Convertible Preferred Stock	(M)			1,300,000		812,500		4,824
Series C Convertible Preferred Stock	(M)			1,200,000		1,148,325		304,470
				4,509,995				319,768

The accompanying unaudited notes are an integral part of these consolidated financial statements.

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2013

(Unaudited)

	Method of	Primary			Shares/
	Valuation (1)	Industry (2)	Cost		Principal		Value
Investments in Non-Controlled Affiliated Companies (3) – 39.6% of net assets at value (Cont.)

Private Placement Portfolio (Illiquid) (18) – 39.6% of net assets at value (Cont.)

D-Wave Systems, Inc. (8)(9)(10)(21)		Electronics
Developing high-performance quantum computing systems
Series 1 Class B Convertible Preferred Stock	(M)		$	1,002,074		1,144,869	$	1,447,114
Series 1 Class C Convertible Preferred Stock	(M)			487,804		450,450		569,369
Series 1 Class D Convertible Preferred Stock	(M)			748,473		855,131		1,080,886
Series 1 Class E Convertible Preferred Stock	(M)			248,049		269,280		340,370
Series 1 Class F Convertible Preferred Stock	(M)			238,323		258,721		327,023
Series 2 Class D Convertible Preferred Stock	(M)			736,019		678,264		857,326
Series 2 Class E Convertible Preferred Stock	(M)			659,493		513,900		649,570
Series 2 Class F Convertible Preferred Stock	(M)			633,631		493,747		624,096
Warrants for Common Stock expiring 6/30/15	( I )			98,644		153,890		43,044
				4,852,510				5,938,798

EchoPixel, Inc. (5)(8)(9)(10)(22)		Life Sciences
Developing algorithms and software to improve visualization of data for life science and healthcare applications
Series Seed Convertible Preferred Stock	(M)			750,000		2,516,778		750,000

Enumeral Biomedical Corp. (5)(8)(9)(10)		Life Sciences
Developing therapeutics and diagnostics through functional assaying of single cells
Series A Convertible Preferred Stock	(M)			1,026,832		957,038		1,478,450
Series A-1 Convertible Preferred Stock	(M)			750,000		576,923		836,538
Series A-2 Convertible Preferred Stock	(M)			1,050,001		724,138		1,050,001
				2,826,833				3,364,989

HzO, Inc. (5)(8)(9)		Electronics
Developing novel industrial coatings that protect electronics against damage from liquids
Series A Convertible Preferred Stock	(M)			666,667		4,057,294		1,027,713
Series B Convertible Preferred Stock	(M)			3,565,338		14,230,331		3,604,543
				4,232,005				4,632,256

The accompanying unaudited notes are an integral part of these consolidated financial statements.

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2013

(Unaudited)

	Method of	Primary			Shares/
	Valuation (1)	Industry (2)	Cost		Principal		Value
Investments in Non-Controlled Affiliated Companies (3) – 39.6% of net assets at value (Cont.)

Private Placement Portfolio (Illiquid) (18) – 39.6% of net assets at value (Cont.)

Kovio, Inc. (5)(8)(9)		Electronics
Developing semiconductor products using printed electronics and thin-film technologies
Series A' Convertible Preferred Stock	(M)		$	5,242,993		2,160,000	$	22,459
Series B' Convertible Preferred Stock	(M)			2,006,540		3,015,493		31,352
Secured Subordinated Convertible Bridge Note, 7%, acquired 6/7/13	(M)			51,112	$	50,000		107,898
				7,300,645				161,709

Laser Light Engines, Inc. (5)(8)(9)(23)		Energy
Manufacturing solid-state light sources for digital cinema and large-venue projection displays
Series A Convertible Preferred Stock	(M)			2,000,000		7,499,062		0
Series B Convertible Preferred Stock	(M)			3,095,802		13,571,848		0
Secured Convertible Bridge Note, 12%, acquired 10/7/11	(M)			227,800	$	200,000		27,800
Secured Convertible Bridge Note, 12%, acquired 11/17/11	(M)			108,948	$	95,652		13,296
Secured Convertible Bridge Note, 12%, acquired 12/21/11	(M)			94,092	$	82,609		11,483
Secured Convertible Bridge Note, 12%, acquired 3/5/12	(M)			495,219	$	434,784		60,435
Secured Convertible Bridge Note, 12%, acquired 7/26/12	(M)			212,942	$	186,955		25,987
Secured Convertible Bridge Note, 20%, acquired 4/29/13	(M)			180,822	$	166,667		23,167
Secured Convertible Bridge Note, 20%, acquired 7/22/13	(M)			173,151	$	166,667		23,167
				6,588,776				185,335

Metabolon, Inc. (5)(8)(10)		Life Sciences
Developing service and diagnostic products through the use of a metabolomics, or biochemical, profiling platform
Series B Convertible Preferred Stock	(M)			2,500,000		371,739		1,951,723
Series B-1 Convertible Preferred Stock	(M)			706,214		148,696		780,689
Series C Convertible Preferred Stock	(M)			1,000,000		1,000,000		1,794,510
Series D Convertible Preferred Stock	(M)			1,499,999		835,882		1,499,999
Warrants for Series B-1 Convertible Preferred Stock expiring 3/25/15	( I )			293,786		74,348		149,592
				5,999,999				6,176,513

OpGen, Inc. (8)(10)		Life Sciences
Developing tools for genomic sequence assembly and analysis
Series C Convertible Preferred Stock	(M)			3,260,000		23,623,188		13,940

The accompanying unaudited notes are an integral part of these consolidated financial statements.

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2013

(Unaudited)

	Method of	Primary			Shares/
	Valuation (1)	Industry (2)	Cost		Principal		Value
Investments in Non-Controlled Affiliated Companies (3) – 39.6% of net assets at value (Cont.)

Private Placement Portfolio (Illiquid) (18) – 39.6% of net assets at value (Cont.)

Produced Water Absorbents, Inc. (5)(8)(9)(10)		Energy
Developing nano-structured absorbent materials for environmental remediation of contaminated water in the oil and gas industries
Series A Convertible Preferred Stock	(M)		$	1,000,000		1,000,000	$	147,441
Series B Convertible Preferred Stock	(M)			648,000		2,592,000		750,559
				1,648,000				898,000

Senova Systems, Inc. (5)(8)(9)		Life Sciences
Developing next-generation sensors to measure pH
Series B Convertible Preferred Stock	(M)			1,218,462		1,350,000		540,000
Series B-1 Convertible Preferred Stock	(M)			583,960		1,509,902		603,960
Warrants for Series B Preferred Stock expiring 10/15/17	( I )			131,538		164,423		65,753
Warrants for Series B Preferred Stock expiring 4/24/18	( I )			20,000		25,000		9,997
				1,953,960				1,219,710

SiOnyx, Inc. (5)(8)(9)		Electronics
Developing silicon-based optoelectronic products enabled by its proprietary Black Silicon
Series A Convertible Preferred Stock	(M)			750,000		233,499		175,124
Series A-1 Convertible Preferred Stock	(M)			890,000		2,966,667		2,225,000
Series A-2 Convertible Preferred Stock	(M)			2,445,000		4,207,537		3,155,653
Series B-1 Convertible Preferred Stock	(M)			1,169,561		1,892,836		1,419,627
Series C Convertible Preferred Stock	(M)			1,171,316		1,674,030		1,255,523
Secured Conv. Bridge Note, 8%, acquired 7/22/13	(M)			424,662	$	418,066		424,662
Warrants for Series B-1 Convertible Preferred Stock expiring 2/23/17	( I )			130,439		247,350		128,820
Warrants for Common Stock expiring 3/28/17	( I )			84,207		418,507		74,745
				7,065,185				8,859,154

Ultora, Inc. (5)(8)(9)		Energy
Developing energy-storage devices enabled by carbon nanotubes
Series A Convertible Preferred Stock	(M)			886,830		886,830		886,830

Total Non-Controlled Private Placement Portfolio (cost: $65,269,025)							$	51,573,574

Total Investments in Non-Controlled Affiliated Companies (cost: $65,269,025)							$	51,573,574

The accompanying unaudited notes are an integral part of these consolidated financial statements.

