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 March 31, 2011

¨    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        x  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 May 10, 2011
Common Stock, $0.01 par value per share
31,000,601 shares

 
 
 

Harris & Harris Group, Inc.
Form 10-Q, March 31, 2011
 
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 Cash Flows
4
  
Consolidated Statements of Changes in Net Assets
5
  
Consolidated Schedule of Investments
6
  
Notes to Consolidated Financial Statements
33
  
Financial Highlights
44
  
     
Item 2.  Management's Discussion and Analysis of Financial Condition  and Results of Operations
45
  
     
Background
45
  
Overview
45
  
Investment Strategy
47
  
Involvement with Portfolio Companies
47
  
Historical Investments and Current Investment Pace
48
  
Importance of Availability of Liquid Capital
49
  
Our Sources of Liquid Capital
49
  
Recent and Pending Potential Liquidity Events from our Portfolio as of March 31, 2011
50
  
Maturity of Current Equity-Focused Venture Capital Portfolio
50
  
Current Business Environment
52
  
Valuation of Investments
53
  
Assessment of Venture Capital Investment Portfolio as of March 31, 2011
56
  
Investment Objective
63
  
Results of Operations
64
  
Financial Condition
68
  
Liquidity
69
  
Borrowings
70
  
Contractual Obligations
71
  
Capital Resources
71
  
Critical Accounting Policies
71
  
Recent Developments – Portfolio Companies
74
  
Forward-Looking Statements
75
  
     
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
75
  
     
Item 4.  Controls and Procedures
77
  
     
PART II.  OTHER INFORMATION
    
     
Item 1A.  Risk Factors
78
  
     
Item 5. Exhibits
78
  
     
Signatures
79
  
     
Exhibit Index
80
  
 
 
 
 

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 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, 2010.

 
1
 

HARRIS & HARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

ASSETS
   
March 31, 2011
    
December 31, 2010
  
   
(Unaudited)
        
Investments in portfolio securities, at value:
            
Unaffiliated privately held companies (cost: $28,274,450 and $37,480,266, respectively)
   $ 44,311,705     $ 56,315,330  
Unaffiliated publicly traded securities (cost: $7,299,590 and $0, respectively)
     4,447,843       0  
Non-controlled affiliated privately held companies (cost: $51,752,650 and $51,451,965, respectively)
     42,541,213       42,775,415  
Controlled affiliated privately held companies  (cost: $9,750,660 and $9,715,153, respectively)
    6,458,228       7,059,677  
Total investments in private portfolio companies and public securities, at value (cost: $97,077,350 and $98,647,384, respectively)
   $ 97,758,989     $ 106,150,422  
Investments in U.S. Treasury obligations, at value (cost: $39,196,567 and $38,273,349, respectively)
     39,196,328       38,274,617  
Cash
     7,054,254       3,756,919  
Restricted funds (Note 3)
     1,252,752       2,751  
Milestone payments from sale of investment, at value (Note 3)
     3,291,750       0  
Funds held in escrow from sale of investment, at value (Note 3)
     477,568       0  
Receivable from unsettled trade
     115,143       0  
Receivable from portfolio company
     14,500       10,000  
Interest receivable
     7,958       5,924  
Prepaid expenses
     322,071       379,705  
Other assets
     682,962       708,830  
Total assets
   $ 150,174,275     $ 149,289,168  
                 
LIABILITIES & NET ASSETS
                 
Post retirement plan liabilities
   $ 1,536,315     $ 1,506,906  
Revolving loan (Note 5)
     1,250,000       0  
Accounts payable and accrued liabilities
     418,770       589,592  
Deferred rent
     333,361       338,758  
Debt interest and other payable
     3,084       0  
Total liabilities
     3,541,530       2,435,256  
                 
Net assets
   $ 146,632,745     $ 146,853,912  
                 
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 03/31/11 and 12/31/10; 32,826,341 issued at 03/31/11  and 32,706,904 issued at 12/31/10
     328,264       327,070  
Additional paid in capital
     208,989,533       208,085,735  
Accumulated net operating and realized loss
     (59,960,921 )     (65,657,668 )
Accumulated unrealized appreciation of investments
     681,400       7,504,306  
Treasury stock, at cost (1,828,740 shares at 03/31/11 and 12/31/10)
     (3,405,531 )     (3,405,531 )
                 