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2013

(Unaudited)

	Method of	Primary			Shares/
	Valuation (1)	Industry (2)	Cost		Principal		Value
Investments in Controlled Affiliated Companies (3) – 0.8% of net assets at value

Private Placement Portfolio (Illiquid) (24) – 0.8% of net assets at value

Ancora Pharmaceuticals Inc. (5)(8)(9)(25)		Life Sciences
Developing synthetic carbohydrates for pharmaceutical applications
Common Stock	( I )		$	2,729,817		57,463	$	0
Series A' Convertible Preferred Stock	( I )			4,855,627		4,855,627		0
Senior Secured Debt, 12.00%, maturing on 12/11/13	( I )			485,195	$	500,000		729,330
Secured Convertible Bridge Note, 8%, acquired 1/23/13	( I )			369,255	$	350,000		149,140
Secured Convertible Bridge Note, 8%, acquired 4/25/13	( I )			310,455	$	300,000		127,835
				8,750,349				1,006,305

Total Controlled Private Placement Portfolio (cost: $8,750,349)							$	1,006,305

Total Investments in Controlled Affiliated Companies (cost: $8,750,349)							$	1,006,305

Total Private Placement and Publicly Traded Portfolio (cost: $109,501,286)							$	94,383,536

Total Investments (cost: $109,501,286)							$	94,383,536

	Method of	Number of
	Valuation (1)	Contracts		Value
Written Call Options (22) – (0.10)% of net assets at value

Solazyme, Inc. — Strike Price $12.50, December 21, 2013	(M)		500	$	27,500

Solazyme, Inc. — Strike Price $15.00, December 21, 2013	(M)		1,000		85,000

Solazyme, Inc. — Strike Price $12.50, March 22, 2014	(M)		1,000		15,000

Total Written Call Options (Premiums Received $190,564)				$	(127,500	)

The accompanying unaudited notes are an integral part of these consolidated financial statements.

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2013

(Unaudited)

Notes to Consolidated Schedule of Investments

(1)

See "Footnote to Consolidated Schedule of Investments" on page 32 for a description of the "Valuation Procedures."

(2)

We classify "Energy" companies as those that seek to improve performance, productivity or efficiency, and to reduce environmental impact, waste, cost, energy consumption or raw materials. We classify "Electronics" companies as those that address problems in electronics-related industries, including semiconductors. We classify "Life Sciences" companies as those that address problems in life sciences-related industries, including biotechnology, agriculture, advanced materials and chemicals, healthcare, bioprocessing, water, industrial biotechnology, food, nutrition and energy.

(3)

Investments in unaffiliated companies consist of investments in which we own less than five percent of the voting shares of the portfolio company. Investments in non-controlled affiliated companies consist of investments in which we own five percent or more, but less than 25 percent, of the voting shares of the portfolio company, or where we hold one or more seats on the portfolio company’s Board of Directors but do not control the company. Investments in controlled affiliated companies consist of investments in which we own 25 percent or more of the voting shares of the portfolio company or otherwise control the company.

(4)

The aggregate cost for federal income tax purposes of investments in unaffiliated privately held companies is $29,399,423. The gross unrealized appreciation based on the tax cost for these securities is $5,379,843. The gross unrealized depreciation based on the tax cost for these securities is $4,855,537.

(5)

All or a portion of the investments or instruments are pledged as collateral under our loan facility.

(6)

The aggregate cost for federal income tax purposes of investments in unaffiliated rights to milestone payments is $3,291,750. The gross unrealized appreciation based on the tax cost for these securities is $83,638. The gross unrealized depreciation based on the tax cost for these securities is $0.

(7)

The aggregate cost for federal income tax purposes of investments in unaffiliated publicly traded companies is $2,790,739. The gross unrealized appreciation based on the tax cost for these securities is $5,713,801. The gross unrealized depreciation based on the tax cost for these securities is $0.

(8)

We are subject to legal restrictions on the sale of our investment(s) in this company.

(9)

These investments are development-stage companies. A development-stage company is defined as a company that is devoting substantially all of its efforts to establishing a new business, and either it has not yet commenced its planned principal operations, or it has commenced such operations but has not realized significant revenue from them.

(10)

Represents a non-income producing security. Investments that have not paid dividends or interest within the last 12 months are considered to be non-income producing.

(11)

Cobalt Technologies, Inc., also does business as Cobalt Biofuels.

(12)

With our investments in convertible bridge notes issued by Ensemble Therapeutics Corporation, we received warrants to purchase a number of shares of the class of stock sold in the next financing of Ensemble Therapeutics Corporation equal to $260,989 divided by the price per share of the class of stock sold in the next financing of Ensemble Therapeutics Corporation. The ability to exercise these warrants is, therefore, contingent on Ensemble Therapeutics Corporation completing successfully a subsequent round of financing. These warrants shall expire and no longer be exercisable on dates ranging from September 10, 2015, through July 8, 2020. The cost basis of these warrants is $157.

The accompanying unaudited notes are an integral part of this consolidated schedule.

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2013

(Unaudited)

(13)

With our investment in the Mersana Therapeutics, Inc., Series A-1 financing, we received a warrant to purchase 277,760 shares of Series A-2 Convertible Preferred Stock. The ability to exercise the warrant is contingent upon Mersana's achievement of certain milestones. Mersana has not achieved those milestones as of September 30, 2013, and, therefore, this warrant is a contingent asset as of that date. The warrant will expire on July 27, 2022.

(14)

As part of a loan the Company made to Molecular Imprints in the second quarter of 2011, we received a liquidation preference payable upon a sale of the company equal to three times the principal of the loan, or $4,044,450. This preference is senior to the preferences of the outstanding preferred stock. While the loan has since been repaid, this liquidation preference remains outstanding as of September 30, 2013.

(15)

OHSO Clean, Inc. also does business as CleanWell Company.

(16)

A portion of this security is held in connection with written call option contracts: 250,000 shares, having a fair value of $2,696,250, have been pledged to brokers.

(17)

As of September 30, 2013, we owned a total of 3,293,190 shares of Champions Oncology, Inc. During the third quarter of 2013, the restriction on the sale of these securities expired.

(18)

The aggregate cost for federal income tax purposes of investments in non-controlled affiliated privately held companies is $65,269,025. The gross unrealized appreciation based on the tax cost for these securities is $8,767,463. The gross unrealized depreciation based on the tax cost for these securities is $22,462,914.

(19)

Adesto Technologies Corporation's Series E shares have certain rights and preferences in a sale or IPO that are not ascribed to the other classes of stock.

(20)

On January 29, 2013, AgInnovation, LLC, changed its name to AgBiome, LLC.

(21)

D-Wave Systems, Inc., is located and is doing business primarily in Canada. We invested in D-Wave Systems, Inc., through Parallel Universes, Inc., a Delaware company. Our investment is denominated in Canadian dollars and is subject to foreign currency translation. See "Note 3. Summary of Significant Accounting Policies."

(22)

Initial investment was made in 2013.

(23)

We have a 25.01 percent voting interest in Laser Light Engines, Inc. However, we do not control this investment as another investor has a 55 percent voting interest and the majority of the board seats of the company.

(24)

The aggregate cost for federal income tax purposes of investments in controlled affiliated companies is $8,750,349. The gross unrealized appreciation based on the tax cost for these securities is $0. The gross unrealized depreciation based on the tax cost for these securities is $7,744,044.

(25)

On October 31, 2013, Ancora sold a substantial portion of its assets, including the use of its corporate name, to CordenPharma International US, Inc. ("Corden"). The remaining assets formed a new company, SynGlyco, Inc., of which we continue to own shares. SynGlyco may receive future royalty payments based upon certain sales targets and other terms of the Corden acquisition.