Net assets
   $ 146,632,745     $ 146,853,912  
Shares outstanding
     30,997,601       30,878,164  
Net asset value per outstanding share
   $ 4.73     $ 4.76  

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

 
2
 

HARRIS & HARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
   
Three Months Ended
    
Three Months Ended
  
   
March 31, 2011
    
March 31, 2010
  
Investment income:
            
Interest from:
            
Fixed-income securities and bridge notes (Note 3)
   $ 121,777     $ 73,073  
Miscellaneous income
     15,047       6,000  
Total investment income
     136,824       79,073  
                 
Expenses:
                
Salaries, benefits and stock-based compensation (Note 7)
     1,239,098       1,389,277  
Administration and operations
     256,558       282,522  
Professional fees
     247,848       243,369  
Rent (Note 3)
     89,500       77,215  
Directors' fees and expenses
     98,781       95,361  
Custody fees
     24,000       24,000  
Depreciation
     12,564       11,969  
Interest and other debt expenses
     3,778       0  
Lease termination costs (Note 3)
     0       68,038  
Total expenses
     1,972,127       2,191,751  
                 
Net operating loss
     (1,835,303 )     (2,112,678 )
                 
Net realized gain (loss):
                
Realized gain (loss) from investments:
                
Unaffiliated companies
     7,534,340       0  
U.S. Treasury obligations/other
     0       (11,523 )
Realized gain (loss) from investments
     7,534,340       (11,523 )
                 
Income tax expense (Note 8)
     2,290       2,632  
Net realized gain (loss) from investments
     7,532,050       (14,155 )
                 
Net (decrease) increase in unrealized appreciation on investments:
                
Change as a result of investment sales
     (7,467,614 )     0  
Change on investments held
     644,708       3,814,564  
Net (decrease) increase in unrealized appreciation on investments
     (6,822,906 )     3,814,564  
                 
Net (decrease) increase in net assets resulting from operations:
                
                 
Total
   $ (1,126,159 )   $ 1,687,731  
                 
Per average basic and diluted outstanding share
   $ (0.04 )   $ 0.05  
                 
Average outstanding shares
     30,918,981       30,859,888  

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

 
3
 

HARRIS & HARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
   
Three Months Ended
    
Three Months Ended
  
   
March 31, 2011
    
March 31, 2010
  
Cash flows (used in) providedA by operating activities:
            
Net (decrease) increase in net assets resulting from operations
   $ (1,126,159 )   $ 1,687,731  
Adjustments to reconcile net (decrease) increase in net assets resulting from operations to net cash used in operating activities:
                
Net realized gain and unrealized appreciation on investments
     (711,434 )     (3,803,041 )
Depreciation of fixed assets, amortization of premium or discount on securities, and bridge note interest
     (69,815 )     (41,107 )
Stock-based compensation expense
     427,314       553,272  
                 
Changes in assets and liabilities:
                
Restricted funds
     (1,250,001 )     0  
Receivable from unsettled trade
     (115,143 )     0  
Receivable from portfolio company
     (4,500 )     28,247  
Interest receivable
     17,198       12,589  
Receivable from investments sold
     0       (799,925 )
Prepaid expenses
     57,634       (244,413 )
Other assets
     13,067       (260,892 )
Post retirement plan liabilities
     29,409       33,051  
Accounts payable and accrued liabilities
     (167,738 )     93,740  
Deferred rent
     (5,397 )     319,534  
Net cash used in operating activities
     (2,905,565 )     (2,421,214 )
                 
Cash flows from investing activities:
                
Purchase of U.S. government securities
     (59,188,063 )     (2,399,293 )
Sale of U.S. government securities
     58,245,613       5,199,533  
Investment in affiliated portfolio companies
     (272,369 )     (1,171,975 )
Investment in unaffiliated portfolio companies
     (2,262,305 )     (503,083 )
Proceeds from conversion of bridge note
     0       1,356  
Purchase of fixed assets
     0       (80,516 )
Principal payments received on debt investments
     20,876       0  
Proceeds from sale of investments
     7,931,470       0  
Net cash provided by investing activities
     4,475,222       1,046,022  
                 
Cash flows from financing activities:
                
Proceeds from stock option exercises
     477,678       9,949  
Payment of offering costs
     0       (48,928 )
Proceeds from drawdown of credit facility
     1,250,000       0  
Net cash provided by (used in) financing activities
     1,727,678       (38,979 )
                 
Net increase (decrease) in cash:
                
Cash at beginning of the period
     3,756,919       1,611,465  
Cash at end of the period
     7,054,254       197,294  
Net increase (decrease) in cash
   $ 3,297,335     $ (1,414,171 )
                 
Supplemental disclosures of cash flow information:
                
Income taxes paid
   $ 2,290     $ 2,632  

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

 
4
 

HARRIS & HARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

   
Three Months Ended
    
Year Ended
  
   
March 31, 2011
    
December 31, 2010
  
   
(Unaudited)
        
             
Changes in net assets from operations:
            
             
Net operating loss
   $ (1,835,303 )   $ (7,555,807 )
Net realized gain (loss) on investments
     7,532,050       (3,740,518 )
Net (decrease) increase in unrealized appreciation on investments as a result of sales
     (7,467,614 )     3,608,205  
Net increase in unrealized appreciation on investments held
     644,708       18,274,970  
                 
Net (decrease) increase in net assets resulting from operations
     (1,126,159 )     10,586,850  
                 
Changes in net assets from capital stock transactions:
                
                 
Issuance of common stock upon the exercise of stock options
     1,194       186  
Additional paid-in capital on common stock issued net of offering expenses
     476,484       20,527  
Stock-based compensation expense
     427,314       2,088,091  
                 
Net increase in net assets resulting from capital stock transactions
     904,992       2,108,804  
                 
Net (decrease) increase in net assets
     (221,167 )     12,695,654  
                 
Net assets:
                
                 
Beginning of the period
     146,853,912       134,158,258  
                 
End of the period
   $ 146,632,745     $ 146,853,912  

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

 
5
 

HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2011
(Unaudited)
 
 
Method of
          
Shares/
        
 
Valuation (1)
Industry (2)
  
Cost
    
Principal
    
Value
  
Investments in Unaffiliated Companies (3)(4)(5) –  
33.3% of net assets at value
                      
                       
Private Placement Portfolio (Illiquid) –  
30.2% of net assets at value
                      
                       
                       
Bridgelux, Inc. (6)(7)(9)
  
Cleantech
                  
Manufacturing high-power light emitting diodes (LEDs) and arrays
                      
Series B Convertible Preferred Stock
(M)
     $ 1,000,000       1,861,504     $ 2,345,495  
Series C Convertible Preferred Stock
(M)
       1,352,196       2,130,699       2,684,681  
Series D Convertible Preferred Stock
(M)
       1,371,622       999,999       1,259,998  
Warrants for Series C Convertible Preferred Stock expiring 12/31/14
( I )
       168,270       163,900       124,728  
Warrants for Series D Convertible Preferred
                            
Stock expiring 8/26/14
( I )
       128,543       166,665       84,832  
Secured Convertible Bridge Note (including interest)
(M)
       826,648     $ 813,805       826,648  
          4,847,279               7,326,382  
                             
Cobalt Technologies, Inc. (6)(7)(10)
  
Cleantech
                        
Developing processes for making bio-butanol through biomass fermentation
                            
Series C Convertible Preferred Stock
(M)
       749,998       352,112       880,280  
                             
Ensemble Therapeutics Corporation (6)(7)(11)
  
Healthcare
                        
Developing DNA-Programmed ChemistryTM for the discovery of new classes of therapeutics
                            
Series B Convertible Preferred Stock
(M)
       2,000,000       1,449,275       2,000,000  
Secured Convertible Bridge Notes (including interest)
(M)
       355,407     $ 299,169       355,407  
          2,355,407               2,355,407  
                             
GEO Semiconductor Inc. (8) Developing programmable, high-performance video and geometry processing solutions
  
Electronics
                        
Participation Agreement with Montage
                            
Capital relating to the following assets:
                            
Senior secured debt, 13.75%, maturing on 06/30/12
( I )
       441,719     $ 500,000       427,300  
Warrants for Series A Pref. Stock expiring on 09/17/17
( I )
       44,624       100,000       55,800  
Loan and Security Agreement with GEO Semiconductor relating to the following assets:
                            
Subordinated secured debt, 15.75%, maturing on 06/29/11
( I )
       137,375     $ 150,000       144,490  
Warrants for Series A Pref. Stock expiring on 03/01/18
( I )
       8,079       10,000       5,700  
          631,797               633,290  
 
The accompanying notes are an integral part of these consolidated financial statements.