The accompanying unaudited notes are an integral part of this consolidated schedule.

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

	Method of	Primary			Shares/
	Valuation (1)	Industry (2)	Cost		Principal		Value

Investments in Unaffiliated Companies (3) – 33.3% of net assets at value

Private Placement Portfolio (Illiquid) (4) – 19.4% of net assets at value

Bridgelux, Inc. (7)(8)		Energy
Manufacturing high-power light emitting diodes (LEDs) and arrays
Series B Convertible Preferred Stock	(M)		$	1,000,000		1,861,504	$	426,744
Series C Convertible Preferred Stock	(M)			1,352,196		2,130,699		488,456
Series D Convertible Preferred Stock	(M)			1,371,622		999,999		356,865
Series E Convertible Preferred Stock	(M)			672,599		440,334		520,495
Series E-1 Convertible Preferred Stock	(M)			534,482		399,579		368,251
Warrants for Series C Convertible Preferred
Stock expiring 12/31/14	( I )			168,270		163,900		11,210
Warrants for Series D Convertible Preferred
Stock expiring 8/26/14	( I )			88,531		124,999		8,295
Warrants for Series D Convertible Preferred
Stock expiring 3/10/15	( I )			40,012		41,666		3,976
Warrants for Series E Convertible Preferred
Stock expiring 12/31/17	( I )			93,969		170,823		144,181
Warrants for Common Stock expiring 6/1/16	( I )			72,668		132,100		3,308
Warrants for Common Stock expiring 10/21/18	( I )			18,816		84,846		3,800
				5,413,165				2,335,581

Cambrios Technologies Corporation (7)(9)(10)		Electronics
Developing nanowire-enabled electronic materials for the display industry
Series B Convertible Preferred Stock	(M)			1,294,025		1,294,025		700,454
Series C Convertible Preferred Stock	(M)			1,300,000		1,300,000		703,688
Series D Convertible Preferred Stock	(M)			515,756		515,756		870,338
Series D-2 Convertible Preferred Stock	(M)			92,400		92,400		86,625
Series D-4 Convertible Preferred Stock	(M)			216,168		216,168		202,658
				3,418,349				2,563,763

Cobalt Technologies, Inc. (7)(9)(11)		Energy
Developing processes for making bio- butanol through biomass fermentation
Series C-1 Convertible Preferred Stock	(M)			749,998		352,112		933,802
Series D-1 Convertible Preferred Stock	(M)			122,070		48,828		140,664
Series E-1 Convertible Preferred Stock	(M)			42,328		16,890		41,143
Secured Convertible Bridge Note, 10%, acquired 5/25/12	(M)			47,828	$	45,097		47,828
Warrants for Series E-1 Pref. Stock expiring on 10/9/22	( I )			2,781		1,407		3,116
				965,005				1,166,553

The accompanying notes are an integral part of these consolidated financial statements.

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

	Method of	Primary			Shares/
	Valuation (1)	Industry (2)	Cost		Principal		Value

Investments in Unaffiliated Companies (3) – 33.3% of net assets at value (Cont.)

Private Placement Portfolio (Illiquid) (4) – 19.4% of net assets at value (Cont.)

Ensemble Therapeutics Corporation (7)(9)(12)		Life Sciences
Developing DNA-Programmed Chemistry^TMfor the discovery of new classes of therapeutics
Series B Convertible Preferred Stock	(M)		$	2,000,000		1,449,275	$	0
Secured Convertible Bridge Note, 8%, acquired 9/11/08	(M)			336,550	$	250,211		1,563,344
Secured Convertible Bridge Note, 8%, acquired 12/10/09	(M)			60,858	$	48,868		300,461
Secured Convertible Bridge Note, 8%, acquired 1/25/12	(M)			117,634	$	109,400		654,027
				2,515,042				2,517,832

GEO Semiconductor Inc. (13)		Electronics
Developing programmable, high-performance video and geometry processing solutions
Participation Agreement with Montage
Capital relating to the following assets:
Senior secured debt, 13.75%, maturing on 1/15/13	( I )			285,125	$	375,801		347,830
Warrants for Series A Pref. Stock expiring on 9/17/17	( I )			66,684		100,000		79,796
Warrants for Series A-1 Pref. Stock expiring on 6/30/18	( I )			23,566		34,500		28,013
Loan and Security Agreement with GEO Semiconductor relating to the following assets:
Subordinated secured debt, 15.75%, maturing on 1/15/13	( I )			109,574	$	125,000		120,410
Warrants for Series A Pref. Stock expiring on 3/1/18	( I )			7,512		10,000		7,511
Warrants for Series A-1 Pref. Stock expiring on 6/29/18	( I )			7,546		10,000		7,535
				500,007				591,095

Mersana Therapeutics, Inc. (7)(9)(14)		Life Sciences
Developing treatments for cancer based on novel drug delivery polymers
Series A-1 Convertible Preferred Stock	(M)			316,453		294,019		316,453
Common Stock	(M)			3,875,395		350,539		108,667
				4,191,848				425,120

Molecular Imprints, Inc. (7)(10)(15)		Electronics
Manufacturing nanoimprint
lithography capital equipment
Series B Convertible Preferred Stock	(M)			2,000,000		1,333,333		1,789,108
Series C Convertible Preferred Stock	(M)			2,406,595		1,285,071		2,138,498
Non-Convertible Bridge Note	( I )			0	$	0		3,033,338
				4,406,595				6,960,944

The accompanying notes are an integral part of these consolidated financial statements.

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

	Method of	Primary			Shares/
	Valuation (1)	Industry (2)	Cost		Principal		Value

Investments in Unaffiliated Companies (3) – 33.3% of net assets at value (Cont.)

Private Placement Portfolio (Illiquid) (4) – 19.4% of net assets at value (Cont.)

Nanosys, Inc. (7)		Energy
Developing inorganic nanowires and quantum dots for use in LED-backlit devices
Series C Convertible Preferred Stock	(M)		$	1,500,000		803,428	$	186,032
Series D Convertible Preferred Stock	(M)			3,000,003		1,016,950		2,814,423
Series E Convertible Preferred Stock	(M)			496,573		433,688		698,783
Unsecured Convertible Bridge Note, 4%, acquired 7/16/12	(M)			44,633	$	43,821		249,067
				5,041,209				3,948,305

Nano Terra, Inc. (9)		Energy
Developing surface chemistry and nano- manufacturing solutions
Senior secured debt, 12.0%, maturing on 12/1/15	( I )			614,597	$	650,000		622,600
Warrants for Series A-2 Pref. Stock expiring on 2/22/21	( I )			69,168		446,248		66,003
Warrants for Series C Pref. Stock expiring on 11/15/22	( I )			35,403		241,662		35,271
				719,168				723,874

Nantero, Inc. (7)(9)(10)		Electronics
Developing a high-density, nonvolatile, random access memory chip,
enabled by carbon nanotubes
Series A Convertible Preferred Stock	(M)			489,999		345,070		1,349,224
Series B Convertible Preferred Stock	(M)			323,000		207,051		809,569
Series C Convertible Preferred Stock	(M)			571,329		188,315		736,312
Series D Convertible Preferred Stock	(M)			139,075		35,569		139,075
				1,523,403				3,034,180

OHSO Clean, Inc. (16)(17)		Life Sciences
Developing natural, hypoallergenic household cleaning products enabled by nanotechnology- enabled formulations of thyme oil
Participation Agreement with Montage
Capital relating to the following assets:
Senior secured debt, 13.00%, maturing on 3/31/15	( I )			580,025	$	683,200		615,750
Warrants for Series C Pref. Stock expiring on 3/30/22	( I )			91,742		1,109,333		66,759
				671,767				682,509

Total Unaffiliated Private Placement Portfolio (cost: $29,365,558)							$	24,949,756

The accompanying notes are an integral part of these consolidated financial statements.