 
6
 

HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2011
(Unaudited)
 
 
Method of
          
Shares/
        
 
Valuation (1)
Industry (2)
  
Cost
    
Principal
    
Value
  
                       
Investments in Unaffiliated Companies (3)(4)(5) –  
33.3% of net assets at value (Cont.)
                      
                       
Private Placement Portfolio (Illiquid) –  
30.2% of net assets at value (Cont.)
                      
                       
Molecular Imprints, Inc. (6)(7)
  
Electronics
                  
Manufacturing nanoimprint lithography capital equipment
                      
Series B Convertible Preferred Stock
(M)
     $ 2,000,000       1,333,333     $ 1,861,111  
Series C Convertible Preferred Stock
(M)
       2,309,098       1,250,000       2,013,889  
Warrants for Series C Convertible Preferred
                            
Stock expiring 12/31/11
( I )
       190,902       125,000       58,250  
          4,500,000               3,933,250  
                             
Nanosys, Inc. (6)(7)
  
Cleantech
                        
Developing inorganic nanowires and quantum dots for use in batteries and LED-backlit devices
                            
Series C Convertible Preferred Stock
(M)
       1,500,000       803,428       916,225  
Series D Convertible Preferred Stock
(M)
       3,000,003       1,016,950       1,239,680  
Series E Convertible Preferred Stock
(M)
       496,573       433,688       745,076  
          4,996,576               2,900,981  
                             
NanoTerra, Inc. (8)(12)
  
Cleantech
                        
Developing surface chemistry and nano-manufacturing solutions
                            
Senior secured debt, 12.0%, maturing on 02/22/14
( I )
       442,062     $ 500,000       443,888  
Senior secured debt, 12.0%, maturing on 02/22/13
( I )
       217,894     $ 250,000       218,644  
Warrants for Series A Pref. Stock expiring on 02/22/21
( I )
       69,168       446,248       69,168  
          729,124               731,700  
                             
Nantero, Inc. (6)(7)(8)
  
Electronics
                        
Developing a high-density, nonvolatile, random access memory chip, enabled by carbon nanotubes
                            
Series A Convertible Preferred Stock
(M)
       489,999       345,070       1,046,908  
Series B Convertible Preferred Stock
(M)
       323,000       207,051       628,172  
Series C Convertible Preferred Stock
(M)
       571,329       188,315       571,329  
          1,384,328               2,246,409  
 
The accompanying notes are an integral part of these consolidated financial statements.

 
7
 

HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2011
(Unaudited)

 
Method of
          
Shares/
        
 
Valuation (1)
Industry (2)
  
Cost
    
Principal
    
Value
  
                       
Investments in Unaffiliated Companies (3)(4)(5) –  
33.3% of net assets at value (Cont.)
                      
                       
Private Placement Portfolio (Illiquid) –  
30.2% of net assets at value (Cont.)
                      
                       
Polatis, Inc. (6)(7)(8)
  
Electronics
                  
Developing MEMS-based optical networking components and systems
                            
Common Stock
(M)
     $ 135,105       16,438     $ 0  
Series A-1 Convertible Preferred Stock
(M)
       1,000,000       16,775       0  
Series A-2 Convertible Preferred Stock
(M)
       839,000       71,611       0  
Series A-4 Convertible Preferred Stock
(M)
       44,183       4,774       0  
          2,018,288               0  
                             
PolyRemedy, Inc. (6)(7)(8)
  
Healthcare
                        
Developing a platform for producing and tracking the use of wound treatment patches
                            
Series B-1 Convertible Preferred Stock
(M)
       244,500       287,647       23,466  
Series B-2 Convertible Preferred Stock
(M)
       121,706       676,147       30,427  
          366,206               53,893  
                             
Solazyme, Inc. (6)(7)
  
Cleantech
                        
Developing algal biodiesel, industrial chemicals and specialty ingredients using  synthetic biology
                            
Series A Convertible Preferred Stock
(M)
       385,400       988,204       9,970,978  
Series B Convertible Preferred Stock
(M)
       500,000       495,246       4,997,032  
Series C Convertible Preferred Stock
(M)
       3,058,806       651,309       6,571,708  
Series D Convertible Preferred Stock
(M)
       1,499,991       169,390       1,709,145  
          5,444,197               23,248,863  
                             
TetraVitae Bioscience, Inc. (6)(7)(8)
  
Cleantech
                        
Developing methods of producing alternative chemicals and fuels  through biomass fermentation
                            
Common Stock
(M)
       250,000       118,804       0  

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

 
8
 
 
HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2011
(Unaudited)

 
Method of
          
Shares/
        
 
Valuation (1)
Industry (2)
  
Cost
    
Principal
    
Value
  
                       
Investments in Unaffiliated Companies (3)(4)(5) –  
33.3% of net assets at value (Cont.)
                      
                       
Private Placement Portfolio (Illiquid) –  
30.2% of net assets at value (Cont.)
                      
                       
                       
Ultora, Inc. (6)(7)(8)
  
Cleantech
                  
Developing energy-storage devices enabled by carbon nanotubes 
                            
Secured Convertible Bridge Note
(M)
     $ 1,250     $ 1,250     $ 1,250  
                             
Total Unaffiliated Private Placement Portfolio (cost: $28,274,450)
                     $ 44,311,705  
                             
 
Method of
            
Shares/
          
 
Valuation (1)
Industry(2)
  
Cost
    
Principal
    
Value
  
                             
Publicly Traded Portfolio (Illiquid) –  
3.1% of net assets at value
                            
                             
NeoPhotonics Corporation (6)(7)(13)
  
Electronics
                        
Developing and manufacturing optical devices and components
                           
Common Stock
(M)
     $ 7,299,590       450,907     $ 4,447,843  
                             
Total Unaffiliated Publicly Traded Portfolio (cost: $7,299,590)
                       $
4,447,843
  
                             
Total Investments in Unaffiliated Companies (cost: $35,574,040)
                     $ 48,759,548  
 
The accompanying notes are an integral part of these consolidated financial statements.

 
9
 

HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2011
(Unaudited)

 
Method of
          
Shares/
        
 
Valuation (1)
Industry (2)
  
Cost
    
Principal
    
Value
  
                       
Investments in Non-Controlled Affiliated Companies (3)(14) –
29.0% of net assets at value
                      
                       
Private Placement Portfolio (Illiquid) –  
29.0% of net assets at value
                      
                       
ABS Materials, Inc. (6)(7)
  
Cleantech
                  
Developing nano-structured absorbent materials for environmental remediation  and for the petroleum industry
                      
Series A Convertible Preferred Stock
(M)
     $ 375,000       375,000     $ 375,000  
                             
                             
Adesto Technologies Corporation (6)(7)(8)
  
Electronics
                        
Developing low-power, high- performance memory devices
                            
Series A Convertible Preferred Stock
(M)
       2,200,000       6,547,619       2,420,000  
Series B Convertible Preferred Stock
(M)
       2,200,000       5,952,381       2,200,000  
          4,400,000               4,620,000  
                             
                             
Cambrios Technologies Corporation (6)(7)(8)
  
Electronics
                        
Developing nanowire-enabled electronic materials for the display industry
                            
Series B Convertible Preferred Stock
(M)
       1,294,025       1,294,025       323,506  
Series C Convertible Preferred Stock
(M)
       1,300,000       1,300,000       586,690  
Series D Convertible Preferred Stock
(M)
       515,756       515,756       644,695  
Unsecured Convertible Bridge Note (including interest)
(M)
       95,154     $ 92,400       95,154  
          3,204,935               1,650,045  
                             
                             
Contour Energy Systems, Inc. (6)(7)(8)
  
Cleantech
  
 
                  
Developing batteries using nanostructured materials
                            
Series A Convertible Preferred Stock
(M)
       2,009,995       2,565,798       2,681,260  
Series B Convertible Preferred Stock
(M)
       1,300,000       812,500       1,254,919  
          3,309,995               3,936,179  

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

 
10
 

HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2011
(Unaudited)

 
Method of
          
Shares/
        
 
Valuation (1)
Industry (2)
  
Cost
    
Principal
    
Value
  
Investments in Non-Controlled  Affiliated Companies (3)(14) –
29.0% of net assets at value (Cont.)
                      
                       
Private Placement Portfolio (Illiquid) –  
29.0% of net assets at value (Cont.)
                      