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

	Method of	Primary			Shares/
	Valuation (1)	Industry (2)	Cost		Principal		Value

Rights to Milestone Payments (Illiquid) (5) – 2.7% of net assets at value

Amgen, Inc. (7)(10)		Life Sciences
Rights to Milestone Payments from
Acquisition of BioVex Group, Inc.	( I )		$	3,291,750	$	3,291,750	$	3,400,734

Total Unaffiliated Rights to Milestone Payments (cost: $3,291,750)							$	3,400,734

Publicly Traded Portfolio (6) – 11.2% of net assets at value

NeoPhotonics Corporation (10)(18)		Electronics
Developing and manufacturing optical devices and components
Common Stock	(M)		$	821,971		50,807	$	291,632

Solazyme, Inc. (10)(19)		Energy
Developing algal biodiesel, industrial chemicals and specialty ingredients using synthetic biology
Common Stock	(M)			4,248,476		1,797,790		14,130,629

Total Unaffiliated Publicly Traded Portfolio (cost: $5,070,447)							$	14,422,261

Total Investments in Unaffiliated Companies (cost: $37,727,755)							$	42,772,751

The accompanying notes are an integral part of these consolidated financial statements.

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

	Method of	Primary			Shares/
	Valuation (1)	Industry (2)	Cost		Principal		Value

Investments in Non-Controlled Affiliated Companies (3) –
48.4% of net assets at value

Private Placement Portfolio (Illiquid) (20) – 47.3% of net assets at value

ABSMaterials, Inc. (7)(9)		Energy
Developing nano-structured absorbent materials for environmental remediation
Series A Convertible Preferred Stock	(M)		$	435,000		390,000	$	97,871
Secured Convertible Bridge Note, 8%, acquired 10/1/12	(M)			204,033	$	200,000		232,080
				639,033				329,951

Adesto Technologies Corporation (7)(9)(10)		Electronics
Developing low-power, high-performance memory devices
Series A Convertible Preferred Stock	(M)			2,200,000		6,547,619		4,474,625
Series B Convertible Preferred Stock	(M)			2,200,000		5,952,381		4,117,841
Series C Convertible Preferred Stock	(M)			1,485,531		2,122,187		1,643,416
Series D Convertible Preferred Stock	(M)			1,393,147		1,466,470		1,227,285
				7,278,678				11,463,167

AgBiome, LLC (formerly AgInnovation, LLC) (7)(9)(10)(16)(21)		Life Sciences
Providing early stage research and discovery for agriculture and utilizing the crop microbiome to identify products that reduce risk and improve yield
Series A-1 Convertible Preferred Stock	(M)			2,000,000		2,000,000		2,000,000

Contour Energy Systems, Inc. (7)(9)(10)		Energy
Developing batteries using nano-structured materials
Series A Convertible Preferred Stock	(M)			2,009,995		2,565,798		1,703,814
Series B Convertible Preferred Stock	(M)			1,300,000		812,500		1,008,380
Series C Convertible Preferred Stock	(M)			1,200,000		1,148,325		1,125,002
				4,509,995				3,837,196

The accompanying notes are an integral part of these consolidated financial statements.

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

	Method of	Primary			Shares/
	Valuation (1)	Industry (2)	Cost		Principal		Value

Investments in Non-Controlled Affiliated Companies (3) –
48.4% of net assets at value (Cont.)

Private Placement Portfolio (Illiquid) (20) – 47.3% of net assets at value (Cont.)

D-Wave Systems, Inc. (7)(9)(22)		Electronics
Developing high-performance quantum computing systems
Series 1 Class B Convertible Preferred Stock	(M)		$	1,002,074		1,144,869	$	1,493,024
Series 1 Class C Convertible Preferred Stock	(M)			487,804		450,450		587,432
Series 1 Class D Convertible Preferred Stock	(M)			748,473		855,131		1,115,176
Series 1 Class E Convertible Preferred Stock	(M)			248,049		269,280		351,168
Series 1 Class F Convertible Preferred Stock	(M)			238,323		258,721		337,398
Series 2 Class D Convertible Preferred Stock	(M)			736,019		678,264		884,524
Series 2 Class E Convertible Preferred Stock	(M)			409,032		317,746		414,372
Series 2 Class F Convertible Preferred Stock	(M)			392,993		305,286		398,124
Warrants for Common Stock expiring 6/30/15	( I )			98,644		153,890		40,103
				4,361,411				5,621,321

Enumeral Biomedical Corp. (7)(9)(10)		Life Sciences
Developing therapeutics and diagnostics through functional assaying of single cells
Series A Convertible Preferred Stock	(M)			1,026,832		957,038		1,325,507
Series A-1 Convertible Preferred Stock	(M)			750,000		576,923		750,000
				1,776,832				2,075,507

HzO, Inc. (7)(9)(10)		Electronics
Developing novel industrial coatings that protect electronics against damage from liquids
Series A Convertible Preferred Stock	(M)			666,667		4,057,294		760,227
Series B Convertible Preferred Stock	(M)			2,000,000		7,895,776		1,737,366
				2,666,667				2,497,593

Kovio, Inc. (7)(9)(10)		Electronics
Developing semiconductor products using printed electronics and thin-film technologies
Series A' Convertible Preferred Stock	(M)			5,242,993		2,160,000		359,321
Series B' Convertible Preferred Stock	(M)			2,006,540		3,015,493		1,362,591
				7,249,533				1,721,912

The accompanying notes are an integral part of these consolidated financial statements.

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

	Method of	Primary			Shares/
	Valuation (1)	Industry (2)	Cost		Principal		Value

Investments in Non-Controlled Affiliated Companies (3) –
48.4% of net assets at value (Cont.)

Private Placement Portfolio (Illiquid) (20) – 47.3% of net assets at value (Cont.)

Metabolon, Inc. (7)(10)		Life Sciences
Developing service and diagnostic products through the use of a metabolomics, or biochemical, profiling platform
Series B Convertible Preferred Stock	(M)		$	2,500,000		371,739	$	1,951,723
Series B-1 Convertible Preferred Stock	(M)			706,214		148,696		780,689
Series C Convertible Preferred Stock	(M)			1,000,000		1,000,000		1,794,510
Series D Convertible Preferred Stock	(M)			1,499,999		835,882		1,499,999
Warrants for Series B-1 Convertible Preferred Stock expiring 3/25/15	( I )			293,786		74,348		71,164
				5,999,999				6,098,085

Nextreme Thermal Solutions, Inc. (7)(9)(10)(23)		Energy
Developed thin-film thermoelectric devices for cooling and energy conversion
Common Stock	(M)			4,384,762		8,080,153		0

OpGen, Inc. (7)(10)(16)		Life Sciences
Developing tools for genomic sequence assembly and analysis
Series C Convertible Preferred Stock	(M)			3,260,000		23,623,188		3,260,000

Produced Water Absorbents, Inc. (7)(9)(10)		Energy
Developing nano-structured absorbent materials for environmental remediation of contaminated water in the oil and gas industries
Series A Convertible Preferred Stock	(M)			1,000,000		1,000,000		278,170

Senova Systems, Inc. (7)(9)(10)		Life Sciences
Developing next-generation sensors to measure pH
Series B Convertible Preferred Stock	(M)			1,218,462		1,350,000		810,000
Warrants for Series B Preferred Stock expiring 10/15/17	( I )			131,538		164,423		98,637
				1,350,000				908,637

The accompanying notes are an integral part of these consolidated financial statements.

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

	Method of	Primary			Shares/
	Valuation (1)	Industry (2)	Cost		Principal		Value

Investments in Non-Controlled Affiliated Companies (3) –
48.4% of net assets at value (Cont.)