                       
                       
Crystal IS, Inc. (6)(7)
  
Cleantech
                  
Developing single-crystal aluminum nitride substrates  for light-emitting diodes
                            
Common Stock
(M)
     $ 1,734,199       3,994,468     $ 0  
Warrants for Series A-1 Pref. Stock expiring 05/05/13
( I )
       8,746       15,231       0  
Warrants for Series A-1 Pref. Stock expiring 05/12/13
( I )
       1,351       2,350       0  
Warrants for Series A-1 Pref. Stock expiring 08/08/13
( I )
       2,543       4,396       0  
          1,746,839               0  
                             
D-Wave Systems, Inc. (6)(7)(8)(15)
  
Electronics
                        
Developing high- performance quantum computing systems
                           
Series B Convertible Preferred Stock
(M)
       1,002,074       1,144,869       1,380,483  
Series C Convertible Preferred Stock
(M)
       487,804       450,450       543,153  
Series D Convertible Preferred Stock
(M)
       1,484,492       1,533,395       1,848,968  
Series E Convertible Preferred Stock
(M)
       248,049       269,280       324,698  
Series F Convertible Preferred Stock
(M)
       238,323       258,721       311,966  
Warrants for Common Stock expiring 06/30/15
( I )
       98,644       153,890       72,482  
          3,559,386               4,481,750  
                             
Enumeral Biomedical Corp. (6)(7)(8)
  
Healthcare
                        
Developing therapeutics and diagnostics through functional assaying of single cells
                            
Unsecured Convertible Bridge Note (including interest)
(M)
       275,425     $ 250,000       358,758  
                             
                             
                             
Innovalight, Inc. (6)(7)(8)
  
Cleantech
                        
Developing silicon-based nanomaterials  for use in the solar energy industry
                            
Series B Convertible Preferred Stock
(M)
       2,500,000       16,666,666       1,235,515  
Series C Convertible Preferred Stock
(M)
       1,993,568       5,810,577       1,728,843  
Series D Convertible Preferred Stock
(M)
       721,090       4,046,974       672,820  
Warrants for Series D Preferred Stock expiring 03/03/18
( I )
       37,196       304,194       10,951  
Unsecured Convertible Bridge Note (including interest)
(M)
       236,465     $ 271,007       272,299  
          5,488,319               3,920,428  

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

 
11
 

HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2011
(Unaudited)
 
 
Method of
          
Shares/
        
 
Valuation (1)
Industry (2)
  
Cost
    
Principal
    
Value
  
Investments in Non-Controlled Affiliated Companies (3)(14) –
29.0% of net assets at value (Cont.)
                      
                       
Private Placement Portfolio (Illiquid) –  
29.0% of net assets at value (Cont.)
                      
                       
Kovio, Inc. (6)(7)
  
Electronics
                  
Developing semiconductor products using printed electronics and thin-film technologies
                      
Series A' Convertible Preferred Stock
(M)
     $ 5,242,993       2,160,000     $ 1,439,620  
Series A3X Convertible Preferred Stock
(M)
       526,225       526,225       526,225  
          5,769,218               1,965,845  
                             
Mersana Therapeutics, Inc. (6)(7)(8)
  
Healthcare
                        
Developing treatments for cancer based on novel drug delivery polymers
                            
Series A Convertible Preferred Stock
(M)
       700,000       68,451       136,902  
Series B Convertible Preferred Stock
(M)
       1,542,098       866,500       1,733,000  
Unsecured Convertible Bridge Notes (including interest)
(M)
       981,217     $ 821,975       981,217  
          3,223,315               2,851,119  
                             
Metabolon, Inc. (6)(7)
  
Healthcare
                        
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       1,087,608  
Series B-1 Convertible Preferred Stock
(M)
       706,214       148,696       435,043  
Series C Convertible Preferred Stock
(M)
       1,000,000       1,000,000       1,000,000  
Warrants for Series B-1 Convertible Preferred
                            
Stock expiring 3/25/15
( I )
       293,786       74,348       90,076  
          4,500,000               2,612,727  
                             
Nextreme Thermal Solutions, Inc. (6)(7)
  
Cleantech
                        
Developing thin-film thermoelectric devices for cooling and energy conversion
                            
Series A Convertible Preferred Stock
(M)
       1,750,000       17,500       5,940  
Series B Convertible Preferred Stock
(M)
       2,634,762       4,870,244       269,389  
          4,384,762               275,329  

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

 
12
 

HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2011
(Unaudited)

 
Method of
          
Shares/
        
 
Valuation (1)
Industry (2)
  
Cost
    
Principal
    
Value
  
                       
Investments in Non-Controlled Affiliated Companies (3)(14) –
29.0% of net assets at value (Cont.)
                      
                       
Private Placement Portfolio (Illiquid) –  
29.0% of net assets at value (Cont.)
                      