Private Placement Portfolio (Illiquid) (20) – 47.3% of net assets at value (Cont.)

SiOnyx, Inc. (7)(9)(10)		Electronics
Developing silicon-based optoelectronic products enabled by its proprietary Black Silicon
Series A Convertible Preferred Stock	(M)		$	750,000		233,499	$	160,367
Series A-1 Convertible Preferred Stock	(M)			890,000		2,966,667		2,037,507
Series A-2 Convertible Preferred Stock	(M)			2,445,000		4,207,537		2,889,736
Series B-1 Convertible Preferred Stock	(M)			1,169,561		1,892,836		1,300,000
Series C Convertible Preferred Stock	(M)			1,171,316		1,674,030		1,255,523
Warrants for Series B-1 Convertible Preferred Stock expiring 2/23/17	( I )			130,439		247,350		50,113
Warrants for Common Stock expiring 3/28/17	( I )			84,207		418,507		32,098
				6,640,523				7,725,344

Ultora, Inc. (7)(9)		Energy
Developing energy-storage devices enabled by carbon nanotubes
Series A Convertible Preferred Stock	(M)			671,830		671,830		671,830

Xradia, Inc. (7)(10)		Electronics
Designing, manufacturing and selling ultra- high resolution 3D x-ray microscopes and fluorescence imaging systems
Series D Convertible Preferred Stock		(M)		4,000,000		3,121,099		12,303,684

Total Non-Controlled Private Placement Portfolio (cost: $57,789,263)							$	60,792,397

The accompanying notes are an integral part of these consolidated financial statements.

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

	Method of	Primary			Shares/
	Valuation (1)	Industry (2)	Cost		Principal		Value

Investments in Non-Controlled Affiliated Companies (3) –
48.4% of net assets at value (Cont.)

Publicly Traded Portfolio (Illiquid) (24) – 1.1% of net assets at value

Champions Oncology, Inc. (10)		Life Sciences
Developing its TumorGraft^TM platform for personalized medicine and drug development
Common Stock	(M)		$	2,000,000		2,666,667	$	1,348,227

Total Non-Controlled Affiliated Publicly Traded Portfolio (cost: $2,000,000)							$	1,348,227

Total Investments in Non-Controlled Affiliated Companies (cost: $59,789,263)							$	62,140,624

Investments in Controlled Affiliated Companies (3)(25) –
2.4% of net assets at value

Private Placement Portfolio (Illiquid) – 2.4% of net assets at value

Ancora Pharmaceuticals Inc. (7)(9)		Life Sciences
Developing synthetic carbohydrates for pharmaceutical applications
Common Stock	( I )		$	2,729,817		57,463	$	0
Series A' Convertible Preferred Stock	( I )			4,855,627		4,855,627		521,494
Senior Secured Debt, 12.00%, maturing on 12/11/13	( I )			446,731	$	500,000		453,270
				8,032,175				974,764

The accompanying notes are an integral part of these consolidated financial statements.

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

	Method of	Primary			Shares/
	Valuation (1)	Industry (2)	Cost		Principal		Value

Investments in Controlled Affiliated Companies (3)(25) –
2.4% of net assets at value (Cont.)

Private Placement Portfolio (Illiquid) – 2.4% of net assets at value (Cont.)

Laser Light Engines, Inc. (7)(9)		Energy
Manufacturing solid-state light sources for digital cinema and large-venue projection displays
Series A Convertible Preferred Stock	(M)		$	2,000,000		7,499,062	$	0
Series B Convertible Preferred Stock	(M)			3,095,802		13,571,848		1,008,225
Secured Convertible Bridge Note, 12%, acquired 10/7/11	(M)			229,721	$	200,000		229,721
Secured Convertible Bridge Note, 12%, acquired 11/17/11	(M)			108,577	$	95,652		108,577
Secured Convertible Bridge Note, 12%, acquired 12/21/11	(M)			92,848	$	82,609		92,848
Secured Convertible Bridge Note, 12%, acquired 3/5/12	(M)			477,953	$	434,784		477,953
Secured Convertible Bridge Note, 12%, acquired 7/26/12	(M)			196,728	$	186,955		196,728
				6,201,629				2,114,052

Total Controlled Private Placement Portfolio (cost: $14,233,804)							$	3,088,816

Total Investments in Controlled Affiliated Companies (cost: $14,233,804)							$	3,088,816

Total Private Placement and Publicly Traded Portfolio (cost: $111,750,822)							$	108,002,191

	Method of			Shares/
	Valuation (1)	Cost		Principal		Value

U.S. Government Securities (26) – 10.9% of net assets at value

U.S. Treasury Bill — due date 03/28/13	(M)	$	13,996,136	$	14,000,000	$	13,998,880

Total Investments in U.S. Government Securities (cost: $13,996,136)						$	13,998,880

Total Investments (cost: $125,746,958)						$	122,001,071

The accompanying notes are an integral part of these consolidated financial statements.

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

	Method of	Number of
	Valuation (1)	Contracts		Value

Written Call Options (16) – (0.03)% of net assets at value

Solazyme, Inc. — Strike Price $10.00, March 16, 2013	(M)		1,500	$	(37,500	)

NeoPhotonics Corporation — Strike Price $7.50, February 16, 2013	(M)		500		(5,000	)

Total Written Call Options (Premiums Received $50,000)				$	(42,500	)

The accompanying notes are an integral part of these consolidated financial statements.

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

Notes to Consolidated Schedule of Investments

(1)

See "Footnote to Consolidated Schedule of Investments" on page 32 for a description of the "Valuation Procedures."

(2)

We classify "Energy" companies as those that seek to improve performance, productivity or efficiency, and to reduce environmental impact, waste, cost, energy consumption or raw materials using nanotechnology-enabled solutions. We classify "Electronics" companies as those that use nanotechnology to address problems in electronics-related industries, including semiconductors. In the fourth quarter of 2012, we renamed the industry classification "Healthcare" to "Life Sciences." We classify "Life Sciences" companies as those that address problems in life sciences-related industries, including biotechnology, agriculture, advanced materials and chemicals, healthcare, bioprocessing, water, industrial biotechnology, food, nutrition and energy.

(3)

(4)

The aggregate cost for federal income tax purposes of investments in unaffiliated privately held companies is $29,365,558. The gross unrealized appreciation based on the tax cost for these securities is $4,376,000. The gross unrealized depreciation based on the tax cost for these securities is $8,791,802.

(5)

The aggregate cost for federal income tax purposes of investments in unaffiliated rights to milestone payments is $3,291,750. The gross unrealized appreciation based on the tax cost for these securities is $108,984. The gross unrealized depreciation based on the tax cost for these securities is $0.

(6)

The aggregate cost for federal income tax purposes of investments in unaffiliated publicly traded companies is $5,070,447. The gross unrealized appreciation based on the tax cost for these securities is $9,882,153. The gross unrealized depreciation based on the tax cost for these securities is $530,339.

(7)

We are subject to legal restrictions on the sale of our investment(s) in this company.

(8)

With the conversion of our bridge note into shares of Series E-1 Preferred Stock, we received a warrant to purchase shares of common stock at $0.25 per share. The number of shares is determined by certain financial targets for 2012 set upon receipt of the audited financial statements for 2012. These financial statements have not yet been issued, and, therefore, the warrant remains contingent as of December 31, 2012.

(9)

The accompanying notes are an integral part of this consolidated schedule.

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

(10)

Represents a non-income producing security. Investments that have not paid dividends or interest within the last 12 months are considered to be non-income producing.

(11)

Cobalt Technologies, Inc., also does business as Cobalt Biofuels.

(12)

With our investment in a convertible bridge note issued by Ensemble Therapeutics Corporation, we received a warrant to purchase a number of shares of the class of stock sold in the next financing of Ensemble Therapeutics Corporation equal to $149,540 divided by the price per share of the class of stock sold in the next financing of Ensemble Therapeutics Corporation. The ability to exercise this warrant is, therefore, contingent on Ensemble Therapeutics Corporation completing successfully a subsequent round of financing. This warrant shall expire and no longer be exercisable on September 10, 2015. The cost basis of this warrant is $89.86.

(13)

The outstanding loans with maturity dates of 1/15/13 were not repaid as of that date. The maturity dates of these loans are expected to be extended to at least 6/30/13. GEO Semiconductor continues to pay principal and interest, as applicable, on each loan based on the terms negotiated as of December 31, 2012.

(14)

With our investment in the Mersana Therapeutics, Inc., Series A-1 financing, we received a warrant to purchase 277,760 shares of Series A-2 Convertible Preferred Stock. The ability to exercise the warrant is contingent upon Mersana's achievement of certain milestones. Mersana has not achieved those milestones as of December 31, 2012, and, therefore, this warrant is a contingent asset as of that date. The warrant will expire on July 27, 2022.

(15)

(16)

Initial investment was made during 2012.

(17)

OHSO Clean, Inc. also does business as CleanWell Company.

(18)

A portion of this security is held in connection with written call option contracts: 50,000 shares, having a fair value of $287,000, have been pledged to brokers.

(19)

A portion of this security is held in connection with written call option contracts: 150,000 shares, having a fair value of $1,175,000, have been pledged to brokers.

(20)

The aggregate cost for federal income tax purposes of investments in non-controlled affiliated companies is $57,789,263. The gross unrealized appreciation based on the tax cost for these securities is $15,229,665. The gross unrealized depreciation based on the tax cost for these securities is $12,226,531.

(21)

On January 29, 2013, AgInnovation, LLC, changed its name to AgBiome, LLC.

The accompanying notes are an integral part of this consolidated schedule.

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

(22)

(23)

On February 13, 2013, Nextreme Thermal Solutions, Inc., was acquired by Laird Technologies, Inc., for $1 and the potential for future milestone payments.

(24)

The aggregate cost for federal income tax purposes of investments in non-controlled affiliated publicly traded companies is $2,000,000. The gross unrealized appreciation based on the tax cost for these securities is $0. The gross unrealized depreciation based on the tax cost for these securities is $651,773.

(25)

The aggregate cost for federal income tax purposes of investments in controlled affiliated companies is $14,233,804. The gross unrealized appreciation based on the tax cost for these securities is $0. The gross unrealized depreciation based on the tax cost for these securities is $11,144,988.

(26)

The aggregate cost for federal income tax purposes of our U.S. government securities is $13,996,136. The gross unrealized appreciation on the tax cost for these securities is $2,744. The gross unrealized depreciation on the tax cost of these securities is $0.

The accompanying notes are an integral part of this consolidated schedule.

HARRIS & HARRIS GROUP, INC.

FOOTNOTE TO CONSOLIDATED SCHEDULE OF INVESTMENTS

VALUATION PROCEDURES

Determination of Net Asset Value

The 1940 Act requires periodic valuation of each investment in the portfolio of the Company to determine its net asset value. Under the 1940 Act, unrestricted securities with readily available market quotations are to be valued at the current market value; all other assets must be valued at "fair value" as determined in good faith by or under the direction of the Board of Directors.

The Board of Directors is responsible for (1) determining overall valuation guidelines and (2) ensuring that the investments of the Company are valued within the prescribed guidelines.

The Valuation Committee, comprised of all of the independent board members, is responsible for determining the valuation of the Company’s assets within the guidelines established by the Board of Directors. The Valuation Committee receives information and recommendations from management. An independent valuation firm also reviews select portfolio company valuations. The independent valuation firm does not provide proposed valuations.

The values assigned to these investments are based on available information and do not necessarily represent amounts that might ultimately be realized when that investment is sold, as such amounts depend on future circumstances and cannot reasonably be determined until the individual investments are actually liquidated or become readily marketable.

II.

Approaches to Determining Fair Value

GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In effect, GAAP applies fair value terminology to all valuations whereas the 1940 Act applies market value terminology to readily marketable assets and fair value terminology to other assets.

The main approaches to measuring fair value utilized are the market approach and the income approach.

Market Approach (M): The market approach may use quantitative inputs such as prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities and the values of market multiples derived from a set of comparable companies. The market approach may also use qualitative inputs such as progress toward milestones, the long-term potential of the business, current and future financing requirements and the rights and preferences of certain securities versus those of other securities. The selection of the relevant inputs used to derive value under the market approach requires judgment considering factors specific to the significance and relevance of each input to deriving value.

Income Approach (I): The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present value amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. Those valuation techniques include present value techniques; option-pricing models, such as the Black-Scholes-Merton formula (a closed-form model) and a binomial model (a lattice model), which incorporate present value techniques; and the multi-period excess earnings method, which is used to measure the fair value of certain assets.

GAAP classifies the inputs used to measure fair value by these approaches into the following hierarchy:

Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2: Quoted prices in active markets for similar assets or liabilities, or quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 2 inputs are in those markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers; and

Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are those inputs that reflect our own assumptions that market participants would use to price the asset or liability based upon the best available information.

Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement and are not necessarily an indication of risks associated with the investment.

III.

Investment Categories

The Company’s investments can be classified into five broad categories for valuation purposes:

Equity-related securities;

Long-term fixed-income securities;

Short-term fixed-income securities;

Investments in intellectual property, patents, research and development in technology or product development; and

All other securities.

The Company applies the methods for determining fair value discussed above to the valuation of investments in each of these five broad categories as follows:

EQUITY-RELATED SECURITIES

Equity-related securities, including options or warrants, are fair valued using the market or income approaches. The following factors may be considered when the market approach is used to fair value these types of securities:

Readily available public market quotations;

The cost of the Company’s investment;

Transactions in a company's securities or unconditional firm offers by responsible parties as a factor in determining valuation;

The financial condition and operating results of the company;

The company's progress towards milestones;

The long-term potential of the business and technology of the company;

The values of similar securities issued by companies in similar businesses;

Multiples to revenue, net income or EBITDA that similar securities issued by companies in similar businesses receive;

The proportion of the company's securities we own and the nature of any rights to require the company to register restricted securities under applicable securities laws; and

The rights and preferences of the class of securities we own as compared with other classes of securities the portfolio company has issued.

When the income approach is used to value warrants, the Company uses the Black-Scholes-Merton formula.

LONG-TERM FIXED-INCOME SECURITIES

Readily Marketable: Long-term fixed-income securities for which market quotations are readily available are valued using the most recent bid quotations when available.

Not Readily Marketable: Long-term fixed-income securities for which market quotations are not readily available are fair valued using the income approach. The factors that may be considered when valuing these types of securities by the income approach include:

Credit quality;

Interest rate analysis;

Quotations from broker-dealers;

Prices from independent pricing services that the Board believes are reasonably reliable; and

Reasonable price discovery procedures and data from other sources.

SHORT-TERM FIXED-INCOME SECURITIES

Short-term fixed-income securities are valued in the same manner as long-term fixed-income securities until the remaining maturity is 60 days or less, after which time such securities may be valued at amortized cost if there is no concern over payment at maturity.

INVESTMENTS IN INTELLECTUAL PROPERTY, PATENTS, RESEARCH AND DEVELOPMENT IN TECHNOLOGY OR PRODUCT DEVELOPMENT

Such investments are fair valued using the market approach. The Company may consider factors specific to these types of investments when using the market approach including:

The cost of the Company’s investment;

Investments in the same or substantially similar intellectual property or patents, research and development in technology or product development, or offers by responsible third parties;

The results of research and development;

Product development and milestone progress;

Commercial prospects;

Term of patent;

Projected markets; and

Other subjective factors.

ALL OTHER SECURITIES

All other securities are reported at fair value as determined in good faith by the Valuation Committee using the approaches for determining valuation as described above.