                       
Questech Corporation (6)(7)
  
Other
                  
Manufacturing and marketing proprietary metal and stone products for home decoration
                            
Common Stock
(M)
     $ 2,130,456       655,454     $ 436,642  
                             
SiOnyx, Inc. (6)(7)(8)
  
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  
Warrants for Series B-1 Convertible Preferred Stock expiring 2/23/17
( I )
       130,439       247,350       139,505  
          5,385,000               6,527,115  
                             
Xradia, Inc. (6)(7)
  
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       8,530,276  
                             
Total Non-Controlled Private Placement Portfolio (cost: $51,752,650)
                   $ 42,541,213  
                             
Total Investments in Non-Controlled Affiliated Companies (cost: $51,752,650)
                   $ 42,541,213  
 
The accompanying notes are an integral part of these consolidated financial statements.

 
13
 

HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2011
(Unaudited)

 
Method of
          
Shares/
        
 
Valuation (1)
Industry (2)
  
Cost
    
Principal
    
Value
  
                       
Investments in Controlled Affiliated Companies (3)(16) –
4.4% of net assets at value
                      
                       
Private Placement Portfolio (Illiquid) –
4.4% of net assets at value
                      
                       
Ancora Pharmaceuticals Inc. (6)(7)(8)
  
Healthcare
                  
Developing synthetic carbohydrates for pharmaceutical applications
                      
Series B Convertible Preferred Stock
(M)
     $ 1,600,000       1,663,808     $ 3,258  
Series C Convertible Preferred Stock
(M)
       1,129,817       2,066,051       315,220  
Secured Convertible Bridge Notes (including interest)
(M)
       1,925,041     $ 1,800,000       1,925,041  
          4,654,858               2,243,519  
                             
Laser Light Engines, Inc. (6)(7)(8)
  
Cleantech
                        
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       1,273,774  
Series B Convertible Preferred Stock
(M)
       3,095,802       13,571,848       2,940,935  
          5,095,802               4,214,709   
                             
Total Controlled Private Placement Portfolio (cost: $9,750,660)
                   $ 6,458,228  
                             
Total Investments in Controlled Affiliated Companies (cost: $9,750,660)
                   $ 6,458,228  
                             
Total Private Placement and Publicly Traded Portfolio (cost: $97,077,350)
                   $ 97,758,989  

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

 
14
 

HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2011
(Unaudited)

 
Method of
          
Shares/
        
 
Valuation (1)
    
Cost
    
Principal
    
Value
  
                       
U.S. Government Securities (17) –  26.7% of net assets at value
                      
                       
U.S. Treasury Bill — due date 04/14/11
(M)
     $ 17,999,204     $ 18,000,000     $ 17,999,820  
U.S. Treasury Bill — due date 05/12/11
(M)
       6,999,192       7,000,000       6,999,650  
U.S. Treasury Bill — due date 06/09/11
(M)
       7,099,466       7,100,000       7,099,077  
U.S. Treasury Bill — due date 07/21/11
(M)
       7,098,705       7,100,000       7,097,781  
                             
Total Investments in U.S. Government Securities (cost: $39,196,567)
                     $ 39,196,328  
                             
Total Investments (cost: $136,273,917)
                       $ 136,955,317  
 
The accompanying notes are an integral part of these consolidated financial statements.

 
15
 

HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2011
(Unaudited)

Notes to Consolidated Schedule of Investments

(1)
See "Footnote to Consolidated Schedule of Investments" on page 29 for a description of the "Valuation Procedures."

(2)
We classify "Cleantech" 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.  We classify "Healthcare" companies as those that use nanotechnology to address problems in healthcare-related industries, including biotechnology, pharmaceuticals and medical devices.  We use the term "Other" for companies that operate primarily in industries other than those within "Cleantech," "Electronics" and "Healthcare."  These industries include mining, decorative products and personal care products.  In the first quarter of 2011, we renamed the sector classification "Electronics/Semiconductors" to "Electronics" and reclassified three companies, NeoPhotonics Corporation, Polatis, Inc., and Xradia, Inc., from a sector classification of "Other" to "Electronics" to reflect a broader definition of electronics to include photonics, metrology, and test and measurement.  We also renamed the sector classification "Healthcare/Biotech" to "Healthcare."

(3)
Investments in unaffiliated companies consist of investments in which we own less than five percent of the voting shares of the portfolio company.