For all other securities, the reported values shall reflect the Valuation Committee's judgment of fair values as of the valuation date using the outlined basic approaches of valuation discussed in Section III. They do not necessarily represent an amount of money that would be realized if we had to sell such assets in an immediate liquidation. Thus, valuations as of any particular date are not necessarily indicative of amounts that we may ultimately realize as a result of future sales or other dispositions of investments we hold.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. THE COMPANY

Harris & Harris Group, Inc.(the "Company," "us," "our" and "we"), is a venture capital company operating as a business development company ("BDC") under the Investment Company Act of 1940 (the "1940 Act") that specializes in making investments in transformative companies enabled by disruptive science. We operate as an internally managed investment company whereby our officers and employees, under the general supervision of our Board of Directors, conduct our operations.

H&H Ventures Management, Inc.^SM ("Ventures"), formerly Harris & Harris Enterprises, Inc.^SM, is a 100 percent wholly owned subsidiary of the Company. Ventures is taxed under Subchapter C (a "C Corporation") of the Internal Revenue Code of 1986 (the "Code"). Harris Partners I, L.P, is a limited partnership and, from time to time, may be used to hold certain interests in portfolio companies. The partners of Harris Partners I, L.P., are Ventures (sole general partner) and the Company (sole limited partner). Ventures pays taxes on income generated by its operations as well as on any non-passive investment income generated by Harris Partners I, L.P. For the period ended September 30, 2013, there was no non-passive investment income generated by Harris Partners I, L.P. Ventures, as the sole general partner, consolidates Harris Partners I, L.P. The Company consolidates its wholly owned subsidiary, Ventures, for financial reporting purposes.

NOTE 2. INTERIM FINANCIAL STATEMENTS

Our interim financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and in conformity with accounting principles generally accepted in the United States of America ("GAAP") applicable to interim financial information. Accordingly, they do not include all information and disclosures necessary for a fair statement of our financial position, results of operations and cash flows in conformity with GAAP. In the opinion of management, these financial statements reflect all adjustments, consisting of valuation adjustments and normal recurring accruals, necessary for a fair statement of our financial position, results of operations and cash flows for such periods. The results of operations for any interim period are not necessarily indicative of the results for the full year. These financial statements should be read in conjunction with the financial statements and notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies followed in the preparation of the consolidated financial statements:

Principles of Consolidation. The consolidated financial statements have been prepared in accordance with GAAP and include the accounts of the Company and its wholly owned subsidiary. In accordance with GAAP and Regulation S-X, the Company may only consolidate its interests in investment company subsidiaries and controlled operating companies whose business consists of providing services to the Company. Our wholly owned subsidiary, Ventures, is a controlled operating company that provides services to us and is, therefore, consolidated. All significant inter-company accounts and transactions have been eliminated in consolidation.

Use of Estimates. The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ from these estimates, and the differences could be material. The most significant estimates relate to the fair valuations of our investments.

Portfolio Investment Valuations. Investments are stated at "value" as defined in the 1940 Act and in the applicable regulations of the Securities and Exchange Commission ("SEC") and in accordance with GAAP. Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) the fair value as determined in good faith by, or under the direction of, the Board of Directors for all other assets. (See "Valuation Procedures" in the "Footnote to Consolidated Schedule of Investments.") As of September 30, 2013, our financial statements include privately held investments fair valued at $85,924,204. The fair values of our privately held investments and warrants of Champions Oncology, Inc., a publicly traded company, were determined in good faith by, or under the direction of, the Board of Directors. Upon sale of investments, the values that are ultimately realized may be different from what is presently estimated. The difference could be material.

Cash. Cash includes demand deposits. Cash is carried at cost, which approximates fair value.

Restricted Funds. At September 30, 2013, and December 31, 2012, we held $10,028 and $10,015, respectively, in "Restricted funds," related to security deposits for sublessors.

Unaffiliated Rights to Milestone Payments. At September 30, 2013, and December 31, 2012, the outstanding milestone payments from Amgen, Inc.’s acquisition of Biovex Group, Inc., were valued at $3,375,388 and $3,400,734, respectively. The milestone payments are derivatives and valued using the probability-adjusted, present value of proceeds from future payments that would be due upon successful completion of certain regulatory and sales milestones. If all remaining milestones are met, we would receive $9,526,393. There can be no assurance as to how much of this amount we will ultimately realize or when it will be realized, if at all. At September 30, 2013, the outstanding milestone payments from Laird Technologies, Inc.’s acquisition of Nextreme Thermal Solutions, Inc., were valued at $0.

Receivable from Sales of Investments. At September 30, 2013, we had a receivable totaling $22,799,975 relating to an unsettled trade from the sale of a U.S. Treasury security. This transaction settled on October 1, 2013, at which time we received the cash for this sale. We liquidated our U.S. Treasury position owing to the risk of default associated with those securities in October.

Funds Held in Escrow from Sale of Investment. At September 30, 2013, there were funds held in escrow fair valued at $1,168,671 relating to the sale of Xradia, Inc., to Carl Zeiss AG. Funds held in escrow are valued using certain discounts applied to the amounts withheld. Funds held in escrow from the Xradia transaction will be released in January and July of 2014 net of any settlement of any indemnity claims and expenses related to the transaction. If the funds held in escrow for this transaction are released in full, we would receive $2,374,827.

Prepaid Expenses. We include prepaid insurance premiums and deferred financing charges in "Prepaid expenses." Prepaid insurance premiums are recognized over the term of the insurance contract. Deferred financing charges consist of fees and expenses paid in connection with the closing of loan facilities and are capitalized at the time of payment. Deferred financing charges are amortized over the term of the loan facility discussed in "Note 5. Debt." Amortization of the financing charges is included in "Interest and other debt expense" in the Consolidated Statements of Operations.

Property and Equipment. Property and equipment are included in "Other assets" and are carried at $250,361 and $288,122 at September 30, 2013, and December 31, 2012, respectively, representing cost, less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the premises and equipment. We estimate the useful lives to be five to ten years for furniture and fixtures, three years for computer equipment, and the lesser of ten years or the remaining life of the lease for leasehold improvements.

Post Retirement Plan Liabilities. The Company provides a Retiree Medical Benefit Plan for employees who meet certain eligibility requirements. Until it was terminated on May 5, 2011, the Company also provided an Executive Mandatory Retirement Benefit Plan for certain individuals employed by us in a bona fide executive or high policy-making position. The net periodic postretirement benefit cost for the year is determined as the sum of service cost for the year and interest on the accumulated postretirement benefit obligation. Unrecognized actuarial gains and losses are recognized as net periodic benefit cost pursuant to the Company's historical accounting policy. The impact of plan amendments are amortized over the service period as a component of "Accumulated other comprehensive income."

Interest Income Recognition. Interest income, including amortization of premium and accretion of discount, is recorded on an accrual basis. When accrued interest is determined to not be recoverable, the Company ceases accruing interest and writes off any previously accrued interest. Securities are deemed to be non-income producing if, on their last interest or dividend date, no cash was paid or no cash or in-kind dividends were declared. These write-offs are reversed through interest income. During the three months and nine months ended September 30, 2013, the Company earned $81,787 and $257,604, respectively, in interest on U.S. government securities, senior secured debt, participation agreements, subordinated secured debt, non-convertible promissory notes and interest-bearing accounts. During the three months and nine months ended September 30, 2013, the Company recorded $33,238 and $172,474, respectively, of bridge note interest. During the three months and nine months ended September 30, 2012, the Company earned $74,821 and $210,146, respectively, in interest on U.S. government securities, senior secured debt, participation agreements, subordinated secured debt and interest-bearing accounts. During the three months and nine months ended September 30, 2012, the Company recorded, on a net basis, $275,148 and $190,466, respectively, of bridge note interest.

Loan Fees. Loan fees received in connection with our venture debt investments are deferred. The unearned fee income is accreted into income based on the effective interest method over the life of the investment.

Call Options. The Company writes covered call options on publicly traded securities with the intention of earning option premiums. Option premiums may increase the Company’s realized gains and, therefore, may help increase distributable income, but may limit the realized gains on the security. When a Company writes (sells) an option, an amount equal to the premium received by the Company is recorded in the Consolidated Statements of Assets and Liabilities as a liability. The amount of the liability is subsequently marked-to-market to reflect the current market value of the option written. When an option expires, the Company realizes a gain on the option to the extent of the premiums received. Premiums received from writing options that are exercised or closed are added to the proceeds or offset against the amount paid on the transaction to determine the realized gain or loss. At September 30, 2013, and December 31, 2012, the Company had 250,000 shares and 150,000 shares, respectively, of Solazyme, Inc., covered by call option contracts. In the event these contracts are exercised, the Company would be required to deliver those shares to the counterparty.

Put Options. The Company purchases put options on publicly traded securities with the intention of limiting its downside risk. When the Company purchases a put option, an amount equal to the premium paid is recorded in the Consolidated Statements of Assets and Liabilities as an investment. The amount of this asset is subsequently marked-to-market to reflect the current value of the put option. In the event that the put option is exercised, the Company would be required to deliver those shares to the counterparty. When the put option expires unexercised, the Company realizes a loss on the premium paid. The Company did not have any put options outstanding at September 30, 2013, or December 31, 2012.

Stock-Based Compensation. The Company has a stock-based employee compensation plan. The Company accounts for the Amended and Restated Harris & Harris Group, Inc. 2012 Equity Incentive Plan (the "Stock Plan") by determining the fair value of all share-based payments to employees, including the fair value of grants of employee stock options and restricted stock awards, and records these amounts as an expense in the Consolidated Statements of Operations over the vesting period with a corresponding increase to our additional paid-in capital. At September 30, 2013, and December 31, 2012, the increase to our operating expenses was offset by the increase to our additional paid-in capital, resulting in no net impact to our net asset value. Additionally, the Company does not record the potential tax benefits associated with the expensing of stock options or restricted stock because the Company currently intends to qualify as a regulated investment company ("RIC") under Subchapter M of the Code, and the deduction attributable to such expensing, therefore, is unlikely to provide any additional tax savings. The amount of non-cash, stock-based compensation expense recognized in the Consolidated Statements of Operations is based on the fair value of the awards the Company expects to vest, recognized over the vesting period on a straight-line basis for each award, and adjusted for actual awards vested and pre-vesting forfeitures. The forfeiture rate is estimated at the time of grant and revised, if necessary, in subsequent periods if the actual forfeiture rate differs from the estimated rate and is accounted for in the current period and prospectively. See "Note 9. Stock-Based Compensation" for further discussion.

Rent expense. Our lease at 1450 Broadway, New York, New York, commenced on January 21, 2010. The lease expires on December 31, 2019. The base rent is $36 per square foot with a 2.5 percent increase per year over the 10 years of the lease, subject to a full abatement of rent for four months and a rent credit for six months throughout the lease term. Certain leasehold improvements were also paid for on our behalf by the landlord, the cost of which is accounted for as property and equipment and "Deferred rent" in the accompanying Consolidated Statements of Assets and Liabilities. These leasehold improvements are depreciated over the lease term. We also lease office space in California and North Carolina. We apply these rent abatements, credits, escalations and landlord payments on a straight-line basis in the determination of rent expense over the lease term.

Realized Gain or Loss and Unrealized Appreciation or Depreciation of Portfolio Investments. Realized gain or loss is recognized when an investment is disposed of and is computed as the difference between the Company's cost basis in the investment at the disposition date and the net proceeds received from such disposition. Realized gains and losses on investment transactions are determined by specific identification. Unrealized appreciation or depreciation is computed as the difference between the fair value of the investment and the cost basis of such investment.

Income Taxes. As we intend to qualify as a RIC under Subchapter M of the Code, the Company does not accrue for income taxes. The Company has capital loss carryforwards that can be used to offset net realized capital gains. The Company recognizes interest and penalties in income tax expense. We pay federal, state and local income taxes on behalf of our wholly owned subsidiary, Ventures, which is a C corporation. See "Note 10. Income Taxes."

Foreign Currency Translation. The accounting records of the Company are maintained in U.S. dollars. All assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the rate of exchange of such currencies against U.S. dollars on the date of valuation. For the three months ended September 30, 2013, included in the net increase in unrealized depreciation on investments was an unrealized gain of $132,582 resulting from foreign currency translation. For the nine months ended September 30, 2013, included in the net increase in unrealized depreciation on investments was an unrealized loss of $177,465 resulting from foreign currency translation. For the three months and nine months ended September 30, 2012, included in the net increase in unrealized appreciation on investments was unrealized appreciation of $216,249 and $199,932, respectively, resulting from foreign currency translation.

Securities Transactions. Securities transactions are accounted for on the date the transaction for the purchase or sale of the securities is entered into by the Company (i.e., trade date).

Concentration of Credit Risk. The Company places its cash and cash equivalents with financial institutions and, at times, cash held in depository accounts may exceed the Federal Deposit Insurance Corporation insured limit.

NOTE 4. BUSINESS RISKS AND UNCERTAINTIES

We invest primarily in privately held companies, the securities of which are inherently illiquid. We also have investments in small publicly traded companies. Although these companies are publicly traded, their stock may not trade at high volumes and prices can be volatile, which may restrict our ability to sell our positions. These privately held and publicly traded businesses tend to not have attained profitability, and many of these businesses also lack management depth and have limited or no history of operations. Because of the speculative nature of our investments and the lack of a liquid market for and restrictions on transfers of privately held investments, there is greater risk of loss relative to traditional marketable investment securities.

We do not choose investments based on a strategy of diversification. We also do not rebalance the portfolio should one of our portfolio companies increase in value substantially relative to the rest of the portfolio. Therefore, the value of our portfolio may be more vulnerable to microeconomic events affecting a single sector, industry or portfolio company and to general macroeconomic events that may be unrelated to our portfolio companies. These factors may subject the value of our portfolio to greater volatility than a company that follows a diversification strategy. As of September 30, 2013, and December 31, 2012, our largest 10 investments by value accounted for approximately 74 percent and 73 percent, respectively, of the value of our equity-focused venture capital portfolio. Our largest three investments, by value, Adesto Technologies Corporation, SiOnyx, Inc., and Molecular Imprints, Inc., accounted for approximately 16 percent, 10 percent and 7 percent, respectively, of our equity-focused venture capital portfolio at September 30, 2013. Adesto Technologies, SiOnyx and Molecular Imprints are privately held portfolio companies. As of December 31, 2012, our largest two investments, by value, Solazyme, Inc., a publicly traded company, and Xradia, Inc., a privately held company, accounted for approximately 14 percent and 12 percent, respectively, of our equity-focused venture capital portfolio.

Approximately 91 percent of the portion of our equity-focused venture capital portfolio that was fair valued was comprised of securities of 25 privately held companies and warrants of one publicly traded company. Because there is typically no public or readily ascertainable market for our interests in the small privately held companies in which we invest, the valuation of the securities in that portion of our portfolio is determined in good faith by our Valuation Committee, which is comprised of all of the independent members of our Board of Directors. The values are determined in accordance with our Valuation Procedures and are subject to significant estimates and judgments. The fair value of the securities in our portfolio may differ significantly from the values that would be placed on these securities if a ready market for the securities existed. Any changes in valuation are recorded in our Consolidated Statements of Operations as "Net (decrease) increase in unrealized appreciation on investments." Changes in valuation of any of our investments in privately held companies from one period to another may be significant.

NOTE 5. DEBT

On September 30, 2013, the Company terminated the Revolving Loan Agreement by and between the Company and TD Bank, N.A., dated February 24, 2011, as amen